Wednesday, April 27, 2011

Why Warren Buffett thinks GE NEEDS to buy CREE

Back in the day, when Warren Buffett was looking at buying Coke stock there was one thing...really several, that kept him from doing so. Coke was doing all sorts of things t-shirts, collectors items, nick-knacks, and on and on. But for Buffett, Coke was good at beverages and as soon as they largely abandoned all those ancillary businesses and focused on their beverage business he was in, and in big. Buffett has held Coke stock for decades now and will likely die with that holding.

GE is in a similar place right now as a company. They do all sorts of things: washer/dryers, consumer electronics, airplane engines, smart-grid electrical work, GE Capital (financial services) and on and on. They are a highly diversified industrial company. But, they used to be a light-bulb company. In fact, around the turn of the 20th Century, they were THE light bulb company. GE was lighting. Now, 100 years later, they have the opportunity to be the light bulb company again.

In 2012 incandescent filament light bulbs will disappear off the shelves thanks to a regulation that will leave compact florescent and LED bulbs as our only options. Right now Phillips and GE are the only real competitors in the top end of the LED spectrum. Sure, there are Chinese competitors that compete against GE at the low end of the bulb market...but then GE has manufacturing facilities in China. GE has made a large push into China so that they can have access to competitive sourcing of materials and wages. You know who else has manufacturing operations in China that may just benefit GE? Cree, a $4.4 Billion Dollar company that is the leader in LED technology has been expanding it's manufacturing capacity in China so that it can source from that market. We think GE might want to think seriously about buying this extremely well run company. There should actually be some unthought of synergies between the two companies from their China operations. GE can compete all along the lighting spectrum because of their economies of scale (whereas Cree by itself is focused on the high margin business at the top end of the lighting world).

GE is clearly on a mission to re-brand their image as the eco-friendly industrial. Their "ecomagination" portfolio of products and services should have big, wide-open arms for Cree's LED lighting business since LED light bulbs use about 1/10th of the energy that a traditional bulb does and about 1/3 to 1/2 of what the alternative compact florescent bulbs use. That kind of energy savings has GE's "ecomagination" all over it and would be a terrific addition to its product portfolio. Cree's light bulbs also last years longer than compact florescent bulbs, leading to less waste from light bulbs. Compact florescent bulbs contain mercury and are supposed to be disposed of properly at an approved disposal location. What percentage of compact florescent bulbs do you think are disposed of properly, maybe 15-20%? Just think of the ecological benefit of switching to LED bulbs which can last 7-10 years on a smaller bulb and from 20-30 years for the down-lights that go into the massively popular "can lighting" that is found in most homes. In fact, Cree's new LR6 down-light is being used in the kitchen of every new Habitat for Humanity Home. More important, at least for Buffett, is that this acquisition would take GE back to it's roots: the light bulb. The could once again be the leader in lighting...just like it was 100 years ago.

There are more synergies to add. GE's competitor in the LED lighting space is Phillips. Right now Phillips both competes with and buys products from Cree for use in their LED light bulbs. At a certain point Phillips may be able to go it alone. GE currently buys lighting components, LEDs, etc. from Cree for use in their bulbs. Why not compete on the same footing with Phillips and be vertically integrated (it'll once again bring economies of scale and improve margins in the lighting business). GE has a $214 Billion market cap and could easily swallow a company like Cree (currently $4.4 Billion in market cap), even at a premium as they have $117 Billion in cash ($11/share) of cash on the balance sheet and they have annual revenues of $152 Billion. Acquiring Cree might only be a bump in the road of GE's fiscal year...but with only 4-5% adoption of LED products so far of all the uses they could replace the future for this acquisition may be a bright one.

The synergies don't stop there. GE has a nice airplane business right now. How difficult would it be to add LED lights for those giant dashboards in the cockpits? Heck, think about how many lights there are on a plane period (isle lights, overhead lights, exit lights). Imagine the energy savings if all those could be replaced with long life LEDs...see where this is going?

While it may be a stretch to say that Warren Buffett thinks GE needs to buy CREE...GE might feel that way itself when it thinks about the real opportunity. Just think, Cree isn't exactly a slouch itself. The company has $1 Billion in cash (about $9.87/share) and no debt on it's balance sheet and the company earns nearly $1 Billion in annual revenues. They are already in key markets in China, have intellectual property leadership, and an industry best in class product. Best of all, the acquisition would provide tremendous synergies to GE and fit right into their "ecomagination" portfolio which they tout daily via thier commercials on television. They could even use the Cree "Lighting the LED Revolution" from Cree's Social Media Campaign on Facebook.

We think the deal makes a ton of sense...and we think GE would agree (lets hope they take a look). To learn more about just what Cree does, visit our article on at: