Outlook: Acquisitive GEC

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The Independent Online
A BUSINESS does not have to end in .com to command an astronomic valuation, Lord Simpson of GEC demonstrated yesterday. Simply producing the kit that powers the Internet age can be enough. GEC is paying 90 times earnings and seven times sales to buy its way into the market for Internet switching equipment with the pounds 2.8bn acquisition of the US business, FORE Systems.

By any yardstick that is a mind-boggling price for a manufacturing company, even one in such a fast-growing sector of the market. The last time GEC went shopping in the US telecoms industry it snapped up a manufacturer of access equipment for a modest two times sales. This time the market saw Lord Simpson coming, which is reflected in the 80 per cent premium GEC is paying to the market valuation of FORE just a month ago.

Then again, there is nothing quite like the Internet phenomenon. This year the volume of data traffic is forecast to outstrip voice traffic, putting GEC's latest acquisition in pole position to capitalise on the explosion in cyberspace.

Apart from taking GEC deeper into telecoms and still further away from washing machines and power engineering, yesterday's deal produces another strange sensation for GEC shareholders. Once completed, GEC will be geared for the first time anyone can remember. Three months ago GEC was a defence electronics company with a cash mountain of pounds 2.7bn. Today it is about to become a telecoms-led company with net debt and a further pounds 3bn of credit still to tap.

With interest rates at such historic lows, it probably makes sense not to have so much tied up in the bank. But nothing could demonstrate more graphically the break GEC has made with the Lord Weinstock era than Lord Simpson's gamble on the Internet age.