On January 12, 2017, PriceWaterhouseCoopers ("PWC") announced it had "acquired" General Electric's (NYSE:GE) 600 tax accountants and would provide integrated, enterprise managed tax services to GE on a global basis. The deal, which begins on April 1 is for five years. Perhaps this is the recovering accountant in me, but I thought the deal to be quite exciting.
Interestingly, you can find two recent references to PWC on GE's website, but nothing related to this "transaction". Perhaps GE is a bit shy about basically shedding 600 jobs. Perhaps GE did not want to draw the ire of Progressives, already sensitive about corporate tax minimization practices. Perhaps GE thought this move, which continues the Company's shedding of non-core operations to focus on its core industrial competencies was immaterial.
Below: What GE shared about PWC on January 17.
In the transaction, GE eliminates 600 highly paid professionals from its headcount. The Company also ceases to accrue incremental retirement (pension and healthcare) costs. Using outside accounting firms to assist with tax compliance is not a new GE practice. As recently as 2012, GE paid KPMG $8-$10 million annually for "overflow" tax services, until scrutiny (for running afoul of Sarbanes-Oxley rules) forced the companies to halt this practice.
Lower Cost, State-Of-The-Art Thinking
GE presumably will receive equivalent (or better) tax services from PWC at a lower cost. However talented GE's tax accountants were, there is no doubt that "tax" is not the company's core competency. PWC's press release affirms this perspective noting, "professional services are simply not part of GE's core business". It is logical that the best tax advice can come from professionals exposed to global best practices, as opposed to GE's best tax practices.
PWC presumably will be able to cull the herd and eliminate weaker performers and more efficiently utilize the remaining staff for high billable hour work (GE is not paying billable hour rates under this contract) as there will be times when a sub-set of the ex-GE accountants are not engaged on GE work (seasonal lulls, etc.). PWC technology will also likely displace manual or quasi-manual processes for some processes. To be clear, I am not maligning GE, its personnel or its processes; PWC notes it will, " integrate GE's tax technologies and end-to-end global processes." However, a no one who has worked in a large corporate environment can attest to the many wasted hours in marginally relevant meetings, non-optimized practices and non-relevant corporate initiatives. While professional service firms have their quirks, they are designed to efficiently deliver as many hours of service to clients out of their key resource (human capital). I sincerely think a firm focused on delivering tax and accounting advice can perform the function 1) more efficiently and 2) with a better outcome (though GE sets a high bar as the Company was well known for its success in minimizing taxes).
Demonstrated Thought (and Action) Leadership
Despite GE's reticence to trumpet this deal, as a GE shareholder, I am pleased. The deal shows GE continues to be creative in problem solving. The deal shows GE's relentless shedding of non-core activities. The deal also demonstrates GE's continued commitment to improve margin through the reduction of overhead. I want creative, forward-thinking from my management teams.
The Beauty of Focusing on the Core
My first job out of business school was with United Airlines. I noted that the airlines only had two "must have" assets, the first of course was pilots to fly the planes, the second was the proprietary reservations system to optimize revenue. Almost everything else operational was essentially non-core and could (not necessarily should) be outsourced. Maintenance, aircraft, flight attendants, gate personnel, etc. can all be contracted based on performance metrics (you can wet charter jets, but even I thought that a bridge too far). Upon presenting my findings, I was politely laughed out of the room (though I later did help sell the non-core flight kitchens and other assets). Perhaps, more than 30 years later, GE is discovering the beauty of concentrating its resources upon those things that are truly core, differentiating and value-added.
I reiterate my target price of $36 for GE ("General Electric: $36 Price Target").
Disclosure: I engaged PWC for tax advice within the last five years. On two occasions, many, many years ago, I was offered employment by PWC; I have never worked for, or received compensation from PWC.
Disclosure: I am/we are long GE.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.