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Why GE Capital Wants to Buy Kemper

March 19, 1994

NEW YORK (AP) _ GE Capital Services Inc., a company once known for financing the purchases of shiny new kitchen appliances and leasing aircraft, is moving aggressively to win your money management business.

That’s one of the key forces behind GE Capital’s $2.2 billion bid for Kemper Corp., a major mutual fund and insurance company in Long Grove, Ill.

It remains to be seen what comes of the bid. This past week Kemper’s board of directors rejected the takeover offer, told GE to mind its own business and vowed to remain independent.

If the future of the Kemper acquisition is in question, GE Capital’s expansionary zeal remains clear.

″GE Capital is making a push in really all areas of financial services,″ said Mike Egizio, analyst with Duff and Phelps Inc., a Chicago-based credit rating agency. The Kemper bid is only the latest example of GE Capital’s attempt to flesh out its consumer financial services business, but is also part of its broader expansion into other fields as well.

One visible example was in 1992, GE Capital launched a credit card called the GE Rewards MasterCard. The card offered a complex series of refunds and discounts linked with various retailers, such as Kmart and Toys R Us.

At the time, analysts said GE Capital’s foray into the credit card business made considerable sense. It capitalized on the company’s existing strength in that field - GE Capital had managed 65 million card accounts in 1992, mostly those of department stores and other retail credit cards.

Earlier this year, GE Capital Mortgage Corp., its mortgage banking business, announced a new mortgage program that required only a 3 percent downpayment. Under the program, aimed at low-income home owners, GE would buy the mortgages from other lenders and provide insurance against default.

These represent just a fraction of the business of GE Capital, the 62-year- old financial services arm General Electric Co., the nation’s fifth largest industrial company.

GE Capital, which accounts for upward of one-third of GE’s profits, is a colossus as well.

About 33,000 people working in 24 separate businesses: insurance, consumer services, specialized financing, equipment management and midmarket financing. The Wall Street securities brokerage Kidder, Peabody is part of GE Capital’s specialized financing unit.

With assets of $212 billion, GE Capital would rival Citicorp as the nation’s largest bank. If GE Capital prevails in its bid for Kemper, it would acquire a business with $1.5 billion in revenues and earnings of $235.5 million last year. Kemper, which employs 6,300 people, has mutual funds with $38.9 billion in assets, according to Value Line investment research.

GE Capital spokesman Anthony Zehnder declined to discuss the proposed Kemper acquisition and how such a purchase would fit into GE Capital’s strategy.

Egizio, the Duff and Phelps analyst, said the slowdown in home equity loans and refinancings are among the forces pushing GE Capital to seek expansion in other areas of the consumer field.

″Growth has become more difficult,″ he said. ″With the low interest rates (consumers) have enjoyed in the last couple of years, they have refinanced their first and second mortgage and home equity loans. And that had been a lucrative market for finance companies.″

The other trend driving the Kemper acquisition is GE Capital’s penchant for sniffing out deals.

The company is known for using its financial might, derived from inexpensive access to funds through the impeccable credit rating of its parent, to push for hard bargains. Egizio said that’s especially true in its acquisition of troubled loans from the Resolution Trust Corp., the government agency responsible for selling the assets of failed savings & loans. COMING UP

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