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Balance Sheet
December 31, 1997 (in $ millions) Citicorp Travelers
Liabilities and Equity
Deposits $199,121 ”
Trading account liabilities 30,986 $ 96,166
Securities sold under repurchase agreements ” 120,921
Insurance reserves ” 43,782
Long-term debt 19,785 28,352
Other 39,809 76,441
Preferred stock 1,903 1,450
Common shareholders™ equity 19,293 19,443
$310,897 $386,555
Total Liabilities and Equity

Estimate the pro forma income, common shareholders™ equity, and total assets for
Citigroup in 1997, using the pooling-of interests method. What concerns would you
have as a shareholder about Citigroup using the pooling-of-interests method? What
criteria would you use as an analyst to decide when, if ever, the pooling-of-interests
method is an appropriate method of recording a business combination between two
firms? Does the Citicorp-Travelers merger satisfy these criteria?
4. Review the financial statement effects for the Dura investments in Spiros II described
in the chapter. How would these effects be reflected in Dura™s books if its investment
were consolidated?
5. Below is the segment disclosure reported by General Electric in its 1998 annual
In addition, General Electric provided the following information about the businesses
comprising CECS:
“Consumer services ” private-label and bank credit card loans, personal loans, time
sales and revolving credit and inventory financing for retail merchants, auto leasing
and inventory financing, mortgage servicing, and consumer savings and insurance
Equipment management ” leases, loans, sales and asset management services for
portfolios of commercial and transportation equipment, including aircraft, trailers,
auto fleets, modular space units, railroad rolling stock, data processing equipment,
containers used on ocean-going vessels, satellites.
Mid-market financing ” loans, financing and operating leases and other services for
middle-market customers, including manufacturers, distributors and end users, for a
variety of equipment that includes vehicles, corporate aircraft, data processing equip-
ment, medical and diagnostic equipment, and equipment used in construction, man-
ufacturing, office applications, electronics and telecommunications activities.
Entity Accounting Analysis

8-19 Part 2 Business Analysis and Valuation Tools

Revenues for the years ended December 31
Total revenues Intersegment revenues External revenues
(in millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
Aircraft Engines $ 10,294 $ 7,799 $ 6,302 $ 292 $101 $ 86 $ 10,002 $ 7,698 $ 6,216
Appliances 5,619 5,801 5,586 12 12 5 5,607 5,789 5,581
Industrial Products and Systems 11,222 10,984 10,401 479 491 453 10,743 10,493 9,948
NBC 5,269 5,153 5,232 ” ” ” 5,269 5,153 5,232
Plastics 6,633 6,695 6,509 20 24 22 6,613 6,671 6,487
Power Systems 8,466 7,915 7,643 166 80 67 8,300 7,835 7,576
Technical Products and Services 5,323 4,861 4,700 14 18 23 5,309 4,843 4,677
All Other 264 308 291 ” ” ” 264 308 291
Eliminations (1,367) (1,176) (1,032) (983) (726) (656) (384) (450) (376)
Total GE segment revenues 51,723 48,340 45,632 ” ” ” 51,723 48,340 45,632
Corporate items (a) 507 2,919 1,116 ” ” ” 507 2,919 1,116
GECS net earnings 3,796 3,256 2,817 ” ” ” 3,796 3,256 2,817
Total GE 56,026 54,515 49,565 ” ” ” 56,026 54,515 49,565
GECS 48,694 39,931 32,713 ” ” ” 48,694 39,931 32,713
Eliminations (4,251) (3,606) (3,099) ” ” ” (4,251) (3,606) (3,099)
Consolidated revenues $100,469 $90,840 $79,179 $” $” $” $100,469 $90,840 $79,179
GE revenues include income from sales of goods and services to customers and other income. Sales from one Company component to another generally are
priced at equivalent commercial selling prices.
(a) Includes revenues of $944 million and $789 million in 1997 and 1998, respectively, from an appliance distribution affiliate that was deconsolidated in
1998. Also includes $1,538 million in 1997 from exchanging preferred stock in Lockheed Martin Corporation for the stock of a newly formed subsidiary .

Property, plant and equipment Depreciation and amortization
additions (including equipment (including goodwill and other
leased to others) intangibles)
Assets at December 31 For the years ended December 31 For the years ended December 31
(in millions) 1998 1997 1996 1998 1997 1996 1998 1997 1996
Aircraft Engines $ 8,866 $ 8,895 $ 5,423 $ 480 $ 729 $ 551 $ 398 $ 292 $ 282
Appliances 2,436 2,354 2,399 150 83 168 137 131 123
Industrial Products and Systems 6,466 6,672 6,574 428 487 450 440 408 362
NBC 3,264 3,050 3,007 105 116 176 127 142 121
Plastics 9,813 8,890 9,130 722 618 748 591 494 552
Power Systems 7,253 6,182 6,322 246 215 185 215 199 184
Technical Products and Services 3,858 2,438 2,245 254 189 154 143 137 123
All Other 189 224 239 ” ” ” 52 46 40
Total GE segments 42,145 38,705 35,339 2,385 2,437 2,432 2,103 1,849 1,787
Investments in GECS 19,727 17,239 14,276 ” ” ” ” ” ”
Corporate items and eliminations (a) 12,798 11,482 10,310 158 129 114 189 180 176
Total GE 74,670 67,426 59,925 2,543 2,566 2,546 2,292 2,029 1,963
GECS 303,297 255,408 227,419 8,110 7,320 5,762 3,568 3,240 2,805
Eliminations (22,032) (18,822) (14,942) ” ” ” ” ” ”
Consolidated totals $355,935 $304,012 $272,402 $10,653 $9,886 $8,308 $5,860 $5,269 $4,768
Additions to property, plant and equipment include amounts relating to principal businesses purchased.
(a) Depreciation and amortization includes $84 million of unallocated RCA goodwill amortization in 1998, 1997 and 1996 that relates to NBC.
296 Entity Accounting Analysis

Entity Accounting Analysis

Specialized financing ” loans and financing leases for major capital assets, includ-
ing industrial facilities and equipment and energy-related facilities; commercial and
residential real estate loans and investments; and loans to and investments in public
and private entities in diverse industries.
Specialty insurance ” U.S. and international multiple-line property and casualty
reinsurance; certain directly written specialty insurance and life reinsurance; finan-
cial guaranty insurance, principally on municipal bonds and structured finance is-
sues; private mortgage insurance; and creditor insurance covering international
customer loan repayments.
Very few of the products financed by GECS are manufactured by GE™s segment.”
How useful is GE™s segment information? What do you learn from this information
that you cannot learn from the consolidated results? How important is GECS to GE™s
overall performance? What other information would you want to have to analyze the
performance of GECS?

1. Most countries outside the U.S. follow similar reporting practices for controlling and “influ-
ential” investments in other companies. However, these practices are relatively recent in some
countries, including Germany and Japan, where parent companies formerly reported using a strict
legal definition of an entity.
2. SFAS No 131, Disclosures About Segments of Enterprise and Related Information.
3. Gilson et al. (1999) show that since financial analysts specialize by industry and it is not eco-
nomical for investment brokers to have more than one analyst follow a single firm, firms with
diverse segments are underfollowed and undervalued relative to stand-alone entities. See Gilson,
Healy, Noe, and Palepu, “Changes in Organizational Form and Capital Market Intermediation:
Analyst Coverage After Stock Breakups,” working paper, Harvard Business School, 1999.
Thermo Electron Corporation

I n technology, things that have a high payoff are very risky. You need the
ability to pursue risky ventures and yet not risk the company. If that means pursu-
ing a lot of little things instead of one big thing, so be it”especially if the one big
thing never panned out.
”George Hatsopolous
Forbes, 11/16/87 Business Analysis and
Valuation Tools
In early July 1994, research analyst John Kolmanoff was considering the recent per-
formance of Thermo Electron (NYSE: TMO), a technology creation company with an im-
pressive track record for capitalizing on internally developed and externally acquired
research. In the past, Kolmanoff had strongly recommended Thermo Electron to his cli-
ents, and many had pro¬ted from its extraordinary price appreciation during the last ¬ve
years (see Exhibit 1). However, the ¬rm™s stock had recently been lagging the S&P 500,
declining 19 percent for the six months ended June 30, 1994 (versus only a 10 percent
decline for the S&P 500). This decline had been accompanied by an increase in short 8
positions in the stock, and by criticism of the company™s accounting. As a result of these Entity Accounting Analysis

developments, Kolmanoff decided that it was time to reconsider the company.

Dr. George Hatsopolous founded Thermo Electron in 1956 in his Belmont, Massachu-
setts, garage using a $50,000 loan from his friend Peter Nomikos, heir to a Greek ship-
ping fortune. A graduate student at the Massachusetts Institute of Technology,
Hatsopolous hoped to capitalize on his doctoral research by commercializing the pro-
cess of converting heat directly into electricity without moving parts. Two years later his
prototype was completed and was widely acclaimed in the popular press as a break-
through. One article proclaimed that the invention could be used to power satellites, mil-
itary equipment, and even motor vehicles. Money ¬‚owed in from the venture capital
community and the federal government. Although the process subsequently proved to be
uneconomical, the research led to several spillover products which were economically
viable, and which formed the basis for Thermo Electron™s early success.
Souren G. Ouzounian and Professor Paul M. Healy prepared this case as the basis for class discussion rather
than to illustrate either effective or ineffective handling of an administrative situation. We are also grateful to Don
McAllister for his helpful input. Copyright © 1998 by the President and Fellows of Harvard College. Harvard Business
School case 9-198-033.

298 Entity Accounting Analysis

Entity Accounting Analysis

During the 1960s the company provided contract research for public utilities and gov-
ernment agencies such as NASA, the U.S. Air Force, and the now defunct Atomic Energy
Commission. In 1971, when the U.S. Congress required car manufacturers to monitor
exhaust emissions, no instruments with the required precision were available. Dr. Hat-
sopolous saw the opportunity this presented and quickly contacted Ford Motor Com-
pany to offer his company™s services in developing the new instruments. At the time Ford

Thermo Electron Corporation
was skeptical of Thermo Electron™s ability to complete the contract, but the instruments
were delivered on time, ahead of any competitors. As a result, many other auto compa-
nies came to Thermo Electron for the same devices. This infant instruments business
grew to become Thermo Instrument Systems, Inc.
The company continued to grow rapidly in the 1980s and early 1990s by developing
a wide range of innovative new products. These included a portable device for detecting
plastic bombs, a portable drug detector used by customs agents and police, a cardiac as-
sist device to keep patients alive while awaiting transplants, the ¬rst commercial detector
and analyzer for nitrosamines (carcinogens), a portable remediation system that removes
gasoline from contaminated soil, soil-analysis instrumentation for the Environmental
Protection Agency, a home-use radon detector kit, and the ¬rst commercially practical
instrument for monitoring concentrations of NO2. Other recent innovations included
mammography systems, paper-recycling and papermaking equipment, alternative en-
ergy systems, industrial process equipment, and a number of other specialized products.
While much of Thermo Electron™s research success was internally generated at the
company™s own research labs, it was not afraid to buy other developers. For example, in
1989 it acquired a San Diego-based laser lab. At the time of the acquisition the lab relied
almost exclusively on the shrinking Star Wars budget for funding. Following a remark-
able transformation, it developed a painless method to remove unwanted hair using laser
technology, and as a result of a spinout in 1991, became ThermoTrex. But not all of the
company acquisitions were so successful. A small metal-plate company that had been
acquired ended up costing Thermo Electron $18 million, and an environmental engi-
neering company acquired in 1988 cost $6 million.

Thermo Electron mirrored the psyche of its founder, Dr. George Hatsopolous, whose tal-
ents spanned many ¬elds”he is an inventor, teacher, self-taught economist, and CEO.
He has used the Socratic method to encourage organizational learning and growth, and
fostered an open-door policy for employees to discuss problems and ideas.
The almost 9,000-person company was unique in several other ways. First, it had
always retained the right to use the technology it developed. This permitted it to use the
technology created for one project as a springboard for new ventures. At times this pol-
icy was costly, and the ¬rm undertook research at a reduced fee to retain the rights to the
Entity Accounting Analysis

8-23 Part 2 Business Analysis and Valuation Tools

Thermo Electron™s corporate structure, designed by Dr. Hatsopolous and his brother
John Hatsopolous, the Company™s Chief Financial Of¬cer, was also a unique feature of
the business. The ¬rm sold a minority interest to the public in subsidiaries that focused
on the best ideas and products that came from the parent company™s R&D labs. The par-
ent company typically kept between 70 and 80 percent of the stock in these “spinouts,”
but the units functioned as independent companies with their own management and their
Thermo Electron Corporation

own shareholders. As John Hatsopolous explained, “The plan is simple: let employees
develop an idea, spend some time and money testing the quality and market potential of
the product, then set up a subsidiary and let it grow.”1


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