GE BREAKUP—DON’T LAUGH, IT COULD HAPPEN

November 11, 2017


Portions of this post are taken from the publication “Industry Week”, Bloomberg View, 30 October 2017.

The Bloomberg report begins by stating: “The industrial conglomerate has lost $100 billion in market value this year as investors came to terms with the dawning reality that GE’s businesses don’t generate enough cash to support its rich dividend.”

Do you in your wildest dreams think that Jack Welch, former CEO of GE, would have produced results such as this?  I do NOT think so.  Welch “lived” with the guys on Wall Street.  These pitiful results come to us from Mr. Jeffery Immelt.  It’s also now clear that years of streamlining didn’t go far enough as challenges of dumpster-fire proportions at its power and energy divisions overshadowed what were actually pretty good third-quarter health-care and aviation numbers.  Let me mention right now that I can sound off at the results.  I retired from a GE facility—The Roper Corporation, in 2005.

The new CEO John Flannery’s pledged to divest twenty billion ($20 billion) in assets perhaps is risking another piecemeal breakup but as details leak on the divestitures and other changes Flannery’s contemplating, there’s at least a shot he could be positioning the company for something more drastic.  Now back to Immelt.

Immelt took over the top position at GE in 2001. Early attempts at changing the culture to meet Immelt’s ideas about what the corporate culture should look like were not very successful. It was during the financial crisis that he began to think differently. It seems as if his thinking followed three paths. First, get rid of the financial areas of the company because they were just a diversion to what needed to be done. Second, make GE into a company focused upon industrial goods. And, third, create a company that would tie the industrial goods to information technology so that the physical and the informational would all be of one package. The results of Immelt’s thinking are not impressive and did not position GE for company growth in the twenty-first century.

Any potential downsizing by Flannery will please investors who have viewed the digital foray as an expensive pet project of Immelt’s, but it’s sort of a weird thing to do if you still want to turn GE into a top-ten software company — as is the divestiture of the digital-facing Centricity health-care IT operations that GE is reportedly contemplating.  Perhaps a wholesale breakup of General Electric Co. isn’t such an improbable idea after all.

GE has lost one hundred billion ($100 billion) in market value this year as investors came to terms with the dawning reality that GE’s businesses don’t generate enough cash to support its rich dividend. It’s also now clear that years of streamlining didn’t go far enough as challenges of dumpster fire proportions at its power and energy divisions overshadowed what were actually pretty good third-quarter health-care and aviation numbers.

One argument against a breakup of GE was that it would detract from the breadth of expertise and resources that set the company apart in the push to make industrial machinery of all kinds run more efficiently. But now, GE’s approach to digital appears to be changing. Rather than trying to be everything for everyone, the company is refocusing digital marketing efforts on customers in its core businesses and deepening partnerships with tech giants including Microsoft Corp and Apple Inc. It hasn’t announced any financial backers yet, but that’s a possibility former CEO Jeff Immelt intimated before he departed. GE’s digital spending is a likely target of its cost-cutting push.

This downsizing will please investors who have viewed digital as an expensive pet project of Immelt’s, but it’s sort of a weird thing to do if you still want to turn GE into a top-10 software company — as is the divestiture of the digital-facing Centricity health-care IT operations that GE is reportedly contemplating.

The company is unlikely to abandon digital altogether. Industrial customers have been trained to expect data-enhanced efficiency, and GE has to offer that to be competitive. As Flannery said at GE’s Minds and Machines conference last week, “A company that just builds machines will not survive.” But if all we’re ultimately talking about here is smarter equipment, as opposed to a whole new software ecosystem, GE doesn’t necessarily need a health-care, aviation and power business.

Creating four or five mini-GEs would likely mean tax penalties.  That’s not in and of itself a reason to maintain a portfolio that’s not working. If it was, GE wouldn’t also be contemplating a sale of its transportation division. But one of GE’s flaws in the minds of investors right now is its financial complexity, and there’s something to be said for a complete rethinking of the way it’s put together. For what it’s worth, the average of JPMorgan Chase & Co. analyst Steve Tusa’s sum-of-the-parts analyses points to a twenty-dollar ($20) valuation — almost in line with GE’s closing price of $20.79 on Friday. Whatever premium the whole company once commanded over the value of its parts has been significantly weakened.

Wall Street is torn on General Electric, the one-time favorite blue chip for long-term investors, which is now facing an identity crisis and possible dividend cut. Major research shops downgraded and upgraded the industrial company following its third-quarter earnings miss this past Friday. The firm’s September quarter profits were hit by restructuring costs and weak performance from its power and oil and gas businesses. It was the company’s first earnings report under CEO John Flannery, who replaced Jeff Immelt in August. Two firms reduced their ratings for General Electric shares due to concerns about dividend cuts at its Nov. 13 analyst meeting. The company has a 4.2 percent dividend yield. General Electric shares declined 6.3 percent Monday to close at $22.32 a share after the reports. The percentage drop is the largest for the stock in six years. Its shares are down twenty-five (25%) percent year to date through Friday versus the S&P 500’s fifteen (15%) percent return.

At the end of the day, it comes down to what kind of company GE wants to be. The financial realities of a breakup might be painful, but so would years’ worth of pain in its power business as weak demand and pricing pressures drive a decline to a new normal of lower profitability. Does it really matter, then, what the growth opportunities are in aviation and health care? As head of M&A at GE, Flannery was at least partly responsible for the Alstom SA acquisition that swelled the size of the now-troubled power unit inside GE. If there really are “no sacred cows,” he has a chance to rewrite that legacy.

CONCLUSIONS:

Times are changing and GE had better change with those times or the company faces significant additional difficulties.  Direction must be left to the board of directors but it’s very obvious that accommodations to suite the present business climate are definitely in order.

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