Break-up of General Electric unlikely to reveal pot of gold
Break-up of General Electric unlikely to reveal pot of gold
Full or partial spin-offs might add little or nothing to value, say analysts
2 HOURS AGO
As chief executive of US industrial behemoth General Electric from 1981-2001, Jack Welch was acclaimed as a business alchemist, able to take the base metal of other companies and transmute them into gold through his management skill.
GE chief John Flannery is considering a further dismantling of the wide-ranging conglomerate/Reuters
edited by kcontents
If leadership is about building something that stands the test of time, however, Mr Welch’s record looks much less impressive. Jeff Immelt, his successor, spent much of his 16-year tenure as chief executive dismantling Mr Welch’s company. Now John Flannery, who took over from Mr Immelt last August, has signalled that he is considering breaking down GE still further.
The harsh truth for investors, however, is that there is no magic formula for creating value through restructuring. There is a good chance that full or partial spin-offs of the kind now being looked at by Mr Flannery will add little or nothing to GE’s valuation. The group’s history under Mr Immelt shows the limits of what portfolio management can achieve.
Early signs of concern about GE’s outlook emerged even while Mr Welch was still in charge. The shares peaked above $60 in August 2000, but a little more than a year later, as Mr Immelt took over, they were already down to about $40.
Mr Immelt embarked on a mammoth house-clearing, pulling out of insurance, while retaining liabilities that would hurt the company more than a decade later, then plastics and entertainment. In April 2015 he launched the biggest shake-up of all, announcing the sale of most of GE’s financial services operations.
Many analysts and investors urged him on. Trian Partners, the activist investment fund, revealed in October 2015 it had taken a stake, arguing that GE was “executing a bold transformation that will generate attractive stockholder returns in the years ahead as the company reshapes its portfolio from a broad conglomerate”.
GE’s performance, however, failed to repay that confidence. The shares occasionally broke above $30 in 2016, but in the past 12 months they have been in steep decline as operational problems mounted, culminating in a dividend cut announced last November.
Explaining then how he planned to respond to that cut and the poor cash generation that had made it necessary, Mr Flannery said he wanted a “simpler and more focused GE”. He said he planned to sell about $20bn of assets, including two of the divisions with the deepest roots in the company: transportation, which makes locomotives, and lighting, which includes Current, the energy management business.
Those plans have so far been no more effective in enthusing investors than Mr Immelt’s. During the past two months since just before the dividend cut announcement, GE shares have dropped a further 12 per cent.
That was the backdrop to Mr Flannery’s revelation on a call with analysts on Tuesday that he was still doing a “substantial amount of work on examining the portfolio and the structures” of the company. The announcements last November, he suggested, might have been just the opening salvo in a restructuring campaign that could result in further radical change.
The call had not been convened to discuss restructuring: Mr Flannery and other GE executives were there to address the additional $15bn that the company will have to pay to cover legacy insurance liabilities over the next seven years. But in answer to a question from Deane Dray from RBC Capital Markets, Mr Flannery went into some detail about his thinking, highlighting the potential for full or partial spin-offs in some core divisions: power equipment, aviation and healthcare.
He mentioned Synchrony Financial, the consumer credit business that was spun off first in part and then fully, and Baker Hughes, the oilfield services group where GE retains a 62.5 per cent stake, as possible examples to follow. “That's something we’d consider for other parts of the company. Whether that’s power, aviation or healthcare, we’re going to have to go through all of those exercises,” he said.
There is another precedent for this type of change. Siemens, GE’s closely watched rival, is selling a minority stake in its Healthineers healthcare business which is expected to attract a valuation of about $50bn. An initial public offering, giving Healthineers a separate listing, is expected in the next few months.
Such a spin-off can be a good way for companies to jolt investors into properly valuing businesses that are under-appreciated. The problem for GE is that it is not clear that it has any such hidden gems. A sum-of-the-parts valuation suggests that GE’s aviation business, which makes aero engines and other equipment for aircraft, is worth about $85bn, according to Jeff Sprague, an analyst at Vertical Research Partners. The healthcare business might similarly be worth about $56bn, based on comparisons with other companies in the industry, while power generation might be worth about $36bn. Adding those amounts together with the other smaller businesses, and subtracting liabilities including debt and pensions costs, the result is something close to GE’s present market capitalisation of about $158bn. It does not look as though there is a pot of gold there waiting to be uncovered.
A further break-up also risks damaging the group’s financial strength and credit rating. Fitch, the rating agency, warned on Tuesday that it could downgrade GE if it “becomes significantly smaller and disposes of a large part of its industrial businesses, reducing the company's diversification”.
GE’s three core businesses have some technological similarities, and benefit from shared research centres and software development, but there is no overwhelming reason why they have to be in the same group. That does not mean that a demerger would be a quick fix for GE’s problems, however.
The reality is there is no quick fix, analysts say. GE’s performance will be turned round by executives doing the slow and steady work needed to win orders and cut costs. As Jim Corridore, an analyst at CFRA, observed on the charge for insurance liabilities: “We believe GE’s restructuring is a several year process, and this is part of it.”
