Why General Electric is being cut down to size

IF SOMEONE told you a few years ago that Jack Welch’s great American conglomerate General Electric (GE) was heading towards the buffers, you would call for the men in white coats.

The company was fêted in the 90s as the largest and best-run company in the world. It was generating double-digit earnings whilst other conglomerates disintegrated. Now a new CEO says the group might be broken up. In its heyday some people believed in the concept of ‘genius’ and the group had one – Jack Welch.

He bought modestly performing companies and turned them into high achievers. Then, the average American could switch on a GE light bulb, pick a frozen pizza from a GE fridge and pop it into a GE microwave while watching the GE-owned NBC television or sort out his or her GE savings or credit card accounts. Before Welch left, GE shares peaked at $60. Today they trade at $15.

A new order was installed in the shape of his successor, Jeff Immelt. During his 16-year tenure Immelt largely dismantled Welsh’s legacy.

He sold the group’s commercial property, online banking and transport financing. He also pulled out of plastics, entertainment (NBC) and even turned his back on the lucrative GE financial services.

Immelt also offloaded the insurance business but astoundingly kept some of the liabilities. He bought an oil field services operation, merging it with Baker Hughes, just before the collapse of oil prices and purchased a French gas-fired equipment company Alstrom as the industry was shifting to renewable energy.

In this execution of change, Immelt was cheered on by some active investors and analysts, but the group failed to repay their confidence.

In Immelt’s tenure the share price inched up to $30 a share, followed by a steep decline. To some investors he was an unlucky general.

GE was considered to be in need of the luck of the Irish or someone with an Irish name, at least. It appointed John Flannery as CEO.

Recently he stunned investors when he announced the group would have to pay $15bn in relation to long-term care insurance, liabilities it retained after spinning off the business more than 10 years ago.

An additional problem for Flannery is the arrival of the SEC, initially to investigate long-term power contracts but since expanded to include its insurance liabilities. These problems are a major blow to Flannery, who has stated he wanted a “simpler and more focused GE”.

Today the group has three core divisions; healthcare, performing well in 2017 with profits up 6pc to $3.4bn; aviation, which includes jet engines was up 8.1pc to $6.6bn; and regrettably for the group and investors, the power division which saw profits collapse.

The reason is a shift away from gas-fired plants for electricity generation to renewable energy. Orders are down 13pc and revenues from services fell 6pc.

This division is now planning to shed 12,000 jobs and looking at site closures which will impact on this year’s profits, expected to be in the $1bn range.

Is this the end of GE and its industrial conglomerate model? Well, Flannery has signalled his objective of a simpler and more focused GE and this could include a partial or total spin off of the three divisions.

He has also indicated he plans offloading $20bn of assets. There’s bound to be a few gems hidden amidst the $130bn group and their individual business is probably worth more than the sum of the parts.

Analysts value healthcare at $56bn, and aviation at $55bn, but the power division might be lucky to get $30bn.

Clearly the breakup runs the risk of damaging the group and shareholder value. If this suggests the eclipse of conglomerates so disliked by activist investors and most academics, it probably is not. But GE shareholders have been suffering badly in recent times. Last year the company cut its dividend by 50pc and GE’s market capitalisation has shrunk to $130bn from its peak of nearly $600bn in 2000. It is the most out-of-favour major industrial company in the US.

GE could consider a merger with one of its competitors United Technologies.

Power division is now planning to shed 12,000 jobs

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.