Board members to go down to 12
GE’s new boss outlines steps for making the conglomerate smaller and more focused.
General Electric Co’s new chief executive John Flannery on Monday outlined steps that will turn the biggest US industrial conglomerate into a smaller, more focused company, surprising some investors who sold the company’s shares to a five-year low.
Flannery’s plan to shrink GE’s multiindustry array of businesses was a reversal of the deal-driven empire building of his predecessors, Jeff Immelt and Jack Welch, and potentially a milestone in the decline of the conglomerate as a business strategy.
Other companies that once emulated the GE model of spreading bets among diverse industries are now unwinding their portfolios as well, something Immelt also did throughout his 16 years as CEO, even as he made acquisitions.
Flannery said he would pare GE down to three core businesses: power, aviation and health care. He will keep Immelt’s strategy of building software to complement GE’s machinery, albeit with a narrower focus and reduced budget.
For investors, Flannery’s decision to cut both the dividend and the 2018 earnings forecast by half added up to a whole that was less than they judged GE be worth last week.
GE shares fell to their lowest level in more than five years as investors worried the years-long overhaul would not pare down enough expenses or generate as much cash as they hoped. They closed off the day’s lows, down 7.2% to $19.02.
GE stock has effectively been dead money since September 2001, when Immelt took over, posting a negative total return even after reinvesting its juicy dividends.
Once the most valuable US publicly traded company, GE now has a market value of $168 billion, less than a fifth of Apple Inc.
Flannery, who took over as CEO on Aug 1, said he was “looking for the soul of the company again” and would focus on “restoring the oxygen of cash and earnings to the company.”
He will cut its board to 12 from 18 members, and bring on three new directors early next year.
GE said it already has shed 25% of its corporate staff, meaning 1,500 jobs around the world, including some at its Boston headquarters. It is aiming to reduce overhead cost by $2 billion next year, half of that at its troubled power unit that sells electrical generation equipment.
The transition includes GE getting rid of at least $20 billion of assets through sales, spin-offs or other means.
“GE will jettison businesses with a very dispassionate eye,” Flannery said, keeping only units that offer growth, a leading market position and a large installed base.
GE said it would exit its lighting, transportation, industrial solutions and electrical grid businesses, all of which were widely expected, closing factories around the globe. But it was vague about other disposals.
It plans to get rid of its 62.5% stake in oilfield services company Baker Hughes, only months after making the multi-billion dollar investment.
Flannery offered no quick fixes for investors. He said power, one of the businesses GE would focus on, was “challenged,” but could be turned around in one to two years.
GE’s Digital unit, on which Immelt bet billions of dollars, would focus on selling apps to customers in its core businesses, Flannery said.
He confirmed that the shift meant sales staff were being let go, as Reuters reported last week.
GE also will cut spending on the digital unit to $1.1 billion in 2018 from $1.5 billion in 2017. GE had previously said it would invest $2.1 billion in its digital unit in 2017, but that tally included money not tied to Predix, GE’s industrial-internet platform.
Flannery said there was “no retreat on the idea” of GE providing both applications and the Predix platform to connect industrial equipment to computers that can make machines run better. However, getting one of its key applications to run on Predix could take two more years.
He added that some of its healthcare IT business, such as software for imaging and hospital staff scheduling, were still critical to the company and not likely to be divested.
The dividend cut, to 48 cents from 96 cents next year, is only the third in the company’s 125-year history and the first not during a broader financial crisis. It is expected to save about $4 billion in cash annually.
GE forecast 2018 adjusted earnings of $1 to $1.07 a share, compared with its earlier estimate of $2 per share. Wall Street was expecting $1.16, according to Thomson Reuters I/B/E/S.
In this handout photo GE CEO John Flannery addresses investors at a meeting in New York.