Electric Co.’s chief executive said the company is considering
breaking apart the American icon, after a sudden collapse in its profits last
year raised questions about the industrial conglomerate’s business model.
John Flannery, who took over as
CEO last summer, said the Boston company is re-evaluating its strategy and
structure, including carving out its major divisions into separately traded
units. GE employs about 300,000 people and sells everything from airplane
landing gear to hospital incubators around the globe.
“We are looking aggressively at
the best structure or structures for our portfolio to maximize the potential of
our businesses,” Mr. Flannery said on a conference call Tuesday, promising to
update investors in the Spring. “We need to continue to move with purpose to
GE spent decades striking deals
that once made it the most valuable U.S. company, with a financial-services arm
that rivaled the biggest banks and a media empire that included NBC. But since
the financial crisis the company has shrunk
its operations to focus on its core industrial divisions. It also made
big bets on oil and coal markets that have depressed recent results.
After years of underperformance,
GE shares tumbled last year—erasing more than $100 billion in market
value—after the company changed CEOs and revealed that it was struggling to
generate enough cash to fund its dividend. On Tuesday, GE disclosed it would
book a $6.2 billion charge in its fourth quarter and would have to set aside
$15 billion over seven years to bolster insurance reserves at its GE Capital
unit, surprising investors with deeper-than-expected problems in a business
many thought the company had left behind.
The possible breakup of an icon
like GE reflects broader pressures on businesses to adapt faster to
technological change and competitive threats. “The challenge for large
companies, especially for conglomerates, is how do you adjust the pace of
decision making…to reflect the world we live in,’’ said Richard I. Lesser, CEO
of Boston Consulting Group Inc.
A breakup would come just a few
months after Mr. Flannery unveiled his plan to turn around the struggling giant
by focusing on its three core units—aviation, power and health care. In
November, Mr. Flannery slashed the dividend by half and said he would divest
$20 billion of assets, though he stopped short of the more dramatic structural
changes he raised on Tuesday.
GE has been under pressure from
investors, including activist Trian Fund Management, to
cut costs and revamp its operations. Last year, executives blamed
overcapacity in its big power business for a shortfall in profits and cash
flow. In December, GE said it would cut 12,000 jobs in the unit, which makes
turbines used in power plants around the world.
On Tuesday, Mr. Flannery revealed
new problems in GE’s insurance business and said the latest thinking on the
company’s structure was part of his continuing review of the portfolio. For
decades, GE has argued its different units benefit from centralized research
and global sales teams and a management culture that is consistent throughout
“The real core approach here is
to make sure that these businesses can flourish in the decades ahead and that
they have the right capital structures and investment resources to do that,” he
He pointed to the spinoff of GE’s
credit-card business into Synchrony
Financial and the merger of the GE Oil & Gas division into
separately traded Baker Hughes as
examples of moves that could work for other parts of the company. GE is now
exploring a sale of its majority stake in Baker Hughes.
U.S. businesses, large and small,
have been under pressure from investors to streamline their operations or carve
them up. Firms including aluminum pioneer Alcoa Corp. , chemical
giant DowDuPont Inc., Xerox Corp. and Hewlett-Packard have moved in recent
years to pull themselves apart.
Honeywell International Inc. and United Technologies Corp. ,
rivals to GE, are both exploring changes. Another industrial conglomerate, Tyco
International Inc., broke itself into several companies a decade ago, under the
guidance of a Trian ally.
“GE is a relic of a bygone era,”
said Robert Salomon, a management professor at New York University’s Stern
School of Business. Mr. Salomon said former GE Chief Jack Welch’s status as
“darling of Wall Street” in the 1990s allowed his pursuit of diversification to
work when the same approach failed for many other managers and conglomerates.
The idea that companies from
different industries can be managed together in an efficient way and help
offset growth cycles doesn’t add a lot of value, Mr. Salomon said. Over the
last decade, former CEO Jeff Immelt worked to shift the focus back to the industrial
operations, but ultimately didn’t do enough, he added.
The charge disclosed Tuesday
follows a reassessment of the conglomerate’s remaining insurance business.
Although GE sold much of its financial-services operations after the 2008
financial crisis, it kept on its books billions
of dollars of coverage for long-term-care policies that had been sold
by other insurers to consumers. Those policies—about 300,000 of them—promise to
pay for nursing homes and other care for individuals.
Although GE hasn’t covered new
policies since 2006, it and other insurers have begun to reckon with what are
emerging as deep shortfalls. Over the past several years, many insurers have
sought regulatory approval from state insurance departments to increase rates,
with partial success, saying they aren’t collecting enough in premiums to
offset the claims as those individuals age.
GE discovered last year that its
reinsurance coverage was operating at a deficit, prompting the company to
review all of its assumptions, according to a person familiar with the matter.
The upshot is that the GE Capital
unit, which had been paying dividends in recent years to the parent company,
won’t pay dividends to GE for the foreseeable future. GE had suspended the GE
Capital dividend last year and slashed
its payout to shareholders by half.
Mr. Flannery has been working to
streamline the once far-reaching GE Capital unit and focus it on providing
financing for GE’s industrial
operations, such as jet engines and MRI machines. He expressed frustration
at the review’s results while saying the actions would restore GE Capital
ratios to appropriate levels.
“A charge of this magnitude from
a legacy insurance portfolio in run-off for more than a decade is deeply
disappointing,” he said.
GE shares slid 3.6% in afternoon
trading Tuesday to $18.09, down more than 40% from a year ago. Wall Street was
braced for the charge, which GE had said would exceed $3 billion. The company
is slated to report its fourth-quarter financial results next week.
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