3 June 2020

GE Considers A Breakup Amid Troubles

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General 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 reshape GE.”

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 company.

“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 told analysts.

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.

Click here for the original article from Wall Street Journal.
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