GE plans to split into 3 companies
GE PLANS TO SPLIT INTO 3 COMPANIES, TO FOCUS ON HEALTHCARE, AVIATION AND ENERGY
Following years of underperformance, the US industrial conglomerate, General Electric (GE) announced on Tuesday, November 9th, 2021 that it will split into three entities. These separate entities to be formed will be focusing on aviation, health care, and energy all within the firm. GE in a news release revealed plans to spin off the healthcare unit by early 2023 and the energy unit by early 2024.
The company, which represents the symbol of American ingenuity, has made its mark in the manufacturing of products ranging from jet engines to lightbulbs, kitchen appliances to X-ray machines.
GE’s roots can trace back to Thomas Edison and was once the pinnacle of financial success, famed for its consistent returns, corporate prowess, and an unwavering pursuit of expansion. Before the financial crisis in 2017, GE was the world’s second most valuable firm, behind ExxonMobil, Royal Dutch Shell, and Toyota. However, as the nation’s digital giants have taken up the mantle of innovation, GE has fallen out of favour with investors and has struggled to evolve. Apple, Microsoft, Alphabet, and Amazon, whose goods have grown indispensable to modern American life, have market capitalizations in the trillions of dollars. Meanwhile, years of debt, poorly timed acquisitions, and underperforming operations have reduced GE’s value. It now has a market capitalization of almost $122 billion.
The division is in the hopes of achieving more centralized growth and profit, CEO Lawrence Culp made this known in a statement accompanying the announcement “By forming three industry-leading, global public companies, each can benefit from increased concentration, specialized capital allocation, and strategic flexibility to generate long-term growth and value for customers, investors, and workers,” He further added that “To better serve our clients, we are putting our technical experience, leadership, and worldwide reach to work.”
Culp will take on the role of non-executive chairman of the healthcare company, which will remain GE’s 19.9% ownership. On January 1, 2022, Peter Arduini will take over as president and CEO of GE Healthcare, while the integrated renewable energy, power, and digital firm will be led by Scott Strazik. John Slattery, the company’s current CEO, will continue to run the aviation business with Culp.
Wedbush Securities managing director Dan Ives said the split was long overdue. “Traditional stalwarts like GE, GM, and IBM all had to adjust with the times as huge US firms looked in the mirror and saw the sluggish growth and lack of organizational efficiency,” Ives stated in a press release on Tuesday. “It’s another milestone in GE’s long and illustrious history, as well as a sign of the times in this new digital era,” says the company.
GE used to be associated with business excellence and innovation. Jack Welch, the company’s larger-than-life CEO, cut jobs and rapidly grew the company through acquisitions. According to Fortune, GE was worth $14 billion when Welch took over in 1981, and it was worth more than $400 billion by the time he stepped down 20 years later.
Even in the early 2000s, GE was the largest business by market value, but then came the financial crisis. Weighed down by its problematic financial business, GE’s successor, Jeff Immelt, was never able to reclaim the top spot.
Culp, who formerly headed Danaher,( an American company that designs, manufactures, and markets professional, medical, industrial, and commercial products and services), became GE’s CEO in 2018. Under Culp’s leadership, the corporation has spun off or sold several of its divisions in an effort to streamline the conglomerate’s business structure.
“We’ve made a lot of progress over the last several years, not only with the balance sheet but also with enhancing our core operations,” Culp said during a conference call with investors and analysts on Tuesday. “However, as we’ve seen in several cases outside of GE over the previous decade, spinning a solid business increases focus and accountability.”
GE shares have lagged the market for the past two decades, notwithstanding recent outperformance. According to FactSet, the stock has lost 2% each year since 2009, compared to a 9% average return for the S& P 500. GE said it was on schedule to reduce its debt by $75 billion by the end of 2021, leaving it with around $65 billion in gross debt. According to Colin Scarola, an equity analyst with CFRA Research, the company’s liabilities will continue to haunt the new stand-alone entities.
Wall Street experts applauded GE’s decision on Tuesday morning. In a statement to clients, Analyst Joseph O’Dea said, “The move does add expense, but the nimbleness of three specialized entities will likely be viewed as an opportunity set to more than balance any new costs.”
According to GE, the proceeds from the recent sale of its aviation financing unit would be utilized to reduce debt, with gross debt forecast to be less than $65 billion by the end of 2021. The spinoffs will cost roughly $2 billion in transaction and operations costs, according to the company.
