GE’s storied past as a premier American business empire has been heading downhill since the turn of the century, and has been in shreds since the 2008 financial crisis. Under CEO Larry Culp, the conglomerate is finally splitting into three distinct entities, each with an independent focus, management, and finances.
Falling share prices, more than a decade of falling revenues, and a general negative consensus over its future outlook finally made U.S. industrial behemoth General Electric announce a company-wide split that will see the formation of three independent companies, each involved in separate sectors.
The three independent companies are GE Healthcare, GE Energy comprising GE Power, GE Renewable Energy, and its digital arm GE Digital; with the remainder being its golden goose GE Aviation.
According to CEO Lawrence “Larry†CulpOpens a new window , GE, which emerged as a national powerhouse and a conglomerate in its 129 years of existence, took the landmark decision to improve financial, business, and operating performance.
Culp said in an interview, “What we’re doing today is creating three outstanding investment-grade, global leaders in health care, aviation and energy. GE has led in these markets for a long time and today we’re setting ourselves up for another century of leadership.â€
Investors and traders quickly displayed their support for the move that aims to spin off GE Healthcare by 2023, and GE Energy by 2024. The company’s share price, already up more than 54% in the past 12 months, jumped over 5.8% the next day of the announcement as the market opened but settled for a 2.66% gain at day’s end. Still, a three-year high.
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As the week progressed, share prices of GE fell as investors started booking profits. GE shares closed at $107 on November 11. It is possible that this is just a consolidation of the investor positions in the company. RBC Capital Markets analyst Deane DrayOpens a new window touts GE shares to be actually worth $130, or 21.5% higher than where it closed on Thursday, November 11.
Taken under the leadership of Culp, who was appointed the company chief executive in October 2018, GE’s decision contrasts with that of Jack WelchOpens a new window , an industry legend, GE veteran and former CEO. Welch took over the reins of GE in 1981, then valued at less than $15 billion, and turned it into the highest-valued U.S. company with a market cap of ~$410 billionOpens a new window by the time he left.
Since then, the company underwent arguably its worst business phase as the 2008 financial crisis hit. With a market cap of just over $117 billion, GE has slipped considerably and currently sits at #77Opens a new window .
Unlike Welch, who expanded GE through diversification, Culp is taking the opposite path, emphasizing on debt reduction by selling off several businesses since he became the CEO. Under his watch, GE’s overall debt came down from $110 billion in 2018 to $63 billion.
Moreover, GE was bleeding cash from some of its divisions, which the company had no business being in. Case in point, GE’s finance arm GE Capital. It generated $31 billion in proceeds when it was sold off in March 2021. GE has also been selling its stake in oil field services company Baker Hughes since 2018, and offloaded GE Biopharma in March 2020.
“The world demands—and deserves—we bring our best to solve the biggest challenges in flight, healthcare, and energy,†saidOpens a new window Culp, who also serves as the GE chairman. “By creating three industry-leading, global public companies, each can benefit from greater focus, tailored capital allocation, and strategic flexibility to drive long-term growth and value for customers, investors, and employees. We are putting our technology expertise, leadership, and global reach to work to better serve our customers.â€
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Post the spin-off, GE will retain a 19.9% stake in GE Healthcare with Culp serving as the non-executive chairman of the new entity. Peter ArduiniOpens a new window will take up the role of president and CEO of GE Healthcare from January 1, 2022. Scott StrazikOpens a new window , the CEO of GE Power, will take up the same role at the combined renewable energy, power, and digital unit GE Energy.
Finally, GE Aviation will continue to be led by John SlatteryOpens a new window as CEO, and Culp in a leading role after the two companies are spun-off.
GE expects a one-time separation, transition, and operational costs of approximately $2 billion and tax costs of less than $0.5 billion. The proposed spin-offs of GE Healthcare and GE Energy are intended to be tax-free for GE and GE shareholders for U.S. federal income tax purposes.
Wells Fargo analyst and MD Joseph O’DeaOpens a new window noted, “The move does add cost, but nimbleness of three focused companies will likely be viewed as an opportunity set to more than offset any new costs.†With proceeds from the sales, GE expects to reduce its debt by more than $75 billion by the end of 2021.
Besides GE, U.S. healthcare company Johnson & Johnson, and Japanese tech giant Toshiba are also breaking off into smaller companies.
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