GE GE Aerospace

By Ted Mann 

Nelson Peltz's decision to bet $2.5 billion on General Electric Co. gave a boost to the industrial giant's foundering stock price, but just how long the good feeling lasts now rests on the company's board and leadership.

The emergence of Mr. Peltz's Trian Fund Management LP as one of GE's top 10 investors came without a typical activist investor's arsenal of attack-like demands for board seats or calls to split up the company. Instead, Trian had a rather light prescription: adding $20 billion in debt to fuel more buybacks, reining in mergers and acquisitions, and accelerating cost-cutting.

Shares of GE rose 5.3% to $26.83 Monday, adding $13 billion in market value. It was the conglomerate's biggest one-day gain since it decided in April to part ways with its massive lending business. But the stock had surrendered all the gains since April amid concerns that global growth is slowing.

Mr. Peltz is gambling that GE's share price hasn't reflected all the work that has been done to streamline the company's industrial businesses and exit the lending operation, said Jack De Gan, a principal at investment manager Harbor Advisory, which owns GE shares. "I'm not really sure how many new ideas he can inject and how much more he can expect them to do."

GE Chief Executive Jeffrey Immelt is in the midst of reshaping the conglomerate to jump-start its stock price that is 32% below when he started in 2001. Mr. Immelt has adopted moves long sought by investors, such as exiting the bulk of GE's finance arm, selling off GE's slow-growing appliance business and cutting corporate expenses to improve margins. Many of those moves have won plaudits from analysts but have done little to boost GE's stock price, which hasn't crossed $30 since the financial crisis.

The investment by Mr. Peltz's Trian followed years of cultivation by GE and Mr. Immelt. While Mr. Peltz was building his position in GE this year, he visited the company's facilities and met with business-unit leaders. Mr. Peltz never briefed the full GE board on his plans for the company, though Trian had conversations with John J. Brennan, GE's lead independent director and the former CEO of mutual fund Vanguard Group, according to a person familiar with the talks.

GE has 16 directors on its board but just four directors that were appointed before Mr. Immelt took on the role of chairman in 2001. Mr. Brennan joined the board in 2012 and was named lead director last year. He has increased the company's engagement with its investors, holding approximately 70 analyst and investor meetings with GE leadership present in 2014, according to GE's annual report.

Mr. Peltz's relationship with GE goes back several years. Mr. Immelt approached Mr. Peltz in 2007 to join GE's board then, but it didn't happen. Two years ago, Mr. Peltz was invited to address GE corporate officers, a meeting GE says wasn't about activism but about business in general.

Mr. Peltz has weighed in to praise Mr. Immelt's leadership in the media, defending him against critics who charge that GE's stock has lagged behind under his stewardship.

Much of Mr. Peltz's investment thesis, laid out in an 81-page slide presentation, was consistent with other research about the company this year. GE has strong growth prospects and leading positions in its three biggest industrial businesses--power turbines, jet engines, and medical scanners. And it is quickly shedding the lending business that had been the primary deterrent to its stock.

"I don't think Trian is the first to tell them to lever up on the industrial debt by $20 billion, and certainly there will be enormous capability to go even further than that," said Jack Murphy, a portfolio manager at Levin Capital Strategies L.P., which holds 10 million shares of GE, its largest industrial holding.

Trian and GE didn't mention changes to the industrial portfolio in announcing Mr. Peltz's investment. Julian Mitchell, an analyst for Credit Suisse, ventured that the arrival of Trian could prompt GE to dispose of businesses that have lagged behind, like its lighting and energy-management units, or undertake a deeper shake-up in its health-care division.

Mr. Mitchell, who has a target share price of $31, seemed to agree with Trian's investment thesis that borrowing to buy back shares could boost GE's stock price. If the company were to borrow $30 billion--$10 billion more than Trian suggested--that could push GE's share price "into the high 30s level over the medium-term."

David Benoit contributed to this article.

Write to Ted Mann at ted.mann@wsj.com

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October 05, 2015 20:05 ET (00:05 GMT)

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