By Thomas Gryta
General Electric Co. is considering breaking itself apart, a
dramatic move that would mark the end of one of the oldest and
largest U.S. conglomerates.
The 125-year-old business, which was once the most valuable U.S.
company and still employs about 300,000 people, sells everything
from airplane engines to hospital incubators. But in the past year
the company that came to embody America's industrial power has
fallen on hard times, prompting it to change CEOs, sell assets and
slash its dividend.
Despite those moves, GE has struggled to reassure shareholders
that it has addressed its problems, especially in a climate where
activist investors are pressuring businesses from Alcoa Inc. to
Xerox Corp. to streamline their operations.
GE shares, down 40% in the past year, fell 2.9% more Tuesday
after the company disclosed it would book a $6.2 billion charge in
its fourth quarter related to its insurance operations and needed
to set aside $15 billion over seven years to bolster insurance
reserves at its GE Capital unit.
John Flannery, who took over as chief executive last summer,
said the Boston company is evaluating carving out its major
divisions into separately traded units. In recent years, GE has
jettisoned operations including home appliances and much of its
once-massive lending arm.
"We need to continue to move with purpose to reshape GE," Mr.
Flannery said on a conference call, promising to update investors
in the spring.
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, the longtime GE executive said he would divest $20
billion in assets, though he stopped short of the dramatic
structural changes he disclosed Tuesday.
People close to GE said the move to break up the company is an
evolution of Mr. Flannery's strategy as he has considered GE's
options, and wasn't prompted by the recent insurance problems.
The first steps to splitting up the company -- likely to result
in a smaller company and not the end of GE -- are expected by
spring, said one person close to the decision making. Multiple
people close to GE warned that pensions and GE's debt structure
could make separating the divisions difficult, but that such
problems can be addressed.
"There is no chance that the company just decides to do
nothing," said one of the people.
GE spent decades building itself up, creating a
financial-services arm that rivaled the biggest banks and a media
empire that included NBC. But since the financial crisis last
decade the company has shrunk its operations to focus on its core
industrial divisions. It also made ill-timed bets on the oil and
coal businesses that have depressed recent results.
After years of underperformance, GE shares tumbled last year --
erasing more than $100 billion in market value -- following the
company's disclosure that it was struggling to generate enough cash
to fund its dividend.
Investors including activist Trian Fund Management have pushed
GE to cut costs and revamp its operations. Last year, executives
blamed overcapacity in its big power business, which makes turbines
used in power plants around the world, for a shortfall in profits
and cash flow. In December, GE said it would cut 12,000 jobs in the
unit.
On Tuesday, as Mr. Flannery revealed new problems in GE's
insurance business, he said the latest thinking on the company's
structure was part of his continuing review of the portfolio. For
decades, GE had argued that 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 revampings. 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 CEO 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 conglomerate concept -- that companies from different
industries can be managed together in an efficient way and help
offset their disparate economic cycles -- doesn't add a lot of
shareholder value, Mr. Salomon said.
Over the past decade, former CEO Jeff Immelt worked to shift the
focus back to the company's industrial operations, but ultimately
didn't do enough, he added.
The charge disclosed Tuesday follows a reassessment of the
conglomerate's remaining insurance business. 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.
Reinsurance is an arrangement in which an insurer takes
responsibility for paying claims on policies that another insurer
sold to businesses or individuals
Although GE hasn't sold reinsurance since 2006, it and primary
insurers are now reckoning with old long-term-care policies that
were underpriced and are creating deep shortfalls as policyholders
age.
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 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.
Wall Street was braced for the insurance charge, which GE had
said would exceed $3 billion.
The company is slated to report its fourth-quarter financial
results next week.
--Joann S. Lublin, Leslie Scism and David Benoit contributed to
this article.
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
January 16, 2018 19:27 ET (00:27 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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