Breaking up is often hard to do, but when survival depends on business agility, nimbleness and a long-term competitive strategy, there’s sometimes no alternative.
And that’s where General Electric (GE) finds itself. While announcing on Tuesday that its insurance business, which is part of the slimmed-down GE Capital, would take a $6.2 billion charge for the fourth quarter, CEO John Flannery also shared his vision for a segmented vision. “We are looking aggressively at the best structure or structures for our portfolio to maximize the potential of our businesses,” he said.
In other words, the 126-year old industrial conglomerate, which is set to report fourth quarter results next week, believes breaking up into smaller businesses is in its best interest. This strategic breakup may result in “separately traded assets really in any one of our units, if that’s what made sense,” Flannery said. But Wall Street hates the idea, punishing GE shares on Tuesday by as much as 4.26% to a session low of $17.96 on more than twice its average volume.
Gautam Khanna, Bill Ledley and Jeff Molinari, analysts at Cowen believes the company is worth far more together than as separate entities. “GE’s sum-of-the-parts valuation is below the current stock price, and that was true before [the] announcement today,” the analysts said in a research note Tuesday. “Thus, we see no quick fix for the stock.”
GE shares, which lost some 45% of its value in 2017, were the worst-performing component on the Dow Jones Industrial Average last year. GE’s stock grossly underperformed that of its closest peers such as Honeywell (HON), United Technologies (UTX), Boeing Co. (BA) and 3M (MMM) by significant margins. And this was partly because the Boston-based company has had a difficult time managing its many business, which includes lighting, health care, transportation, renewable energy, oil and gas, aviation and power.
This strategic breakup may result in “separately traded assets really in any one of our units, if that’s what made sense,” Flannery said. It would seem, by breaking up into smaller parts, the company is looking to reverse its fortunes with some financial creativity and flexibility. After all, a breakup has worked wonders for the likes of Alcoa (AA), Abbott Labs (ABT) and Mondelez (MDLZ).
But in GE’s case, it’s a double-edged sword. The breakup would also cause GE to lose synergies it has benefited from in terms of legal, tax and other costs, according to the Cowen analysts. What’s more, GE’s industrial operations would also be on the hook for the lion’s share of the $32 billion in net debt held by the company’s financial services unit, GE Capital. And this could be just the one of the reasons investors were angry today.
GE stock closed Tuesday at $18.21, losing 3%. The shares have risen 4.36% year to date, compared with a 3.85% rise in the S&P 500 (SPX) index. It may be a while before this news of a possible breakup settles in. But the topic is poised to dominate GE’s conference call when its Q4 results are released next week. Stay tuned.