GE Breakup Idea's Time Has Come
GE Breakup Idea's Time Has Come
(Bloomberg Gadfly) -- General Electric Co. is finally contemplating a more radical breakup, but it had to go through quite the journey to get to this point.
After announcing a $6.2 billion after-tax charge in relation to legacy insurance businesses on Tuesday -- the latest in a long-running series of ugly surprises -- CEO John Flannery again faced questions about the ultimate structure GE should take as a company. His response had a new wrinkle this time: Flannery reiterated previous platitudes about no sacred cows, but he also seemed to give credence to the idea of a split that would see some of GE's divisions, including its health care, aviation and power mainstays, becoming separately traded assets.
A breakup still seems to be in the analysis phase, although CNBC is reporting an announcement could come by spring. Either way, this is the strongest wording we've seen thus far from Flannery. And to that I say: it's about time.
It is now abundantly apparent that the previous management team led by Jeff Immelt had little handle on the comings and goings of all the pieces of this sprawling conglomerate. The reasons for keeping GE together -- shared resources and technology -- look increasingly tenuous. If you ask employees, they don't really see the benefit of having both a power and an aviation business, for example.
But while it's the right move, I'm still a bit puzzled by GE's handling of the messaging around the company's turnaround. There was a decent contingency of investors hoping for a breakup going into GE's November investor update. Instead, all they got was a lower dividend and $20 billion of proposed divestitures that GE had by and large already announced.
The one new idea was a wind-down of its stake in the publicly traded amalgamation of its energy assets with Baker Hughes. On Tuesday, Flannery said that Baker Hughes structure is one he'd consider for the health care, aviation or power businesses. Might that have been a good thing to mention back in November?
I understand that some of GE's turnaround updates have come in dribs and drabs out of necessity. The insurance review, for example, wasn't completed until late last week. But if you are going to have a big investor update to lay out your strategy for rebuilding the company, that would seem to be your one shot to lay all your cards out on the table as far as a radical reset.
Mind you, a breakup will not be a quick fix for GE's problems. Not all investors are for it. Numerous analysts calculate that the sum of the company's parts is below its current stock price -- and that math arguably just got less attractive given its need to shrink GE Capital to maintain leverage levels in light of the significant charges with the insurance business. There may be tax liabilities.
But the appeal is the opportunity to rethink what GE wants to be as a company. It's possible that more-focused, nimble management teams with better aligned incentives could ultimately reap more value than sum-of-the-parts calculations suggest.
GE has arguably been in the middle of a slow-burn breakup for a decade. It may be time to take the final step.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.
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