- General Electric announced a major reorganization on Tuesday, saying it plans to spin off its healthcare business and divest its stake in oil-services company Baker Hughes.
- The efforts can be viewed as a challenge to multiple initiatives implemented by former CEO Jeff Immelt, who was replaced in October.
- One Wall Street analyst argues that Immelt’s legacy has been damaged by these new corporate maneuverings, and explains why a change was necessary.
Perhaps the biggest blow to date was landed on Tuesday, when the company said it plans to spin off its healthcare business and divest its stake in oil-services company Baker Hughes.
It wasn’t just that John Flannery, who replaced Immelt as GE’s chief executive officer in October, announced a massive shake-up to the company’s operations. It was that the businesses he targeted were two of Immelt’s pet projects from his 16-year tenure.
Immelt’s ties to GE Healthcare run particularly deep, with the former CEO having headed up the division – formerly known as GE Medical Systems – in the late 1990s, before taking over the top job for the entire company.
Meanwhile, the divestiture of GE’s 62.5% stake in Baker Hughes marks the dismantling of a deal Immelt fought tooth and nail for just 18 months prior. While his goal at the time was to play a rebound in energy prices, Flannery and the company’s board were clearly dissatisfied with its ultimate effect on GE’s bottom line.
On a broader basis, Flannery’s attempt to streamline GE’s operations by trimming fat is a challenge to Immelt’s overall approach of combining disparate businesses into a single conglomerate. It’s a far cry from the former CEO’s diversified approach, which included 380 acquisitions made during his tenure at a cost of more than $US175 billion, according to data compiled by Forbes.
Flannery’s message is clear: This is the new and allegedly improved GE. The company is going to focus on the areas where it excels (aviation, power, renewable energy) and exit cost-heavy areas saddled with debt.
Jeff Windau, a senior equity analyst at Edward Jones, didn’t pull any punches when discussing the impact of recent events on Immelt’s public perception.
“His legacy is tarnished based on what has happened here,” he told Business Insider by phone.
Of course any discussion of Immelt’s GE tenure is incomplete without looking at the measuring stick for any CEO: the company’s stock price.
And judging by its performance in recent years, it seems the measures Flannery has taken to improve matters were overdue. After surging more than 300% from the start of the bull market through the first half of 2016, GE has since tumbled more than 60%.
Windau, for one, has some ideas why the company’s stock has flailed – and it doesn’t paint a pretty picture for Immelt. He argues that amid all the deal activity swirling around GE at all times, the former CEO was unable to make satisfactory improvements to the company’s balance sheet.
“They weren’t able to reinvest into business that really improve the cash position of GE,” Windau told Business Insider. “They did make an investment in a power-related business, but those businesses haven’t generated the kind of cash that they had previously.”
He continued: “It seems like [Flannery] is saying those businesses haven’t generated huge cash flows, and those flows were then not reinvested well.”
One other issue relating to GE’s stock is the prized dividend it offers. While the company said it will maintain its current distribution through the healthcare spinoff, it has plans to adjust it “in line with industrial peers” after that’s concluded.
Some Wall Street experts are bracing for the worst, with JPMorgan analyst Steve Tusa telling clients that “the dividend will be cut materially.” Needless to say, such a trimming would be an unwelcome development for investors who rely on the regular payment, especially after it was already lowered in November.
Issues bubbling to the surface
To Windau, the failure of the entity known as GE Capital – a subsidiary still kicking around despite multiple spinoffs – serves as a microcosm of the issues that plagued the end of Immelt’s tenure.
It all comes back to the company’s balance sheet, which has been bogged down by debt obligations, and is the impetus for the firmwide consolidation sought by Flannery. Put simply, Windau says Immelt borrowed too much money, and misused the cash he did have on hand.
Bank of America Merrill Lynch is certainly no fan of GE Capital. Back in early April, the firm wrote in a client note that the business had “zero equity value,” which is troubling considering the $US95 billion of outstanding debt it had on the books at the end of 2017.
There’s also the peculiar case of the $US15 billion shortfall from GE’s legacy long-term care insurance business. It was revealed in January that management had underestimated the amount in reserves it needed to cover potential payouts to policyholders, with collected premiums unable to cover the costs of the business.
The announcement took investors by surprise, and, perhaps more important, raised questions around any other liabilities the company may have trouble offloading in the future. These are likely the same types of questions GE’s board asked themselves when deciding to replace Immelt.
“Those things took a long time to develop and unfortunately a lot of that’s hitting now,” Windau said. “These troubled businesses had been falling for quite a while, and the issue is now at the forefront.”
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