The future looks bright The future looks bright\images\insights\article\light-bulb-changing-small.jpg April 15 2024 April 17 2024

The future looks bright

General Electric's split sheds light on the potential for value creation. 

Published April 17 2024
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Breaking up is hard to do, but in business it can be the right call.

This month marked the end of General Electric’s storied existence as an industrial conglomerate when it spun off its power and renewables business as GE Vernova. Founded more than 100 years ago and powered by innovation, GE produced iconic consumer household products, such as lightbulbs and radios. Perhaps a victim of its own success, the company became so dominant in many of these categories it sought external growth opportunities, often in unrelated markets like financial services, entertainment and energy.

GE’s path to diversification added stability at times, but based on the company's recent history, it ultimately proved to be value destructive. Famed CEO Jack Welch divested its market-leading GE/RCA television business but made a regrettable pivot to financial services with GE Capital. Difficult to manage, it burned out in spectacular fashion as the economic backdrop unraveled through the financial crisis. Even as the company struggled to regain its footing, it continued to make deals, though not always helpful ones. The widely panned $14 billion acquisition of French-based power company Alstom led to the demise of CEO Jeff Immelt. Under his successor, John Flannery, the conglomerate still struggled financially, burdened by debt. Real change was needed.

GE accomplished this by looking externally for its next leader, something it had never done. It hired Larry Culp based on his track record of success at Danaher. During his tenure at the life sciences firm, he drove shareholder returns based on continuous improvement and value-added capital allocation—attributes GE had been missing for a long time. Recognizing the parts were worth more than the whole, he ushered the company to a split into three businesses focusing on the aerospace, health care and power industries. Its share price has more than doubled since the plan was announced, outpacing broader equity market gains during that same time.

Faced with similar challenges, many successful companies implement a less risky strategy of increased internal investment in organic growth opportunities complemented by smaller external “bolt-on” acquisitions to add ballast in a specific area. But transforming a department into a separate company through a spin-off/split can accelerate the process. It essentially mandates that the growth opportunity gets the necessary attention and investment. When effectively executed, this strategy can be a source of shareholder value creation.

GE HealthCare operates in a consolidated industry with long-term tailwinds from an aging population. GE Vernova sits at the center of the energy transition and stands to benefit from the increased power demands of the AI boom. GE Aerospace, which will trade under the legacy GE ticker symbol, powers three of every four daily commercial flights and should benefit from the secular growth in travel stemming from the rise in the global middle class. Like the lightbulb that launched the original, the future looks bright for the standalone companies. 

Tags Markets/Economy . Fixed Income .

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