General Electric Company (GE) has come to a full circle and now can’t afford to be anything but a more focused industrial company that it once was before getting spun into this all encompassing conglomerate. For years, GE managed to spend its way into all sorts of businesses but was trapped in poor investment performances. The results have been a lot of money out but not enough of it in return, with negative cash flows balanced out by ever increasing debt load. Naturally, this can’t go on forever and the time is finally here for GE to rein in any unnecessary spending and squeeze out every bit of more revenue. GE’s restructuring essentially looks like this: sell both losing businesses to save money and other non-core assets that are still performing for additional cash, as well as increasing the performance of its remaining industrial units.
Accelerating For-Sale Process of Losing Businesses
GE’s most unprofitable business is GE Capital. Just as everyone thought that GE for sure had dissolved its financial operations, GE Capital is still alive, but only not too well. GE has a tendency of taking it slow when it comes to shedding unwanted assets. Either they’re sold one piece at a time or GE would still hold onto them by way of mergers or spin-offs, raising no cash from such transactions. After years of efforts to get out of the financial business, GE is still keeping its industrial financing, namely its aviation and energy finance.
While GE’s financing operations are intended to promote sales of its aviation and energy products and services, it’s unlikely that absent financing from GE, customers looking to purchase GE products won’t be able to find financing arrangements from other specialized financial companies. It’s just not a business that GE can leave its own mark on and generate much added value from. Given GE Capital has assets of over $100 billion out of GE’s total assets of below $400 billion, A complete sale of GE Capital would contribute significant financial resources to cash-strapped GE.
Outright Asset Sales vs. Mergers and Spin-Offs
To state plainly, GE now simply doesn’t have the needed resources to run all the different businesses at optimal levels. To stay competitive in all it does, GE would have to keep up with capital injection and R&D spending continually for each business. Since GE can’t afford that anymore, everything must go except power and aviation, its two largest revenue and profit contributors. GE’s weak finances also make any resource-consuming strategic initiatives a thing of luxury, a reason why GE Digital is also on the chopping block even though Predix, the division’s digital data platform for connected machines, can play a positive role for GE’s aviation and power business. If GE keeps the digital division in-house but is unable to make continued investments, eventually it loses out to deep-pocket players, also aiming at IoT-related platform applications. Trying to survive now, sacrifices like this may harm GE strategically in the long run.
As usual, GE is going only half-way in severing GE Digital since it’s spinning off most of the the division to be an independent, wholly-owned subsidiary. GE is possibly betting on the prospect that it might be able to bring the digital business back in later, when GE has improved its finances and the independent GE Digital has kept up with competition under its own capital structure and new management. Let’s hope it’s not a wishful thinking, not like what happened to GE’s oil and gas business. Instead of selling it for much needed immediate cash, GE merged its oil and gas with Baker Hughes’ field operations and retained a majority stake in the combined company. But now a couple of years later, GE is finally liquidating its holdings just when its position has lost more than half of its original market value.
GE often fails to make the initial hard choice when it comes to asset divestiture. Two more examples would be how GE has handled its transportation and healthcare units. Again here, outright asset sales are giving way to a merger and spin-off, when GE could have gotten more cash if they were direct asset sales. GE Transportation was merged cashless with Wabtec Corporation, a provider of rail equipment and services. For its healthcare unit, GE is selling only 10-20 percent of the assets and spinning off the rest to shareholders. There hasn’t been a lot of cash received by GE from unloading all the assets. When GE remains tied up with many of its old assets, it creates a different kind of uncertainty, that is, how future returns from all the mergers and spin-offs may justify such continued holdings.
Improving Performance of Existing Assets
Poor asset performance has been a problem all around for GE for many years. Retaining mostly its power and aviation assets, GE now lives or dies by the performance of those two assets. There will be a long pause in any kind of asset expansion going forward and improving asset performance now really pertains to increasing revenue out of existing assets and growing their margins. Between GE’s power and aviation divisions, its aviation business has performed better, with continued growth in both revenue and profit for the last three years. But the under-performing power business is the larger unit that saw both revenue and profit declines most recently in 2017. Absent a powerful performance from the main power division, it’s impossible for GE to transition into a stronger financial position.
Investor Note
The life of GE is going to be a boring one for the foreseeable future. Forget about all the good things GE used to bring to excite the markets. Imagination probably won’t be at work when an implicit mission is to pay down debt with every bit saved and earned. After years of debt reductions, GE’s total debt is still close to two and half times its shareholders’ equity, compared to the industry average of an one-to-one ratio. GE can now only hope to make a killing in its remaining power and aviation business whereby there isn’t a lack of tough competitors. Looking outward, if some of GE’s asset divestment plans fail to deliver, with its holdings not generating expected returns, that would put additional pressure on funding debt reductions. It’s worth the wait by all means, while GE is still early in its restructuring and recovery.
JW Investments Associates: Research & Management 