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GE Gives Investors a Breakup. That’s a Start: Brooke Sutherland

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These translations are done via Google Translate

June 26, 2018, by Brooke Sutherland

(Bloomberg Opinion)

Nearly a year into his tenure, General Electric Co. CEO John Flannery has finally broken the tension between the old GE and the new GE.

On Tuesday, the industrial giant delivered its long-awaited breakup plan. No more dribs and drabs; this is the big one. GE will spin off its health-care division, separate out its interest in its Baker Hughes energy business and take additional steps to shrink GE Capital. This is less radical than the full-blown split that some investors had been prepared for, but it will go a long way toward making GE less of a conglomerate. Shares of GE spiked more than 6 percent in early trading.

Investors had been getting antsy for want of a concrete update on the portfolio, and some fear had crept in that this might just be a slow grind. I’ll caution that GE is still in for a long recovery, and that this isn’t a miraculous fix for all its woes (more on that later). But with Tuesday’s announcement, GE is at least on the path toward the kind of radical rethink I’ve long believed it needed. I give credit to Flannery for finally pulling the trigger.

It’s notable that the health-care business is one of the assets being carved out. It’s long been one of the more obvious misfits in GE’s portfolio; there’s really no reason that MRI machines have to be sold by a company that also purveys jet engines, especially now that the “GE store” of shared technology and resources has been shown to be not all it was cracked up to be.

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But spinning off the business has to be bittersweet for Flannery, who successfully boosted margins and revenue growth there after being brought in to fix it in 2014. Tuesday’s announcement is proof that he’s willing to be pragmatic when it comes to the portfolio. A lot of CEOs say there are no sacred cows; not all of them mean it.

Also significant is the appointment of former Danaher Corp. CEO Larry Culp as lead board director. He has a track record of operational excellence and will replace Jack Brennan, who should have been booted earlier in light of his role in overseeing the poor capital allocation decisions and earnings disappointments that put GE in this mess. Better late than never. GE still doesn’t have an independent chairman, despite an Institutional Shareholder Services Inc. recommendation that it get one. Still, it takes backbone to support Culp ascending to the top board job, given investor murmurings that he might be a good candidate to become GE CEO if Flannery fell short.

And now for the word of caution: None of the changes GE laid out on Tuesday are going to happen quickly, and the value proposition for what remains is still murky.

A separation of the Baker Hughes business isn’t a new idea and GE is guiding for an “orderly” separation over the next two or three years. The plan to sell $25 billion in energy and industrial finance assets is really an extension of a wind-down GE laid out in January following a surprise $15 billion reserve shortfall at an insurance unit, and GE is targeting a 2020 completion date for that. It’s a bit jarring that the parent company is pumping $3 billion into GE Capital after management previously said it wouldn’t need to do so. The health-care spinoff won’t be completed for another 12 to 18 months.

In parting with Baker Hughes and the health-care division, GE is also cutting ties with two of its biggest sources of future growth and a decent chunk of cash flow. It’s appropriate that the company will reconsider its dividend following the separation. But GE will still be left with a struggling power unit, a renewable-energy business where margins are under pressure, and a crown jewel aviation unit that still might not get the attention it deserves. I have long believed that there is value in making GE simpler and giving its business units more autonomy. The onus is on Flannery to prove that out.

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