For decades, General Electric Co.’s market capitalization was greater than the sum of the conglomerate’s many disparate parts. This premium—granted for the diversity of its revenues, the perceived synergies between its businesses and funding sources and a generally high regard for the company’s management—has entirely vanished over the course of the seven years that Jeff Immelt has run the company.
Since the end of 2001, the year when Immelt filled Jack Welch’s shoes, GE’s earnings grew by two-thirds, to $22 billion (Rs93,940 crore) in 2007.
This is no mean feat for a company that, when he took over, already had $126 billion of revenues. At the same time, the credit cards-to-microwaves-to-jet engines maker has seen its market value drop by $125 billion.
Because the market no longer accords GE a premium to the value of its components—and may in fact now ascribe a discount—it is no longer heresy for GE to consider breaking itself up. Its decision to spin off its consumer and industrial arm—which accounts for 10% of its non-financial revenues—shows that such thinking is indeed taking place inside GE’s Fairfield, Connecticut boardroom.
GE said it may spin off the division that includes its consumer appliances and lighting manufacturing operations to its shareholders as part of a strategic review of the business. GE had said in May it was considering a sale of the appliances arm.
“As we explored our options for appliances, it became clear that the fastest, most efficient step we could take in completing the transformation of our industrial portfolio would be to focus on a possible spin-off of the entire unit,” Immelt said in a statement.
But shareholders should not expect a miracle cure for years of stock market underperformance. It has only now become clear that GE will not be penalized for hiving assets off to shareholders—not that financial engineering will save the day. To reach a level of comfort that a GE breakup would be sensible, shareholders must see the jettisoned parts create value on their own.
To date, the case is mixed. Consider Genworth Financial Inc., GE’s former insurance business. The company’s shares trade at around $17 a share—below its 2004 initial public offer price of $19.50. Of course, that is a consequence of the general malaise afflicting financial stocks. Just a year or so ago, Genworth shares stood at $36 apiece.
That makes the consumer and industrial spin-off important. As an independent entity, with its own currency to do deals and reward its staff, the business could be freshly energized.
It will also be freer to pursue ventures of its own, and seek partners around the world who may today compete with one or more of GE’s many businesses.
If this low-growth, so-so profitable cast-off of the conglomerate makes good, calls for a GE break-up will be harder for Immelt to ignore.