The truth will set you free. Especially if that truth is humiliation. The once powerful acquirer General Electric has announced its formal breakdown. The separation in three listed companies – focused on aviation, healthcare technology and power including renewable energy – is hardly radical. A business that was once the USA’s top industrial conglomerate has been cut to size by years of scandal and obstacles.
The split will represent a final unraveling by Larry Culp, CEO, a company outsider free of alliances or commitment to “the GE legacy”. His laser focus was on driving off debt.
Three years ago, GE had $ 140 billion in gross loans in its industrial and financial services unit, GE Capital. That figure is expected to fall below $ 65 billion by the end of this year. GE recently sold its jet rental business to raise $ 24 billion. In 2019, it whipped up a life sciences venture to Danaher for more than $ 20 billion.
The group lowered its dividend to near zero a few years ago to preserve cash. Some analysts were concerned that GE, by selling good businesses, was permanently hurting its growth prospects. But investors sharply discounted assets held by the group with the bleak assumption, born of experience, that it would just be mismanaged.
The worst stain came from the financial services business. A shock insurance loss in 2018 required the group to plug the hole with $ 15 billion in cash. The mess highlighted the “black box” opacity of a business where complicated intragroup accounting made the value of the whole impossible to name accurately.
Since the depths of the market crash in March 2020, GE shares have more than doubled, outperforming the S&P 500 slightly. But a market capitalization of $ 120 billion remains far below where it was five years ago. SpinCos in healthcare and energy should thrive without the stigma of GE’s problems.
The breakup should finally let sunshine peek through. In the company’s darkest days in 2019 and 2020, investors were worried that liabilities exceeded the company’s assets and earnings.
Now shares in GE can even be fully valued. The company will earn only $ 5 billion in industrial free cash flow in 2021. The group’s book value is $ 40 billion and its market value is three times that figure. Breaking up an empire, it seems, ultimately creates more value than building one.
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