US Behemoth General Electric Breaks To Split Into Three Companies

by Sourav Datta - Nov 12, 2021 05:43 PM +05:30 IST
US Behemoth General Electric Breaks To Split Into Three CompaniesGeneral Electric Building
Snapshot
  • General Electric, one of the largest US conglomerates will split into three different public companies to cater aviation, healthcare and, energy sector.

    The breaking up of GE, as per many analysts, marks the end of the conglomerate era of the USA, as they expect several other companies to begin splitting up as well.

One of the United States’ largest conglomerates, General Electric, will split into three different public companies. The three companies will cater to different sectors, namely aviation, healthcare and, energy.

The company announced on Tuesday (9 November) that it will spin off the healthcare business in 2023, while the energy business would be split off in 2024. The energy business would contain renewable energy, fossil fuel and digital units of the company. The company has been struggling with high debt and inefficiency for years.

The company’s conglomerate structure had been built and maintained by Jack Welch, the storied chief executive officer of General Electric. Under Welch, the conglomerate diversified aggressively into several non-core businesses such as television, finance, energy, radio, and several other businesses.

The diversification into financial services through its arm GE Capital would almost destroy the company in 2008. Welch believed that one could earn higher returns through the financial services business, as compared to the industrial manufacturing business.

However, to the contrary, in recent years, the company has attempted to wind down the financial business through the sale of several divisions of GE Capital. The blow to the financial services business was the beginning of GE’s downfall.

It has also been cutting down on non-core businesses and stabilising its operations under the current CEO and chairman Larry Culp. Jeff Immelt, who took over from Welch in 2001, was replaced by John Flannery in 2017, who in turn was replaced by Culp.

Culp called the split a defining moment in the company’s history and reiterated the focus on business performance. “We remain focused on continuing to reduce debt, improve our operational performance, and strategically deploy capital to drive sustainable, profitable growth,” said Culp in a press release.

GE expects the company’s debt to reduce by more than $75 billion by the end of 2021 since 2018. In addition, it also expects to bring the ratio of net debt to EBIDTA (earnings before interest, depreciation, taxes and amortization) to less than 2.5. Since 2008, the company has managed to reduce its debt load by 88 per cent.

According to the ratings agency Standard and Poor’s, the company has a strong position in the aviation and energy businesses. Nevertheless, the company has been put on credit watch, which is a long shot from its heydays where it was one of the world’s highest rates bond issuers.

The separation of the healthcare business is being construed as a negative by credit rating agencies because the other two sectors are facing a slowdown due to the pandemic and lockdowns. In contrast, the healthcare sector has been supporting the other two companies with its strong cash flows.

The company’s stock jumped as investors welcomed the move. Investors expect the leaner structure to allow the individual companies to perform better in a focused manner, and unlock value. While Culp’s predecessors could not solve the issues plaguing GE, Culp’s attempts at restructuring GE have been relatively bold.

According to many analysts, the breaking up of GE marks the end of the conglomerate era of the USA, as they expect several other companies to begin splitting up as well.

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