General Electric (GE) has announced plans to split into three separate companies, breaking up into publicly traded groups for its energy, healthcare, and aviation divisions.
The company on Nov. 9 said the GE Power, GE Renewable Energy, and GE Digital groups will be combined into one business, with the company pursuing a tax-free spin-off of this group in early 2024. The company plans to spin off the healthcare business to its shareholders in early 2023. GE will then remain as a company focused on aviation, though it will retain a 19.9% stake in the healthcare group.
GE earlier this year sold its aircraft leasing business to Irish group AerCap in a $30 billion deal, which the company said would reduce its debt by a similar amount. The company’s competitors in the power generation equipment space also have had financial challenges, and undergone restructuring, in recent years, with rival Siemens spinning off its energy and healthcare businesses.
“Today is a defining moment for GE, and we are ready,” said Chairman and CEO Larry Culp in a statement. “The momentum we have built puts us in a position of strength to take this exciting next step in GE’s transformation and realize the full potential of each of our businesses.”
Culp has made reducing the company’s debt a hallmark of his tenure, continuing to sell off assets as his predecessors had done for more than a decade after the 2008 global financial crisis. GE on Tuesday said these latest moves come on the back of a stronger financial position for the company, including a reduction of more than $75 billion in debt since 2018. GE said all three new companies would have investment-grade credit ratings.
“At GE we have always taken immense pride in our purpose of building a world that works. The world demands—and deserves—we bring our best to solve the biggest challenges in flight, healthcare, and energy,” Culp said. “By creating three industry-leading, global public companies, each can benefit from greater focus, tailored capital allocation, and strategic flexibility to drive long-term growth and value for customers, investors, and employees. We are putting our technology expertise, leadership, and global reach to work to better serve our customers.”
“GE’s decision to spin off its energy-focused business marks a logical and necessary transition, one that will enable the new energy business to focus on expanding and transforming the energy market,” said Andrew Dillon, an innovation fellow in the energy and utilities practice at West Monroe, a business/technology consultancy. Dillon told POWER, “With rapid escalation of importance of decarbonization, grid modernization, advanced energy markets and digital technologies, this decision increases GE’s ability to increase its position relative to other major global energy players. This move is a clear indicator that a pure-play energy spin off is a forward-looking strategic move by GE.”
GE, a Boston, Massachusetts-based industrial giant founded by Thomas Edison in 1892, has faced numerous financial challenges in recent years. The company was removed from the Dow Jones Industrial Average in 2018 after years of declining valuation, in part due to the global move toward renewable energy at a time when GE’s fortunes were still heavily tied to fossil-fueled power generation. The company last year said it was exiting the new-build coal-fired power market. GE’s revenue for 2020 was $79.62 billion, far below its 2008 revenue of more than $180 billion.
GE in December 2020 agreed to pay $200 million to settle charges by the U.S. Securities and Exchange Commission that it had misled shareholders about the decline of its power and insurance businesses in the years before the company’s stock price plummeted. The company’s stock in early 2001 was worth more than $500 billion, and GE was one of the world’s most-valuable companies, alongside Royal Dutch Shell, ExxonMobil, and Toyota.
That worth has fallen to about $125 billion today. The company in July of this year completed a reverse 1-for-8 stock split to support its floundering shares.
A GE spokesperson told POWER that the moves announced Tuesday pave the way for the company’s businesses “to unlock full potential,” with “enhanced focus” and “opportunity for growth.” The spokesperson emphasized that there is “no anticipated impact to employees at this time.”
The company on Tuesday said it expects one-time costs associated with the split, including separation pay, of about $2 billion, and tax costs of less than $500 million depending on the specifics of the transaction.
‘Greater Focus, Strategic Flexibility’
“By creating three industry-leading, global public companies, each can benefit from greater focus, tailored capital allocation, and strategic flexibility to drive long-term growth and value,” said Culp, who will lead the aviation-focused GE after the split. Scott Strazik, currently CEO for GE Power, will head the combined Renewable Energy, Power and Digital business. Peter Arduini, current CEO of GE Healthcare, will continue in that role.
Said Strazik, “I am humbled, and energized to lead our combined GE Renewable Energy, GE Power, and GE Digital businesses moving forward. All one has to do is reflect on the days without power in Texas earlier this year to understand the importance of a resilient energy system … or look at the forest fires in Oregon, or floods in Germany this summer to know we need to accelerate our path to a more sustainable future.”
GE in December 2020 released a white paper outlining its position on how its power groups could combat climate change, including accelerating the phaseout of coal-fired generation.
The GE spokesperson told POWER that today’s announcement comes as “Customer discussions on [the] path to decarbonize [are] increasingly happening at the CEO level,” and that “asset-balancing decisions can best be solved with [an] integrated top-of-the-house approach.” The spokesperson said that the energy groups represent “complementary technologies and operational opportunity in [a] large and growing market,” and that “most importantly as [a] unified business, [will have] a more acute focus on a singular mission—accelerating the energy transition. The world needs us to lead here, in solving the energy trilemma.” The trilemma comes from the World Energy Council’s definition of energy sustainability, which is based on three core dimensions: energy security, energy equity, and environmental sustainability of energy systems.
Struggling Power Business
GE’s power business has struggled financially since the acquisition of Alstom’s Power and Grid business in November 2015. The €9.7 billion ($10.6 billion) transaction—GE’s largest deal ever—was expected to make the company even more of a global leader in the energy space.
But the power market was transitioning away from fossil fuels to cleaner energy sources, and GE—along with other power equipment manufacturers—suffered as a result. Weak earnings associated with the underperforming investment in Alstom prompted GE to restructure its power business in November 2017. Then-CEO John Flannery, who had replaced Jeffrey Immelt earlier that year, announced several changes for the company, including “right-sizing” for market structure, simplifying GE’s portfolio, revamping its supply chain, and resetting its supply base. The company in December 2017 announced it was cutting 12,000 jobs as part of that restructuring.
Flannery famously in June 2018 said the company was “finished” with its overhaul, but that was not the case. The company continued to struggle, and Flannery was replaced as CEO by Culp on Oct. 1, 2018. Soon after, GE divested its Distributed Power business, which included the Jenbacher and Waukesha product lines; sold part of its stake in oil services company Baker Hughes; and announced its intention to reorganize GE Power into two businesses, forming GE Gas Power, comprised of Gas Power Systems and Power Services, and GE Power Portfolio, which includes the Steam, Grid Solutions, Nuclear, and Power Conversion businesses. GE in January 2019 said it would move its grid solutions, solar solutions, and storage businesses from GE Power to GE Renewable Energy.
The company in 2018 said it was cutting manufacturing jobs, including at a flagship facility in New York. GE in early 2019 said it would cut jobs at its units in France, including some associated with the Alstom acquisition. The company in May 2020 announced it would cut another 13,000 jobs from its aviation business due to the impact on air travel from the coronavirus pandemic.
Buffett Bought Large GE Stake in 2008
GE products have touched many corners of life, as the company has held interests in power generation, lighting, radio, cable television, aviation, healthcare, computing, and financial services, among others. The wide scope of its business holdings made it attractive to investors, but that changed in recent years.
The 2008 financial crisis provided warning signs for GE. Then-CEO Jeffrey Immelt issued a profit warning in September of that year, citing “unprecedented weakness and volatility in the financial services markets.” That credit crunch had a major impact on GE Capital, the company’s large financing division that loaned money to consumers and businesses.
Billionaire Warren Buffett poured $3 billion into GE in October 2008, in exchange for preferred stock and “substantial equity participation.” Buffett at the time said, “GE is the symbol of American business to the world. I am confident that GE will continue to be successful in the years to come.”
Though some groups still looked at GE as a solid investment despite a downturn in orders for the company’s gas turbines, and a global move toward renewable energy, some of the company’s board members said they were frustrated with the company’s slow pace of change as demand weakened for its power plant equipment.
Activist hedge fund Trian Partners in 2015 held a $2.5 billion stake in GE, its largest holding at that time. The value of that stake was more than halved over the next three years, prompting Trian founder Nelson Peltz to say the fund’s investment in GE was a “big mistake.” Trian in a statement Tuesday said it “enthusiastically supports this important step in the transformation of GE.”
Many institutional investors have called for a breakup of GE in order to boost the company’s stock performance. Culp, speaking on CNBC on Tuesday, said, “We know looking at spins elsewhere that the focus and the accountability always increase. We think we have an opportunity here as well to have sharper capital allocation and greater strategic flexibility,” repeating parts of his statement from earlier Tuesday.