General Electric remains half-hearted about carve-ups. The $210 billion conglomerate is hacking its energy unit into three pieces, after doing the same with another division a couple of years ago. Cost savings from the latest effort will be worth no more than a mere $300 million. Maybe Chief Executive Jeff Immelt, who has presided over a halving of GE’s share value, will warm to a more significant breakup.
He’s obviously not averse to the concept. The energy business, which generates some $50 billion in annual revenue, will be reorganised into water, oil and gas and energy management. GE will start reporting separate segment results for each in the fourth quarter. GE did much the same with its technology infrastructure arm in 2010. But neither internal restructuring has excited shareholders very much.
They have given Immelt some credit for stopping the 2008 near-death spiral. Selling non-core assets and building up a healthy cash cushion —$122 billion at the end of the second quarter — and nursing GE Capital back to health have helped the stock nearly triple in value since the darkest days of the crisis. But at $20 apiece, the shares are a long way from the $40 where they were trading when Immelt took the reins from Jack Welch in 2001.
Breakups are no panacea. Analysts at Morningstar, for example, project there would be only about a 10 per cent uplift in GE shares if the company were to separate turbines and other industrial products from GE Capital. They also reckon the sum is worth more than those two parts. But GE nevertheless trades at a discount, on a price-to-earnings basis, to other industrial conglomerates like Honeywell and 3M, according to Thomson Reuters data. What’s more, the market has been in a splitsville kind of mood, rewarding the likes of Fortune Brands, Motorola, McGraw-Hill and News Corp for deconstructing their empires.
Immelt said on Friday that the reorganisation of the energy business would “greatly simplify” things for investors. That suggests he appreciates some of the strategic and financial logic behind anti-diversification. To reap the real rewards of it, however, he might need to apply it on a bigger scale.
