GE: Breaking Up Is Hard To Do

By Kristina Zucchi, CFA | October 26, 2010 AAA

When Jeff Immelt, CEO and Chairman of General Electric Company (NYSE:GE) took over the helm from former CEO and Chairman, Jack Welch at the end of 2001, the company and stock had been firing on all cylinders, or so it appeared. However, Immelt was not content with the status quo and did not like the composition of the portfolio. So he made the decision to change the concentration of the portfolio by diversifying into growth industries and shed slower growing businesses. Despite this decision, when the global financial markets took a turn down, the fears of many analysts expressed about the concentration of the portfolio in financial services sent the stock in a downward trend. From $37 a share when Immelt took over, the stock fell to $10 at its lows and currently sits at $16. (For related reading, check out You Don't Know Jack Welch.)

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Re-Making a Global Conglomerate
GE identified businesses it wants to expand and ones it wants to shed. Among those it wants to expand are healthcare/medical systems. To compete with a more complete suite of products, GE made several acquisitions. The company diversified its product suite offered to hospitals and doctors by entering the electronic medical record arena, competing not only against pure play companies like Cerner, (Nasdaq:CERN), but also conglomerates like Microsoft (Nasdaq: MFST). It also expanded its diagnostic business to stay competitive with Philips (NYSE:PHG). GE still believes that healthcare/medical systems is an area of growth, and acquired as well as organic growth will continue to be part of the strategy. (For related reading, check out Management Strategies From A Top CEO.)

On the chopping block has been the GE Appliance business. Announced in 2008, the decision to sell GE Appliance surprised consumers, but not the investment community. However, this week the company announced a plan to invest $432M in the business in the US. The company decided to invest in this business to take advantage of higher-end trends in refrigeration as well as take advantage of more cost effective manufacturing capabilities in the US. This announcement runs counter to the previously announced decision to sell the business.

GE's NBC division has also been the source of speculation that it too will be shed. GE together with Vivendi owns the NBC Universal franchise. However at the end of 2009, it had been announced that Comcast (Nasdaq:CMCSA) will buy a controlling interest in NBC requiring Vivendi to exit the joint venture. On September 27, Vivendi sold almost 8% of its interest to GE and the remaining interest of almost 13% will be sold when the Comcast deal closes.

Bottom Line
Reshaping a US giant is not an easy task. However slow the wheels seem to be moving, the re-make is in progress. Investors tend to think that large corporations are not nimble enough to take advantage of opportunities to change the look of the portfolio, but this week's announcement proves that even a company of this size is able to rationalize the portfolio as needed, or change its previously announced decisions to capitalize on expected trends. (For more, check out Blue Chips Shine In The Third Quarter.)

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