Call it the end of an era. The General Electric Company (GE), a pioneer in American industry and the largest company by market capitalization during the late 1990s, is splitting into three companies. GE CEO Larry Culp announced on Tuesday, Nov. 9, that the company will form three units focused on healthcare, aviation, and energy.
- Industrial powerhouse GE is planning a split into three divisions focused on healthcare, aviation, and energy transition.
- GE's breakup was a long time in the making, after it fell from favor with the markets during the financial crisis.
- The iconic company is the symbol of an era when conglomerates dominated business and hedged risk by diversifying their profit centers. But that model is becoming extinct in the U.S., say experts.
GE Healthcare will be focused on precision healthcare and will be spun out of its parent in early 2023. A new entity focused on energy transition and consisting of a combination of GE Renewable Energy, GE Power, and GE Digital will follow shortly thereafter in early 2024. "Following these transactions, GE will be an aviation-focused company shaping the future of flight," a press release issued by the company states.
Referring to the split as a "defining moment," CEO Culp stated that it would enable "greater focus, tailored capital allocation, and strategic flexibility to drive long-term growth and value for customers, investors, and employees."
GE shares, which rose 55% last year, were up by 2% at the end of trading Tuesday. As of this writing, they are changing hands at $110.61, relatively unchanged from their opening price.
The Breakup of a Conglomerate
GE’s split has been a long time in the making. Started by Thomas Edison in 1892, the company became an industrial powerhouse and conglomerate under the leadership of Jack Welch, who led the company for twenty years from 1981. At one point of time, it supplied power, sold consumer appliances, provided banking services, owned cable channels, and manufactured heavy industry like airplanes.
That complex business structure was meant to multiply profits and mitigate risk by overcoming business downturns through diversification. On the balance sheet, however, it made for an unwieldy mess and siphoned funds from profitable entities toward loss-making ones. For example, GE Capital, the company's financial services arm, became a "cookie jar" for different divisions to pad their operational losses.
While GE's shares had been in a slow decline after Welch's exit, the financial crisis of 2008 became a tipping point for them. The crisis exposed GE Capital's vulnerabilities to the subprime-lending market and shone a spotlight on the parent company's dubious accounting practices. (GE later settled with the SEC for $50 million without admitting or denying wrongdoing).
Investors, realizing the dangers of GE's business diversification, have slashed its market capitalization from $600 billion in 2000 to roughly $120 billion. In response, successive CEOs streamlined the company's operations by selling off units from its bloated structure.
The company has slashed its dividends, and its headcount has plummeted from 300,000 some years ago to 174,000 at the end of last year. "A healthcare investor wants to invest in healthcare. We know we are under-owned in each of those three sectors, in part because of our structure," CEO Culp told analysts Tuesday.
The End of a Business Model?
GE's breakup may also be emblematic of the waning attraction of a conglomerate structure for businesses. Starting in 1960s, the conglomerate route became a popular one for industrial powerhouses like Siemens, Dow DuPont, and United Technologies, which expanded their operations across many businesses.
But they have all pared back their operations in recent times. DuPont sold its food additives business to International Flavors and Fragrances (IFF) earlier this year in a $26 billion deal. Siemens spun off its energy business last year. Even International Business Machines Corporation (IBM), another American icon, split its IT services business to focus on cloud services.
According to Michael Useem, professor emeritus of management at the University of Pennsylvania's Wharton School of Business, the conglomerate model is becoming extinct in the United States. Wall Street "has a really hard time understanding a company or forecasting its results a year out if it has several different companies under its umbrella," he told online publication Quartz. The emergence of managers trained only in a specific business and industry has also contributed to an impending death for the conglomerate model: " … the process of picking and promoting senior managers has become more difficult, and often more specific to industrial and business sectors." said Useem.
Competition, in the form of private equity, has also made it difficult for companies to close deals to diversify their operations, according to Sara Moeller, professor of finance at the University of Pittsburgh. Companies should "focus and stay within [their] lane, while becoming more efficient," she told the Financial Times.