As its name would imply, General Electric was founded as a company that sold electric appliances. Over the course of 123 years, however, GE diversified its business into utilities, transportation, healthcare, and finance. Now labelled a conglomerate, GE is looking to revert back to the industrial giant it was once hailed as.
In recent years, GE has been undergoing restructuring efforts to shed off non-core business divisions so it can focus its energy on its manufacturing operations. Some of its more well-known divestitures include the $11.6 billion sale of its plastics division in 2007 and the sale of NBCUniversal to Comcast, completed in 2013. GE also announced in April its plan to sell the majority of its $500bn AUM GE Capital financing unit, and just yesterday, the company announced the creation of GE Digital, a consolidation of its software and IT components.
Part of the reason for this streamlining of operations is stock price. When it comes to appeasing investors, GE is on the right track. Investors, for the most part, view conglomerates as messy and inefficient. While they do provide diversification, conglomerates become difficult to manage and often lose sight of the core businesses that brought them to where they are today.
Part of GE’s plan focuses on increasing revenue share from industrials to 90% by 2018. This strategy will allow GE to be more operationally effective, and by investing more in R&D in this space, the company can generate higher returns on capital for its investors. Embedded in GE’s restructuring plan is also an estimated $90 billion of cash returned to investors, mostly in the form of dividends and buybacks. As expected, GE’s stock price leaped to its current 52-week high of $28.68 per share post-announcement of its restructuring plan in April after hovering around $25 per share prior to the announcement. Although it is hard to predict if GE will be able to deliver on all aspects of its restructuring plan, it seems pretty clear that investors are encouraging the change.
- Eric Chao