With the strategy of focusing on a smaller group of core businesses and reducing its debt load, General Electric announced the spin off of its healthcare division and its stake in the oil services firm Baker Hughes.
With this move, the company brought an end its efforts at simplification of the large structure of the company and raising funds for the strengthening of its balance sheet. The efforts included the earlier spinning off of its train manufacturing business and sell off of its distributed power division for $3.3bn.
30 per cent of the company’s revenue and 25 per cent of the industrial segment profit last year was accounted for by the divisions that are being spun off as announced on Tuesday.
The business structure of GE had been very \y wide and diverse ever since the 1980s and 1990s and ranged from insurance to entertainment to plastics.
Aero engines and other aircraft part, renewable energy and equipment for the electricity industry are the three divisions that GE will now have.
GE executives told the media that following the completion of the healthcare unit spin-off which should take place within the last 18 months or so, the company could be cutting down its dividends. The company cut dividends last year – only the second time since 1938.
While reducing corporate overheads, more autonomy to the divisions of GE is being attempted to be given by the current chief executive of the company, John Flannery, who was appointed last August.
A slump in the oil industry that impacted Baker Hughes and a reduction in demand in the market for gas-fired power plants are some of the problems that the group has been facing in recent years. Also, the company was delisted from the Dow Jones Industrial Average last week after over half-a-century.
“Today marks an important milestone in GE’s history,” Mr Flannery said. “We will continue to improve our operations and balance sheet as we make GE simpler and stronger.”
Reduction in dependency of the company on shorter-term financing such as commercial paper and reduction of the net debt of the company by $25 billion are among the outcomes for the company that it expects would happen because of the latest move.
The company has been facing problems since the last financial crisis and efforts have been are now being made to repair the company from the mess. A strategy of disposing and offloading a large part of its financial services division was initiated in 2015. This division accounted for over half the company’s profits. However, the move did not deliver the intended outcomes for the company in terms of its performance. This is reflected in the 54 percent drop in the value of GE shares during the last one year or so.
Earlier this year, the company disclosed the US Securities and Exchange Commission was investigating its announcement that it needed to pay an additional $15bn to cover legacy insurance liabilities, and the way it had been accounting for revenues from long-term contracts.
(Adapted from FT.com)