Criminal Probe Against Writedowns by GE Compounds Its Bad Q3 Performance

Following the revelation of a an expanded federal accounting probe, coupled with disappointing third quarter results saw the share price of General Electric drop to their lowest in nine years.

During the announcement of its third quarter results, the first since the taking over of the new chief executive officer Larry Culp, the company announced the news about the widening of the probe by the United States Securities and Exchange Commission (SEC) into the accounting of the company to examine the $22 billion write off charge in its power-equipment unit. The write down is also being investigated by the Justice Department which was first revealed by the company on the day the company announced the replacement of John Flannery by Culp as the chief executive.

GE is battling with its severest slump in its 126 year business history which has been compounded by the federal on GE. The company is facing shortfalls in cash-flow and a steady reduction in demand for its gas turbines. The measures for a turnaround of the company and a reorganization plan for its power division, as disclosed by Culp during the earnings call with analysts, were overshadowed by the announcement about the probes.

There was a 8.8 per cent drop in the shares of the company to reach $10.18 at the close in New York, which is the highest single day drop for the company since March 2009. The value reached the lowest since April of that year.  So far this year, the shares of GE have already dropped by 36 per cent. The gains made from a mini-rally in the stocks after the announcement of the appointment of Culp has also been lost.

The company should be worried about the involvement of the Justice Department. Say analysts.

“It’s just stepping up the seriousness of it,” said Holly Froum, a legal analyst at Bloomberg Intelligence. “The SEC can file civil charges, but the DOJ can file criminal charges.”

In January, the company had said that its accounting in the power division and a $6.2 billion charge in an old insurance portfolio were being look at by the SEC. The company also announced a writedown in its power unit related to goodwill impairment this month.

“When there’s new investigations from the SEC and the Department of Justice, that’s just not the stuff that you can build much of an investment case around in the near term,” Jeffrey Sprague, an analyst at Vertical Research Partners, said in a TV interview. Sprague also noted that the company didn’t deliver any guidance on earnings or cash-flow on Tuesday.

The writedowns were being expected by analysts following acknowledgement by Flannery of the less than expected performance of the power assets that were acquired by the company from Alstom SA in 2015. That deal which was worth $10 billion was literally pushed through by the former CEO, Jeffrey Immelt, at a time when the demand for power equipment was just beginning to falter.

(Adapted from StraitsTimes.com)

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