THIS should have been one of the darkest weeks in the history of General Electric (GE). The firm founded by Thomas Edison has been a member of the Dow Jones Industrial Average, a stockmarket index comprised of leading American companies, for over a century. Alas, mismanagement and a failure to move with the times have turned the erstwhile icon of innovation into a disorganised, debt-laden mess. GE’s shares have plunged to below a quarter of their peak value in 2000. On June 26th GE was ejected from the Dow index and replaced by Walgreens Boots Alliance, a big health-care firm.

Yet on that same day a ray of sunshine also fell on GE. John Flannery, an insider known for his number-crunching skills who took over as the troubled firm’s boss last August, announced details of a much-awaited restructuring plan. Over the next couple of years GE will spin off its healthcare division and unwind its newish stake in Baker Hughes, a petroleum-services firm. He had previously confirmed the sale of its train locomotive division. Taken together, these three units generate roughly $40bn a year, about a third of the firm’s annual revenues.

GE’s share price rose on the news. The obvious reason for cheer was Mr Flannery’s renewed promise to slim down the unwieldy conglomerate, including a vow to slash its net debt and pension obligations by $25bn. He also promised to cut an extra $500m in costs, on top of previously announced cuts, by 2020. Beyond this willingness to wield the axe, Mr Flannery’s plan for fixing GE has three attractive elements: call them “spinners”, spin-offs and “spinning down”.

First, the plan lets management focus on the core businesses of power generation, aviation and renewables (what people at the firm call “things that spin”). This rump produces about $70bn a year in revenues. GE’s power division, which generates about half of those revenues, is in particularly deep trouble. A combination of mismanagement, ill-judged investments and weak global demand has left it in crisis. The division is shedding some 12,000 workers, nearly a fifth of its global workforce. Delivering on GE’s promise to continue “right-sizing the business” to match lower demand will require hard work.

Second, the restructuring is being done in a thoughtful way that should produce shareholder value. Rather than, say, sell the profitable healthcare unit to a strategic buyer in return for a rapid infusion of cash, Mr Flannery will spin it off as a standalone firm. He will give 80% of its shares to GE shareholders (who will thus capture any future financial gains), and sell the remaining fifth. Research by Emelie Feldman of Wharton Business School shows that such spin-offs create value in two ways. Freed from overbearing parents, the new entities become more efficient at allocating capital. Intriguingly, her research shows that the divesting firms also improve their financial performance after a spin-off.

The third reason for cheer is Mr Flannery’s desire to reform GE’s management culture. This week he launched a “new GE Operating System” which promises less centralised decision-making and red tape, and a spinning down of resources from headquarters to business units. GE’s bloated board of directors has been replaced with a smaller, more relevant one that includes Ed Garden, a co-founder of Trian, an activist investor. Steven Winoker of UBS, an investment bank, calls this the most important of all the reforms, praising the new directors as “sharp, useful people.”

The road ahead remains rocky. The firm may be forced to cut its dividend again, reckons Mr Winoker, which will produce howls of protest from investors. Still, if his bold plan succeeds, Mr Flannery will in time have moulded a humbler but fitter GE that may yet endure another century. 

Source: economist
John Flannery gets down to business restructuring General Electric