Downsizing General Electric, the massive task ahead for new management

Over the last 12 months the General Electric share price has fallen by 50% as investors fell out of love with the old giant amid concerns over growing debt and falling profits. John Flannery took the reins as chief executive in the summer of 2017 and while it is taken him some time to put together a cohesive recovery plan for the group, things do seem to be falling into place just now. We already know that the new management are looking to raise in excess of $20 billion by either floating off or selling different areas of the business. But what else can we expect?

A conglomerate of conglomerates

Those who follow the old giants such as General Electric will be well aware that this company is enormous, seems to have a finger in every pie and has to a certain extent grown out of control. From healthcare to aviation, power units to electrical engineering, it seems that General Electric has lost focus and direction. The latest rumours suggest that the electrical engineering division, which was acquired for $3.2 billion back in 2011, is about to be sold for less than the acquisition price.

Downsizing General Electric, the massive task ahead for new management
Downsizing General Electric, the massive task ahead for new management

This may seem a hard pill to swallow for many people but the reality is that the division is under pressure. Just last year we saw a 45% fall in profitability for this particular area of the group which does not bode well for the immediate future – perhaps it could flourish under a different more focused management team.

Hedge fund activists

Over the last few years we have seen hedge fund activist taking a greater interest in companies such as General Electric. While their best years of organic growth may be behind them, very often the sum of the parts is significantly greater than the stock market value. Trian Fund Management LP is one such investor with an interest in General Electric and a seat on its board of directors. It seems that rather than fighting hedge fund activists, the new crop of General Electric management would prefer to work hand-in-hand with them to maximise shareholder returns.

This is an interesting change in trend compared to some companies in years gone by who spent far too much time, money and effort fighting activist shareholders. Whatever their reasons for looking to maximise the value of the company, through disinvestment and potential takeovers, the end goal was the same, an increase in the value of the company.

Could General Electric rally in 2018?

Nick Heymann, an analyst who has covered General Electric for more than 30 years, believes that we could see a rally from the current circa $14 a share up to in excess of $20 a share during 2018. While this would be but a drop in the ocean for those who have been holding General Electric shares for many years, there is potentially an interesting opportunity for those looking to increase their exposure or introduce a maiden General Electric holding to their portfolios.

After a very difficult 12 months, the share price has started to stabilise to a certain extent and with analysts such as Nick Heymann suggesting there may well be limited negative news in the short to medium term, perhaps now might be a good time to review General Electric as a possible investment?

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