💡 Why is General Electric Splitting Up?

What went wrong at one of the world's most powerful companies?

The bigger they are, the harder they fall.

This seems to be true for General Electric, which used to be one of the world's most powerful companies at one time. Sadly, it is now splitting up.

The decision did not really come as a shocker. General Electric has been struggling for quite some time now. 

But why is such a legacy company struggling?

The Beginning

General Electric was founded in 1892 by Thomas Edison, the inventor of the lightbulb himself. The company started off to provide electricity and incandescent bulbs to the American public at affordable prices. 

But the company soon began diversifying its product range: it invented the vacuum technology that helped create microwaves, an early x-ray machine, an electric locomotive, and an electric stove. It basically changed the way American households functioned.

The company that started as a bulb manufacturer, soon had an entertainment, an oil and gas, and a financial arm. This diversification took the company’s valuation to a whopping $600 billion during its peak in the early 2000s. 

But then in 2001, the company's long time CEO Jack Welch retired and things began to go downhill.

The Beginning of the End

The company's new CEO made a series of bad decisions and investments, causing the company massive losses. 

The biggest blow came in 2008, with the burst of America's housing bubble (which deserves a piece of its own). GE's financial arm, GE Capital saw massive losses as markets crashed and people couldn't afford to pay back their mortgages and loans. GE Capital accounted for 55% of the company's profits. And so, its shares fell 42% that year.

The carnage didn’t stop here.

In 2015, the company bought one of its biggest competitors, Alstom, for an insane $10.6 billion. The move was horribly miscalculated as GE chose to invest in Alstom's fossil-fuel powered turbines just as the world was waking up to climate change. So, demand for its products crashed. Along with the demand, GE's profits crashed too. By as much as 45%.

These back to back losses made one thing very clear: GE had its fingers in too many pies.

GE's Attempt to Survive

GE began its saga of divestments which is continuing to date. In 2013, it sold off its broadcasting network NBC to Comcast. In 2015, it sold off most of GE Capital for $26.5 billion. Last year, the company also announced plans to completely divest its oil and gas business.

Due to dwindling profits, GE was also forced to cut down on dividend payments. It offered only a penny (around Rs. 7.4) as dividend in 2018. This further annoyed the already dejected investors, causing more and more of them to pull out. Result? 

The company, which had been one of the original 12 listed on the Dow Jones, was removed from the index in 2018.

Splitting Up

After facing one setback after another, GE has now finally decided that splitting up would be in the best interests of the company. 

The split will allow each company to focus on its individual sector, improve capital allocation, and provide more flexibility in terms of decision making.

So, in 2023 GE Healthcare will spin off from the company. The company manufactures MRIs and other hospital equipment. GE will own a 19.9% stake in the company.

GE will also merge its power unit and renewable energy unit, which will spin-off from the company in 2024, leaving GE only with the aviation business.

The move has clearly excited investors with GE stocks rallying 15% on the news. 

The move has also spurred a long-running debate about what is the best structure for a manufacturing company. Should it focus on a single sector or choose to diversify and grow its consumer base?

Above all, will this change in strategy work out for GE? 

Only time will tell. 

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