William John Market Report 15-11-21
General Electric, once the world’s most valuable company, announces a significant restructuring of its business, William John provides insight.
GeneralElectric, Spinoffs, Divestitures, Conglomerate, Markets, Equities, Value, William John

William John Market Report 15-11-21

William John Market Report 15-11-21

Category: Reports

Conglomerates, defined as companies consisting of a number of different parts that fall under the same group as one company, are some of the largest and most public businesses in the world today. Take for example Reliance Industries, the company owned by Mukesh Ambani (India’s richest man) which has interests in Telecommunications, PetroChemicals, Energy, Textiles and more with an employee headcount of over 195,000 people. 

Companies often spend their lifetime trying to amass the human and physical capital that a “Reliance Industries” has manifested, yet investors often see conglomerates as underperformers. They have been criticised for being unable to compete with various businesses in their sectors and pinned back by bureaucracy and company politics that comes with being an institutional business with hundreds of thousands of employees, dealing in international markets and running businesses often with little shared common interests or economies. 

Given this, since 2017 there has been over 150 company spinoff deals worth over $700 billion, according to Dealogic, including spinoffs by Siemens for its healthcare and energy divisions and United Technologies’ spinoff of Otis Elevators and Carrier heating and air conditioning businesses. In recent weeks, General Electric’s Chief Executive, John Flannery, announced its plans to spin off into three distinct companies covering its power equipment, aviation and healthcare divisions. 

It comes at a time where the stock price of GE has been suffering in the post pandemic era:

William John Analytics, Yahoo Finance

Its stock price in July 2020 of approximately $48 per share was lower than its pricing low during the Financial Crisis ($66 per share in February 2009) and although the company has seen a recovery from Q2 2020, its stock price is trading well below its pre-financial crisis peak of $318 per share, a 2.94x multiple to its current trading price of $108.

Whilst the business’s restructuring represents a paradigm shift for the 129-year-old company, GE has been engaging in spinoffs for most of the past decade. Under John Flannery’s predecessor, Jeff Immelt, the company withdrew from the insurance business and in 2015 sold most of its financial services division, which at the time was generating over half of the group’s profits.

The General Electric today represents a far cry from the business that Jack Welch took to stratospheric heights during his tenure from 1981 to 2001 – culminating in General Electric at one stage becoming the world’s most valuable company during the late 90’s:

Source: William John Analytics, Yahoo Finance

However, a lot of the expansions and acquisitions that Mr Welch made during this period may have contributed to the lacklustre performance that has been observed since. One thing is for sure, if Warren Buffett backed the company during the Financial Crisis, investors should back the company moving forward. By divesting and spinning off its businesses, the company should be able to focus on efficiencies and returns within its roots in aviation, energy and healthcare.

The days of GE as a world leading business is gone with the rise of Big Tech, but it still has a place amongst the elite of commerce if this round of restructuring can deliver the economies that its management and shareholders expect to see over the forthcoming years.

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.