General Electric, once the largest and most diversified industrial conglomerate in the world, is splitting into three separate public companies. The move, announced in November 2021, is expected to be completed by early 2024. The three new companies will focus on aviation, health care, and energy, respectively. What does this mean for GE’s investors, and what numbers should they pay attention to?
The Rationale Behind the Breakup
GE’s decision to break up into three companies is the culmination of a long and painful restructuring process that began in 2018 when Larry Culp took over as CEO. Culp inherited a company that was struggling with debt, declining profits, and a tarnished reputation. Under his leadership, GE sold or spun off several of its businesses, such as lighting, transportation, biopharmacy, and oil and gas. Culp also reduced GE’s debt, improved its cash flow, and streamlined its operations.
The breakup is meant to unlock the value of GE’s core businesses, which have been overshadowed by the complexity and challenges of the conglomerate model. By creating three industry-leading, focused, and independent companies, GE hopes to benefit from greater clarity, agility, and accountability. Each company will have its own capital structure, growth strategy, and innovation agenda, tailored to its specific market and customer needs.
The Spinoffs and the Stock Splits
The first spinoff will be GE HealthCare, which provides medical technology and diagnostic solutions. GE HealthCare was separated from GE in January 2023, and its stock began trading on the Nasdaq Stock Exchange under the ticker symbol GEH. GE shareholders received one share of GEH for every eight shares of GE they owned. GEH is based in Chicago and has a market capitalization of about $70 billion.
The second spinoff will be GE Vernova, which will comprise GE’s current portfolio of energy businesses, including renewable energy, power, and digital energy. GE Vernova is expected to be spun off in early 2024, and its stock will trade on the New York Stock Exchange under the ticker symbol GVN. GE shareholders will receive one share of GVN for every three shares of GE they own. GVN will be based in Cambridge, Massachusetts, and will have a market capitalization of about $40 billion.
The third and final company will be GE Aerospace, which will be the remaining company after the spinoffs. GE Aerospace produces jet engines and components and is the market leader in its field. GE Aerospace will retain GE’s existing trademark and ticker symbol (GE) on the New York Stock Exchange. GE Aerospace will be based in Cincinnati and will have a market capitalization of about $120 billion.
The Implications for Investors
The breakup of GE will have several implications for investors, both positive and negative. On the positive side, investors will have more choice and flexibility in allocating their capital among the three companies, depending on their risk appetite, return expectations, and growth prospects. Investors will also benefit from the improved transparency, efficiency, and performance of each company, as they will no longer be burdened by the legacy issues and cross-subsidies of the conglomerate. Investors will also enjoy the tax-free nature of the spinoffs, as they will not incur any capital gains taxes on the distribution of the new shares.
On the negative side, investors will face some challenges and costs associated with the breakup. For instance, investors will have to adjust their portfolios and rebalance their holdings to reflect the new weightings and valuations of the three companies. Investors will also have to deal with the increased volatility and uncertainty of stock prices during the transition period, as the market will take time to digest and evaluate the new information and expectations. Investors will also have to pay more attention to the industry trends and competitive dynamics of each company, as they will no longer be diversified across multiple sectors and markets.
The Numbers to Watch
As GE splits into three companies, investors will need to watch some key numbers to assess the value and performance of each company. Some of these numbers are:
- Revenue growth: This measures the increase or decrease in sales over some time and reflects the demand and market share of the company’s products and services.
- Operating margin: This measures the profitability of the company’s core operations and reflects the efficiency and cost management of the company.
- Free cash flow: This measures the amount of cash generated by the company’s operations after deducting capital expenditures and reflects the financial health and flexibility of the company.
- Return on invested capital: This measures the return generated by the company on the capital invested by shareholders and creditors and reflects the capital allocation and value creation of the company.
- Dividend yield: This measures the annual dividend paid by the company as a percentage of its stock price and reflects the income and stability of the company.
These numbers will vary depending on the industry and business model of each company, and investors will need to compare them with the peers and benchmarks of each company. For example, GE HealthCare will likely have higher revenue growth and operating margin than GE Vernova, as it operates in a faster-growing and more profitable sector. GE Vernova will likely have a lower free cash flow and return on invested capital than GE Aerospace, as it requires more capital expenditures and faces more competition and regulation. GE Aerospace will likely have a higher dividend yield than GE HealthCare and GE Vernova, as it generates more cash and has a more mature and stable business.
By watching these numbers, investors will be able to evaluate the performance and potential of each company and make informed decisions about their investments.
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