General Electric Co. is considering breaking itself apart, a dramatic move that would mark the end of one of the oldest and largest U.S. conglomerates.
The 125-year-old business, which was once the most valuable U.S. company and still employs about 300,000 people, sells everything from airplane engines to hospital incubators. But in the past year the company that came to embody America's industrial power has fallen on hard times, prompting it to change CEOs, sell assets and slash its dividend.
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Despite those moves, GE has struggled to reassure shareholders that it has addressed its problems, especially in a climate where activist investors are pressuring businesses from Alcoa Inc. to Xerox Corp. to streamline their operations.
GE shares, down 40% in the past year, fell 2.9% more Tuesday after the company disclosed it would book a $6.2 billion charge in its fourth quarter related to its insurance operations and needed to set aside $15 billion over seven years to bolster insurance reserves at its GE Capital unit.
John Flannery, who took over as chief executive last summer, said the Boston company is evaluating carving out its major divisions into separately traded units. In recent years, GE has jettisoned operations including home appliances and much of its once-massive lending arm.
"We need to continue to move with purpose to reshape GE," Mr. Flannery said on a conference call, promising to update investors in the spring.
A breakup would come just a few months after Mr. Flannery unveiled his plan to turn around the struggling giant by focusing on its three core units: aviation, power and health care. In November, the longtime GE executive said he would divest $20 billion in assets, though he stopped short of the dramatic structural changes he disclosed Tuesday.
People close to GE said the move to break up the company is an evolution of Mr. Flannery's strategy as he has considered GE's options, and wasn't prompted by the recent insurance problems.
The first steps to splitting up the company -- likely to result in a smaller company and not the end of GE -- are expected by spring, said one person close to the decision making. Multiple people close to GE warned that pensions and GE's debt structure could make separating the divisions difficult, but that such problems can be addressed.
"There is no chance that the company just decides to do nothing," said one of the people.
GE spent decades building itself up, creating a financial-services arm that rivaled the biggest banks and a media empire that included NBC. But since the financial crisis last decade the company has shrunk its operations to focus on its core industrial divisions. It also made ill-timed bets on the oil and coal businesses that have depressed recent results.
After years of underperformance, GE shares tumbled last year -- erasing more than $100 billion in market value -- following the company's disclosure that it was struggling to generate enough cash to fund its dividend.
Investors including activist Trian Fund Management have pushed GE to cut costs and revamp its operations. Last year, executives blamed overcapacity in its big power business, which makes turbines used in power plants around the world, for a shortfall in profits and cash flow. In December, GE said it would cut 12,000 jobs in the unit.
On Tuesday, as Mr. Flannery revealed new problems in GE's insurance business, he said the latest thinking on the company's structure was part of his continuing review of the portfolio. For decades, GE had argued that its different units benefit from centralized research and global sales teams and a management culture that is consistent throughout the company.
"The real core approach here is to make sure that these businesses can flourish in the decades ahead and that they have the right capital structures and investment resources to do that," he told analysts.
He pointed to the spinoff of GE's credit-card business into Synchrony Financial and the merger of the GE Oil & Gas division into separately traded Baker Hughes as examples of moves that could work for other parts of the company. GE is now exploring a sale of its majority stake in Baker Hughes.
U.S. businesses, large and small, have been under pressure from investors to streamline their operations or carve them up. Firms including aluminum pioneer Alcoa Corp., chemical giant DowDuPont Inc., Xerox Corp. and Hewlett-Packard have moved in recent years to pull themselves apart.
Honeywell International Inc. and United Technologies Corp., rivals to GE, are both exploring revampings. Another industrial conglomerate, Tyco International Inc., broke itself into several companies a decade ago, under the guidance of a Trian ally.
"GE is a relic of a bygone era," said Robert Salomon, a management professor at New York University's Stern School of Business. Mr. Salomon said former GE CEO Jack Welch's status as "darling of Wall Street" in the 1990s allowed his pursuit of diversification to work when the same approach failed for many other managers and conglomerates.
The conglomerate concept -- that companies from different industries can be managed together in an efficient way and help offset their disparate economic cycles -- doesn't add a lot of shareholder value, Mr. Salomon said.
Over the past decade, former CEO Jeff Immelt worked to shift the focus back to the company's industrial operations, but ultimately didn't do enough, he added.
The charge disclosed Tuesday follows a reassessment of the conglomerate's remaining insurance business. GE discovered last year that its reinsurance coverage was operating at a deficit, prompting the company to review all of its assumptions, according to a person familiar with the matter.
Reinsurance is an arrangement in which an insurer takes responsibility for paying claims on policies that another insurer sold to businesses or individuals
Although GE hasn't sold reinsurance since 2006, it and primary insurers are now reckoning with old long-term-care policies that were underpriced and are creating deep shortfalls as policyholders age.
The upshot is that the GE Capital unit, which had been paying dividends in recent years to the parent company, won't pay dividends to GE for the foreseeable future. GE had suspended the GE Capital dividend last year and slashed its payout to shareholders by half.
Mr. Flannery has been working to streamline the once far-reaching GE Capital and focus it on providing financing for GE's industrial operations, such as jet engines and MRI machines. He expressed frustration at the review's results while saying the actions would restore GE Capital ratios to appropriate levels.
"A charge of this magnitude from a legacy insurance portfolio in run-off for more than a decade is deeply disappointing," he said.
Wall Street was braced for the insurance charge, which GE had said would exceed $3 billion.
The company is slated to report its fourth-quarter financial results next week.
--Joann S. Lublin, Leslie Scism and David Benoit contributed to this article.
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(END) Dow Jones Newswires
January 16, 2018 19:27 ET (00:27 GMT)