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The Amazing, Shrinking General Electric

I only wish I could shrink as fast as General Electric (NYSE: GE  ) is planning to. But I can't, and GE can, and so it will. Wisely.

The company ended the week by announcing that it plans to spin off its entire consumer and industrial businesses. That'll get it out of the slow-moving appliance, lighting, motors, and electrical businesses just as soon as the units can be rolled into a separate company and spun off to GE shareholders. That'll probably take place next year.

Also on the way out is its consumer finance business in Japan, which GE said Friday it'll sell to Shinsei Bank for $5.4 billion. Those moves will follow the shedding of the company's flimsy plastics business, which was sold last year to a Saudi Arabian company for $11.6 billion.

GE management obviously hopes that paring those units in favor of concentrating on its faster-growing businesses will boost the company's growth. After a disappointing first quarter and a lackluster second quarter -- which was positive only in that it met expectations -- some punch in the company would be welcomed.

The company's second-quarter results slipped 5.8% from a year ago, with net income coming in at $5.07 billion, or $0.51 per share, compared with $5.4 billion, or $0.52 a share, in the second quarter of 2007. This year's numbers include $400 million for restructuring and other charges. Continuing operations yielded $0.54 a share, comparable to last year. The infrastructure business clearly was the star of the show, chalking up a 24% growth in earnings, with the energy, oil and gas, transportation, and aviation units leading the way.

So GE follows Alcoa (NYSE: AA  ) , which also led off earnings season by reporting lower year-over-year results that nevertheless beat or matched expectations. I'm wondering whether we might be in the early stages of a trend here: pats on the back for big companies with declining earnings that meet or exceed forecasts. Perhaps we'll know more when we hear from the likes of DuPont (NYSE: DD  ) , United Technologies (NYSE: UTX  ) , and Boeing (NYSE: BA  ) .

In the meantime, I'd suggest that Fools let the proof of the pudding be in the results, and resist positions in GE until its restructuring is closer to completion.    

For related Foolishness:

Fool contributor David Lee Smith doesn't have positions in any of the companies mentioned. He does, however, solicit your questions or comments. The Fool has a disclosure policy.

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  • Report this Comment On July 11, 2008, at 5:03 PM, StrategyLeader wrote:

    At Last...Spinoff strategy is accepted!

    Since 2000, I have written several articles, my book The Secret to GE's Success, and numerous blogs suggesting to GE management that they could enhance shareholder value, maintain control over the GE Monogram and reduce complexity by creating "tracking stocks" and allowing GE stockholders to purchase parts of the company, as well as the whole company if they preferred.

    These are some quotes from two of my articles in Chief Executive Magazine:

    In March 2000 article entitled: "Succeeding a Legend" (note this article was writtend before Immelt was appointed and was addressed to all of the candidates for the job)

    I wrote:

    The first step in the evolution is to create at least three companies and establish tracking stocks:

    1- TRADITIONAL GE. This would include the electrical, electro-mechanical and chemical based components of the company. Lighting, power systems, aircraft engine, and plastics would be part of this company. Its mission would be to continue to grow profitable sales and maintain strong positions, using the skills and resources of GE Capital as required. In essence, this is the continuation of the current strategies. There may be, however, some pruning required with Major Appliances as a disposition candidate.

    2- GE FINANCIAL SERVICES. In essence, it is now a separate company and behaves like one. This company should aggressively but selectively continue to gain position and be the financial arm of the other components, which would enable GE to adapt to the dynamic changes in the industry. It may require the acquisition of or merger with a major financial services company.

    3 GE TECHNOLOGY. This is the major change in the portfolio and Welch strategy. Jack elected not to be a major player in the information and communications, biotechnology and new IT-based markets. GE has made many acquisitions in the medical systems and communications area, but nothing real dramatic; most have been either line or market extensions. It has not really decided how to use NBC as a platform for the revolutions taking place in the information, communications and entertainment arenas. The new CEO must take decisive and major steps in these markets before it's too late. New ventures, creating new products and services and so on, all of which GE did before the Welch era.

    By creating these three companies the new CEO would be able to focus each one and be positioned to participate in new markets. The tracking stocks are likely to increase overall stockholder value and reduce the need for debt. But most importantly, it would enable the company to clarify what it really is and develop the most appropriate management and teams to meet the unique needs of the three companies. Integration and communication need not suffer if they are managed.

    In June, 2007 article entitled: Decision Time for Immelt and Buffett, I recommended:

    Imagine if GE gives the investor an opportunity to invest in selective sectors of the company and not just in the total company portfolio. In this scenario, GE decides to offer stock in its key areas/sectors. For instance, it creates separate stock offerings in GE Healthcare, GE Infrastructure, GE Money, GE NBC/Universal, GE Commercial Financing and other key components of the company. These would replicate the current building blocks of the company. So investors could invest in either the total company or selective parts of the company. This is not unrealistic since many companies have done this and have been successful in doing so. Of course, this will require more evaluation.

    · GE is major stockholder of new companies. The GE Corporation would continue. The company would only sell a part of the new companies and retain majority control over the businesses. I would recommend that GE retain 75 percent of the companies and sell the other 25 percent on the open market.

    · GE would focus on maintaining GE traditional success factors. Under this new scenario, the GE corporate staff would be significantly reduced and focused on a few key areas. For instance, the company would continue to work on succession plans for the key management positions in the company and especially the next CEO. The corporate staff would monitor external changes and help the subsidiaries anticipate and respond to change, as well as change the portfolio as required. It would continue to have company wide training at all levels, take stands on political issues as needed and continue the strong financial, strategic and manpower networks that have contributed to its past success.

    The anticipated results could be very positive to all of the key stakeholders. The stock should rise overall, the investor will have more options and the company will continue to retain its AAA rating and have a strong and deep bench.

    Unfortunately, GE management ignored my recommendations, until July 10, 2008.

    Because they have not been able to sell the appliance business, Immelt and team are now accepting the spin off idea as a viable strategic alternative. The only problem with "belated acceptance of the tracking stock/ spin off idea" is timing. Both the consumer and industrial products markets are now slow and negatively impacted by the global recession. The spin-off would have been more effective when everything was growing and not when they are declining.

    However, as a GE stockholder and alumni, I am happy to see that the Immelt team is finally using its imagination to create stakeholder value. I believe that the employees of this new company will be better off being managed by their own experienced management and not by some foreign company that doesn't understand the culture and the "GE success factors".

    In my book I cited five key elements to GE's success, one was Adaptability... which has enabled the company to adapt to change and this may be a sign that this trait is still alive in the GE management team.

    Bill Rothschild, author of The Secret to GE's Success, now available in Chinese, Korean, Indonesian, Japanese, as well as many English versions.

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