What happened
One of the original members of the Dow Jones Industrial Average is announcing plans to split into three parts, and investors are cheering the decision. Shares of General Electric (GE +4.09%) were up as much as 7% on Tuesday morning after the conglomerate founded by Thomas Edison announced plans to streamline.
So what
It has been a rough decade for General Electric, with the company weighed down by debt taken on during an ambitious multiyear campaign to expand from its industrial roots into finance, media, and other sectors. In recent years, GE has mostly been focused on selling off assets and paying down that debt, and the company announced a huge step in that direction on Tuesday.
A GE9X Engine in action. Image source: General Electric.
GE said it intends to break its aviation, healthcare, and energy businesses into three separate public companies, spinning off healthcare in early 2023 and combining and then shedding its renewable energy, power, and grid units as a stand-alone business a year later. When it's all done, the remaining GE will be focused solely on aviation and will be one of the world's largest jet-engine businesses.
In a statement, company chairman and CEO Larry Culp called the split "a defining moment for GE," saying it's the culmination of all of the work in recent years to shed non-core assets and strengthen the balance sheet.
"Our teams have done exceptional work strengthening our financial position and operating performance, all while deepening our culture of continuous improvement and lean," Culp said. "And we're not finished -- we remain focused on continuing to reduce debt, improve our operational performance, and strategically deploy capital to drive sustainable, profitable growth."
Now what
By breaking apart, GE is following a broader "de-conglomeration" trend among industrials, following notable moves including United Technologies' split into three independents last year and Dow Chemical and DuPont's megamerger that ultimately split into three units. The market has rewarded most of these efforts, and the initial response from GE shares indicates there's support for this move.
GE is still very much a work in progress, and this split arguably could (at least temporarily) distract from the work getting energy and other units performing at their potential. But at the same time, there's no real reason to justify why a healthcare business and an aircraft-engine business should be housed under the same corporate roof and have to fight internally for resources.
It's likely that there'll be a lot of value created by this split, but investors need to be aware it will almost certainly take until at least 2024, when the splits are complete, for that value to be recognized.
