By now, most General Electric (NYSE:GE) investors will be aware that management plans to separate the company into three different entities. In a sense, it's following a path already laid by two of its fiercest rivals, Siemens and the former United Technologies. The separation will lead to one-time costs of $2 billion for GE, but what about the benefits? Let's take a look at what investors can expect from the breakup.
The key benefit
Aside from the argument that the new companies will command higher valuations as separate companies, a key point is that the companies will be better run as individual companies.
During the investor presentation, CEO Larry Culp claimed the new companies would have "capital structures and capital allocation frameworks" in line with their "distinct strategies and industry dynamics." As independent companies, they would have the "strategic and financial flexibility will allow them to invest more in existing and adjacent growth markets."
Such corporate language can sometimes be hard to understand and doubly hard to visualize how what Culp is talking about could lead to an improved bottom line. With that in mind, I thought I'd give a couple of examples of how the businesses spun out of Siemens and Raytheon have done precisely what Culp believes GE's businesses can do.
Siemens Healthineers and Varian Medical Systems
Siemens Healthineers (OTC:SMMNY) is a leading healthcare company playing in the imaging (MRI scanners, ultrasound, CT scanners, etc.), diagnostics equipment, and advanced therapies (minimally invasive procedures) space. The company was spun out of Siemens in 2018, with the parent company retaining majority ownership. At the time of the spin, management outlined its "Strategy 2025" to generate growth and focus on adjacent markets as a stand-alone company. That's something management has definitely done by acquiring vascular robotics company Corindus for $1.1 billion, and then taking a majority stake in a healthcare consulting firm ECG Management Consultants -- both deals in 2019.
Then in 2021, Siemens Healthineers completed its monster acquisition of cancer care (radiation oncology and software) specialist Varian Medical Systems for $16.4 billion. The idea is that Siemens Healthineers' expertise in detection and diagnoses will jell seamlessly with Varian's treatment solutions. The deal was financed through a combination of debt and equity.
The takeaway for GE investors is that Siemens Healthineers (a key competitor of GE Healthcare) was better able to do these deals and issue equity because it was a separate company. As a result, investors warmed to the acquisition in a way that they might not have done if Siemens Healthineers were still part of Siemens.
As such, GE Healthcare could follow a similar path; healthcare investors (bond or equity) might be more willing to support the company in similar endeavors, as it's independent rather than part of a conglomerate.
United Technologies and Carrier
The former United Technologies split into three new companies in 2020, namely an aerospace giant which merged with Raytheon Company to become Raytheon Technologies (NYSE:RTX), elevator company Otis, and heating, ventilation, and air conditioning (HVAC) company Carrier (NYSE:CARR).
For reference, Raytheon Technologies is a key competitor of GE Aviation, as they both manufacture engines on the Airbus A320 NEO. However, the business benefiting most from the split is Carrier.
Ever since the separation, Carrier's management has focused on improving its business by initiating substantial cost-cutting measures (aiming for $700 million cuts in ongoing costs by 2023) and refocusing on growing its HVAC business by investing in digital technologies, launching 120 new products in 2020 alone, terminating unfavorable contracts, and selling its Chubb fire and security business for $3.1 billion.
Management is now actively playing "offense" in looking for mergers and acquisition opportunities to grow the business.
Again, it's an excellent example of how companies are energized to improve their businesses and have the financial flexibility to do so now that they operate independently.
Where next for General Electric?
The potential for each new GE business to be valued higher as a separate company compared to being part of a conglomerate will attract attention.
Still, investors shouldn't lose sight of the potential for all three businesses to be better run and engage in corporate activity in a way they couldn't have done before. For example, Siemens Healthineers might not have been able to do the Varian deal. Carrier's management might not be so aggressive in restructuring the business if it were still part of United Technologies.
GE's separation is likely to lead to similar benefits for its future businesses.