- Ted MannThe Wall Street JournalCANCEL
- Victoria McGraneThe Wall Street JournalCANCEL
Updated April 10, 2015 8:59 p.m. ET
General Electric Co.
made one of the biggest strategic shifts in its 123-year history by announcing plans to get out of the banking business and refocus on the conglomerate’s sprawling industrial operations.
Friday’s move to shed almost all of GE Capital also marked the boldest attempt yet by Chief Executive Jeff Immelt to confront the moribund stock price that has marred his 13-year career at the top.
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Mr. Immelt is veering even further away from the strategy he inherited from predecessor Jack Welch. While Mr. Immelt has bolstered GE’s industrial operations with huge deals in power, oil and gas, he already had sold off 65% of the company that Mr. Welch created, including NBC and consumer appliances.
GE shares jumped nearly 11%, or $2.78, to $28.51 in New York Stock Exchange composite trading, their biggest one-day percentage gain in about six years. It was only the eighth time since 2011 that a Dow Jones Industrial Average component gained more than 10% in a day. GE’s stock-price surge added $28 billion to the company’s market value.
Despite the leap, GE shares are down 20% in the past decade, compared with a 73% gain by the Dow.
The giant finance business long churned out about half of the company’s profits but hammered GE during the financial crisis.
Getting rid of GE Capital likely makes its parent company less of a target for activist investors who are routinely rattling the boardrooms at companies viewed as laggards.
Some of those investors had been intrigued by the possibility of going after GE, but Mr. Immelt’s move will unlock $90 billion for shareholders in the form of dividends, stock buybacks and proceeds from spinning off GE’s private-label credit cards and retail-finance businesses.
Mr. Immelt had been pruning GE Capital since soon after the crisis hit in 2008, but the finance arm’s $500 billion in assets rank it as the seventh-largest U.S. bank. After the exit, which will occur during the next 24 months, GE aims to get 90% of its earnings from industrial businesses, up from 58% in 2014.
The remaining 10% will come from the small number of financial businesses that GE is keeping, such as aircraft leasing and energy finance, which support its industrial operations.
“Every shareholder wants us to do this,” one person familiar with the matter said. “No one wants us in this business.”
GE is betting that the shake-up will be worth it because industrial companies usually trade at higher stock-market valuations than financial businesses.
Big banks often are wound down when they are in trouble. GE Capital is healthy and profitable, but executives said new, postcrisis regulations make it too hard to earn a sufficient return on investment. Long-grumbling shareholders complain that lending isn’t worth the risks.
GE Capital is one of four non-banks designated as “systemically important financial institutions” by U.S. regulators, subjecting it to closer oversight and tougher standards on capital buffers against losses.
GE said it plans to apply with regulators to be “de-designated” as a SIFI next year.
No such financial institution has been allowed to escape the new designation, but a spokeswoman for the Treasury Department said the regulatory group that decides which lenders are systemically important welcomes the chance to reconsider a SIFI designation.
“It was never our intention to create a ‘Hotel California’ situation,” Sen. Mark Warner (D., Va.) said, referring to the Eagles song about a place guests could check out from but never leave.
Some lawmakers and other supporters of the toughened rules have hoped that financial firms will slim down to a size that could pose a smaller threat if they get into trouble. GE decided to make a much more dramatic move.
“There was a little bittersweetness,” said GE Chief Financial Officer Jeff Bornstein, who spent more than a decade at GE Capital and helped steer it through the crisis. But staying in the business “doesn’t make any sense,” he said in an interview.
Photos: GE’s Historic Technologies
From the light bulb to jet engines, a look at over 100 years of GE products and milestones
Library Of Congress
General Electric/Associated Press
General Electric/ASSOCIATED PRESS
Jim R. Bounds/Bloomberg News
Vijay Paruchuru/Bloomberg News
Daniel Acker/Bloomberg News
Finance was a big business for GE under Messrs. Immelt and Welch, who plowed billions of dollars into everything from office buildings in Southern California to consumer loans in Japan.
GE’s banking activities started modestly in 1905, when it set up a business to provide financing to utilities. In the Great Depression, GE started financing the sale of appliances to consumers.
The business grew quickly as GE exploited a quirk in the financial markets. Instead of collecting deposits to raise the money needed to make loans like a traditional bank, GE Capital funded itself largely by leaning on GE’s stellar credit rating to sell bonds and short-term debt called commercial paper.
The strategy worked until the financial crisis, when GE was forced to turn to the U.S. for support and slashed its dividend.
At the time, GE was the largest issuer of commercial paper. In his book “On the Brink,” former Treasury Secretary Henry Paulson wrote that he knew the crisis had reached a dangerous peak when Mr. Immelt showed up at his office and said GE Capital was having trouble getting anyone to lend it money for longer than overnight.
Mr. Immelt has expressed regret about expanding GE Capital before the crisis. “Clearly in retrospect, you know, I didn’t get that right,” he said in an interview in September.
Mr. Bornstein said the exit will cost GE a total of $23 billion. Part of that will come from an expected tax bill of $6 billion on $36 billion in cash that GE will bring back from overseas as it reshuffles its balance sheets.
The company’s effective tax rate will double to about 20%, and GE agreed to guarantee $210 billion of GE Capital’s debt.
GE’s top executives and board of directors had examined possible exits from GE Capital since the crisis, Mr. Immelt said Friday in an interview.
Agence France-Presse/Getty Images
Then came “Project Hubble,” the code name for the calculations and evaluation that culminated in Friday’s announcement.
Earlier this year, the company began meeting almost daily with a roughly 50-person team of investment bankers at J.P. Morgan Chase
& Co. and consulting with advisers at Centerview Partners LLC to consider options for an exit, a person familiar with the matter said. Mr. Immelt first told GE directors in February that he wanted to look in earnest at ways to shed GE Capital, another person said.
“We are going to move a mountain here in the next couple of weeks,” Mr. Immelt said, according to this person. GE told regulators of its plans to announce a restructuring during a meeting at Treasury within the last week or so, other people familiar with the matter said.
The plans include selling off $165 billion of loans to borrowers like Wendy’s
franchisees, overseas consumers and private-equity firms. GE also said Friday that it will sell a $26.5 billion portfolio of investments in office buildings and other commercial property to buyers that include Blackstone Group
LP and Wells Fargo
The dramatic shake-up caused some analysts to ask an old question anew: When will Mr. Immelt, 59 years old, decide to retire?
He didn’t address the subject in a conference call Friday but has said he remains passionate about his job and has no plans to go anywhere.
Even analysts and investors who have sharply criticized Mr. Immelt praised his move.
“I know we have all given you a lot of crap over the years, but this is pretty good stuff for redemption,” Barclays Capital analyst Scott Davis told the CEO during GE’s conference call.
Mr. Davis had raised speculation in a recent note to clients that Mr. Immelt might soon step down. “You can keep your job a little longer, I guess,” Mr. Davis said Friday.
—Joann S. Lublin and David Benoit contributed to this article.
Write to Ted Mann at firstname.lastname@example.org and Victoria McGrane at email@example.com
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