Jeffrey Immelt, the CEO of General Electric CompanyGE , recently talked about his arduous challenges to transform the diversified conglomerate into a digital industrial entity in an interview with Business Insider 's Henry Blodget. gave investors some valuable insights about his strategic plans and vision for the company.
GE Pruning: " It's just arithmetic in the end "
Being at the helm since 2001, Immelt had weathered several storms that shook the very foundation of the corporate world, including the ghastly terrorist strikes of 9/11 and the financial crisis that led to the Great Recession. Yet he held the fort and steadied the ship, staying positive all the time with a forward-looking vision.
From a classic conglomerate with diversified business interests in financial services, media, industrial and technology-based operations, he gradually began pruning the company to focus on core manufacturing businesses with a digital edge.
For a company as large as General Electric, the strategic restructuring was slow and steady in order to keep the overall earnings in place during the transition. Although the seed was sown more than a decade back, the process was accelerated by the intense market volatilities that plagued the market during the 2008-09 financial crisis.
Immelt acknowledged that the tough decisions were the call of the hour. In his own words, " …But in many ways this was not that hard because in most companies arithmetic rules, and if you look at financial services and say, given the current regulatory environment, the best return I can hope for is single digits, high single digits maybe. And in our industrial businesses we can generate a 17% or 18% return. It's just arithmetic in the end. "
In accordance with Immelt's vision to transform the diversified conglomerate to an industrial-focused firm, General Electric divested most of the financial units under GE Capital. The only financial operations that were retained by the company included the financing verticals like GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance. These units directly relate to the core industrial operations of the company and thus formed an integral part of its corporate activities.
Earlier, General Electric sold its media and entertainment firm NBCUniversal to Comcast Corporation and GE Plastics to Saudi Basic Industries Corporation. Immelt's current restructuring plan also involved the sale of over 4,400 properties, including warehouses, factories, malls, apartment buildings and other commercial properties of GE Capital Real Estate to a consortium led by private equity firm Blackstone and Wells Fargo & Company WFC . General Electric also spun off its GE Capital Bank into Synchrony Financial SYF as part of its corporate strategy to further dissociate itself from the financial business.
The company is also contemplating to sell its electronics appliance unit to a new buyer after it scraped the deal with Swedish premier electronics manufacturer Electrolux AB ELUXY due to the acrimonious lawsuit filed by the U.S. Department of Justice (DOJ) and its continuous scrutiny has likely led to the cancellation of the deal.
The Growth Driver: Industrial Internet
Immelt acknowledged that the future growth driver of the company is likely to be the Industrial Internet. The Predix software of General Electric is designed to add intelligence to the Internet of Things (IoT) applications. It helps companies to connect their machines, data and people and run industrial-scale analytics. Combining machine connectivity with a data lifecycle management platform powered by engineering simulation will help diverse firms to design their products for the Industrial Internet in an optimum manner.
Immelt observed, " ... [W]hen I talk about the 'Industrial Internet,' it's about capturing data off of machines, turning it back into valuable insight for our customers and that's going to be worth trillions of dollars in the economy, and I think it's going to transform GE. "
The massive restructuring efforts have cumulatively led to the positioning of the company as a 'Digital Industrial' entity. Simultaneously, General Electric has been able to repose faith among investors as share prices witnessed a dramatic improvement, rising 20.7% year to date compared to -1% by the benchmark S&P 500 index and remains well on track to finish the year at its highest price since 2007. The shares also scaled a new 52-week high of $31.23 on Dec 16, 2015 on the bullish outlook for 2016 .
The corporate restructuring activities have also positioned General Electric to probably become the first company to drop its too-big-to-fail label. The company is also seeking to apply for de-designation as a systemically important financial institution in first-quarter 2016. We remain impressed with the continued efforts of this Zacks Rank #3 (Hold) stock to sustain its growth momentum in the near future.
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