Last Friday, the world shook. You can be forgiven for not noticing, for, it was the business world that shook. GE announced it was going to virtually sell all of GE Capital.
GE is one of the, if not THE greatest company on earth. It is the old fashioned industrial conglomerate making everything from aircraft engines to medical equipment. It is known for its legendary business leaders, Reginald Jones, then Jack Welch and then Jeff Immelt. It is known for its excellence in management - it is really the business school where America's future CEOs are produced. It is the leader of many management trends of the future - Six Sigma, Outsourcing to India ....... you name it and GE was probably the first mover.
All that is fine, but in reality, GE was what it was because of GE Capital. For a long time it contributed 50% of the group profits. Although technically not a bank, GE Capital is one of America's largest "banks". Just before the financial crisis, you would have had to question whether GE was really an industrial company - a full 60% of its profits came from GE Capital.
And then the financial crisis hit. GE, yes even GE, had to resort to a government "bailout" in form of $130 bn of loan guarantees. Suddenly, being a big financial institution was bad news. GE's share price tanked and it lost its coveted AAA rating which it had had for 40 years. The jewel in the crown was sudenly turned into a lump of coal.
GE Capital turned around. Of course it would, given the outstanding management talent at its disposal. It is back to being very profitable and last year contributed more than 40% to GE's profits. But there are two lasting legacies - one is that GE became a SIFI" , the dreaded tag of a "Systematically Important Financial Institution" , which essentially is a sticker from the US government that it was too big to fail. SIFIs are subject to incredibly strict government requirements, tight regulation and surveillance post the financial crisis. The second legacy was GE's share price. In 2007 it was $42. Today, despite the resurrection of GE Capital, it is $25 or so. The market is simply scared of large financial institutions and the risks they pose.
GE did what it does best - take a hard decision. It has been announcing its intention to trim down GE Capital for quite a while. It had started to spin off bits and pieces. But on Friday, it announced a virtual disposal of GE Capital. It would sell off almost everything over two years and hold only the parts of GE Capital that were intimately tied to its industrial business - like aircraft leasing. The mighty GE is shrinking. It will become a smaller conglomerate. And it will become an industrial group once again.
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18 comments:
Knowing GE, I am sure they would bounce back but this opens a bigger subject own reaction to disaster. The companies act in India is stamped with Satyam all over it. I really wonder whether this is safeguarding or saving one's backside for the future. By the way seriously impressed with this new fan of Anushka Sharma. You must be making someone really jealous.
Well, that is the way of legislation isn't it. It will respond to an event disproportionately. Given that we are blessed with Ramamrithams, we will no doubt get intricate laws that will "protect" against every imaginable way around. Having said that as a layman, I don't think the new(ish) Companies Act is all that bad. Yes, there is a plethora of rules, but that is the way of the corporate world everywhere on earth.
lol :D rightly said...thalai off late is veryyyyy keen abt anushka :D
thala..I am really curious..ithu newslayum perusa cover agala solreenga..and even it had been..how come u r able to decipher it to this paamaran level (mine)..chaancela thala..unga sense of analysis is pullariching..konjam sollikudungalen :)
Gils - you are generous with your praise. Orey ice vechittinga
Well, this is the same as the way you give insights and angles in your movie reviews :):)
While this is a big news for corporate world, the companies do it all the time, don’t they?
Mergers, Acquisitions, Restructuring is all part of business done for a variety of reasons. A common person may find it difficult to phantom to sell the business that generates 50% revenues, the companies seem fine to do it with either promoters / shareholders pocketing the profits or money being invested in other ventures and the story continues…
I however feel for the employees of GE capital who will bear the brunt under the new management as it always happens, there would be quite some layoffs, restructuring etc. under the name of integration of the acquired company with the other businesses of the buyer.
Oh yes Niraj - M&A is common all the time - especially with GE which does at the rate of 1 a week. But even by that standards a sell off of GE Capital is earth shaking - those sort of deals happen once in years.
I wouldn't worry too much about the employees. GE Capital has some of the best management talent in the world and they'll look after themselves. The staff, with a GE label, can easily find another job if it came to that. That's the advantage of having the letters GE in your CV !!
GE as in General Education? hehehe
I can't understand what is there to be admired when it was a "successful" corporation that had be bailed out by us taxpayers ... it was yet another bank that screwed up, and while the bank and bankers got bailed out, well ...
I recall from my younger days the question of whether Julius Caesar was a great Roman emperor or whether he just happened to be en emperor when the Roman empire was at its greatest. To me, Jack Welch is one of those characters--he happened to be at the right place and at the right time. Any reasonably smart person at the right place and time could have been as "successful" as he was ...
Now, I will duck and cover as you lob grenades at me ;)
Gils, konjam help pannuppa ... ;)
Of course you'd say all this, so nu surprise !!
The "bailout" issue needs some attention. GE Capital's actions were not the cause of the financial crisis. They lent normally within their risk profile. When the crisis hit, there was systemic issue with financial markets completely drying up. When such situations occur (like in a natural disaster) it is the duty of the government to step in. What GE Capital received was only loan guarantees. They didn't take cash like many of the banks did. I would hardly put them in the bracket of "banks and bankers who screwed up". So you can't paint the whole category of financial companies with a broad brush and condemn them all.
As for Jack Welch, you couldn't be more wrong. To be that successful over 20 years (not one or two) is not due to luck. During his time the value of GE increased 4000%. Everybody else also operated during the same period. Nobody was anywhere as successful as he was. You may not like him, for, after all he was Neutron Jack, but you cannot fault his achievements.
The promise of high returns in an increasingly deregulated and disaggregated marketplace for credit attracts a lot of players, and GE took advantage of that. Of course, because of their superior human capital they did this very well. And now that increasing regulation has made the prospect of better than normal returns difficult to achieve - and though they are achieving them - its time to say good bye. It is a good lesson in management decision-making and I think you are right to applaud them for it.
uhumm...when thalai gives such a passionate defence for welch..its better to pray the grenades don't hit u and scurry for cover...even a full battery of barak anti missile system wouldn't be sufficient :D
Brilliantly put in one paragraph. Yes, there were disproportionate returns and that's why GE Capital became so big. Now that is not so and that's why GE Capital is being let go of. Well said.
I think I learnt more in the last five years about running a business than in the 25 years since graduating from business school. Everyone should try entrepreneurship. I really appreciate the quality of management that GE brings because in the end, management is a science that makes the unknown and inchoate measureable. Especially Peter Drucker's "The Practice of Management" - it should be a bible on every CEO's desk.
avvalo mariyathaiya thalaikku? ayyo, ayyo!!! ;)
"GE has long used the financial operations of GE Capital to hold down its overall tax rate, a strategy that has allowed the conglomerate to pay taxes at a lower rate than its peers. The impact has been significant enough that GE discusses it in its securities filings and was deterred for a long time from seriously considering a spinoff. ... GE Capital can borrow in the U.S., using the interest it pays to offset its industrial profits at home, and then make profits by investing the money out of Uncle Sam’s reach overseas."
says the venerable WSJ (http://on.wsj.com/1JEEvdz)
So what if all that meant that Uncle Sam had to bail out, oppos, stand as a loan guarantor ... hehehe ...
And, of course, letting go means a great deal of accounting gimmicks along the way, right? ;)
"In reporting its first quarter earnings Friday morning, the conglomerate revealed that it recorded a $13.6 billion loss related to the planned sale of the majority of its finance unit."
http://onforb.es/1ba61o3
Amen. There is no better business school than the school of entrepreneurship. If only it weren't so hard .......
Good Lord - Is that really you. Making a tax argument !!! Wow That is as earth shattering as 40 deg warm sunshine where you live :):)
Yes Ramesh, you are right when you said "But you may not have read about it at all in the papers." - thats why I come here to read your blog. Isnt my case rested?
Awww. Every time you have the kindest words to say.
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