18 January 2018

MARKET - GE Takes US$11B Charge and May Restructure

A 125 Year Old Company Struggles to Regain 'Greatness' in a New World


As Chief Executive, John Flannery took over the reigns of General Electric in August 2017, he faced the challenge of redefining or  rediscovering 'greatness' for this legacy organization. 

Flannery is GE’s eleventh CEO and the company’s tenth Chairman. General Electric is the largest industrial company in the world and operates in 180 countries. Once a leading brand, GE is now ranked 11th on the Forbes list of the most valuable brands. The market capitalization of industrial companies has also been descending as digital companies ascend to the top spots.

On Tuesday, Flannery announced that GE will take a charge of US$11B in the fourth quarter of which US$6.2B is for reevaluation of insurance assets, US$3.4B is for U.S. tax changes and US$1.8B is for impairments of energy financing at GE Capital. The company will also need to add as much as US$15B to insurance reserves over the next 7 years to remain compliant. 

Although, GE is no longer involved in the long-term care insurance business and has not written such policies since 2006, the company is still responsible for some 300,000 policies. The company estimates the additional costs could be as much as US$50,000 per policy. 

This US$15 billion set-aside highlights the difficulties long-term care insurers and reinsurers face as they make good on policies dating back decades. Many of these policies seriously underestimated the cost of care, increasing life spans and reduced government programs. 

There are also other challenges that need to be addressed. Analysts have pointed to falling sales of power turbines, a build-up of inventory and declining profit margins in some businesses. Flannery has already eliminating thousands of jobs and cut $3.5 billion in costs but the turnaround effort is still likely to take more than a year to play out.

In November, Flannery announced a plan to refocus on power, aviation and healthcare.  However, with GE shares falling 40% over the past year, the company may now be forced to restructure or break up operations. Current share prices (US$18.21) give the company a market value of US$156 billion.

GE is the largest industrial company in the US. It has previously raised the idea of selling assets, but went slightly further on Tuesday. Flannery is now saying GE is “looking aggressively” at spin-offs and other ways to monetize the value of GE’s power, aviation and healthcare units.

Investors are paying close attention. Disruption is widespread and General Electric is not the only legacy company trying to sort out a role in this brave new world.

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