General Electric is spinning off its healthcare division as a separate enterprise in an effort to focus its attention on its power, aviation and renewable energy businesses.
The multinational conglomerate announced the news Tuesday as the final piece in a string of spinoffs it has undertaken to cut debt, simplify its structure, and raise cash, including the spinoff of its train manufacturing business last month and the $3.3 billion sale of its distributed power division. It also will sell off shares of its ownership in oil services company Baker Hughes over the next two to three years.
“Today marks an important milestone in GE’s history,” CEO John Flannery said in a statement. “We are aggressively driving forward as an aviation, power and renewable energy company – three highly complementary businesses poised for future growth. We will continue to improve our operations and balance sheet as we make GE simpler and stronger.”
The news follows a difficult year for the company, which has experienced a loss of $100 billion in wealth with its stock dropping by 55 percent against a 15 percent overall fall of the Dow. It also comes the same day as its removal
from the Dow Jones Industrial Average, a place in which it has held steady continuously since November 7, 1907. Company shares closed Monday at $12.75 and rose by 6.5 percent in pre-market trading.
The company will instead focus on its core businesses of power, aviation and renewable energy, which accounted for more than half of the company’s $122 billion in revenue last year, mainly through the sale of turbines to power plants and engines to jet makers. The healthcare unit accounted for about 16 percent of companywide sales last year, adding up to $19.1 billion.
"GE expects to generate cash from the disposition of approximately 20% of its interest in the Healthcare business and to distribute the remaining 80% to GE shareholders through a tax-free distribution," Kieran Murphy, president and CEO of GE Healthcare, said in a statement. "The structure, sequence and timing of these transactions will be determined and announced at a later date, but are expected to be completed over the next 12 to 18 months. GE Healthcare will conduct business as usual throughout this process, continuing to serve its partners and customers"
Murphy will retain his position. There are no plans to spin off the aviation or power divisions, with GE executives planning to increase funding for the company’s finances over the next year.
Decision-making and resource allocation will be overseen by executives at its Boston headquarters, who plan to move resources and services from their location to business units to speed up decision-making and improve execution, aiming to shrink its size below what it was a decade ago.
“GE will be much smaller and more focused, but will it be a better company?” Erik Gordon, a professor at the University of Michigan’s Ross School of Business, told The Wall Street Journal
. “The loss of the healthcare division, a source of stability in recent years and home to its fast-growing life sciences business, makes GE dependent on fewer markets. “A slowdown in the jet engine business will have bigger-than-ever effects on the smaller GE.”
Flannery, who replaced
Jeff Immelt last August as CEO, first announced
in November the company’s intention to cut off $20 billion of its assets and focus on power engines, power generation and healthcare as part of its aim to reduce net debt by $25 billion by 2020. He later warned
earlier this year that other changes could take place due to a $6.2 billion charge incurred from a poorly-performed legacy portfolio of long-term care insurance.
As part of the plan, GE will shrink operations for its research, marketing and other functions by slashing $500 million in additional costs by the end of 2020. It also will set aside $15 billion to cover GE Capital obligations for the next seven years, and plans to reduce lending and contribute $3 billion to the finance division. In addition, GE has established a $20 billion credit facility with different banks as an extension through 2020 of a prior arrangement.
Investors in the tech giant, such as Trian Fund Management LP, have met the decision to sell off its healthcare division with enthusiasm. Trian has suffered losses since investing with GE in 2015. “Trian supports the strategic initiatives announced today by GE, and believes that these initiatives will create substantial value for shareholders,” a spokeswoman told The Wall Street Journal.
The company will maintain a quarterly dividend until the separation of the healthcare business unit, which will inherit $18 billion in liabilities from its parent company.
The possibility of layoffs and other aspects of the plan have not yet been determined.
GE specified to HCB News that executives were not available at this time for an interview.