GE Brings New Leadership to Revamp Ailing Power Business
Leadership shuffle
In mid-November 2018, General Electric’s (GE) newly appointed CEO Larry Culp announced a leadership shuffle to help turn around the company’s ailing Power business. The leadership shuffle includes bringing back former GE executive John Rice from retirement to be the chair of the newly structured gas power business. Prior to his re-recruitment, Rice had served the company for 39 years before retiring in December 2017 as vice chair. During this period, he led several divisions of GE including energy and transportation.
Restructuring plans
For the last few years, General Electric has been evaluating sales and spin-off options to optimize its business. In June, the company announced a massive restructuring plan. Under the restructuring plan, General Electric decided to divest and split off certain assets to focus on only three sectors—aviation, renewable energy, and power.
According to the restructuring plan, General Electric intends to exit the oil and gas business, divest its lighting division, and spin off its Healthcare segment into a standalone company. On November 13, General Electric announced that it entered a series of agreements with Baker Hughes (BHGE). The agreements include a stake sale in Baker Hughes that would raise almost $4 billion for General Electric.
On November 16, General Electric announced that its lending arm, GE Capital, had sold $1.5 billion worth of its healthcare equipment finance portfolio to TIAA Bank. The company announced that it would sell up to 49.9% of its Healthcare business and then spin-off the unit as a standalone company.
For the Transportation segment, General Electric has entered into an agreement with Wabtec. According to the agreement, General Electric will receive a $2.9 billion up-front cash payment. General Electric’s shareholders will own 50.1% in the combined company.
General Electric intends to completely divest its lighting division, which generated ~$1 billion in revenues in 2017. The segment’s revenues fell 18% YoY to $385 million in the third quarter. As part of General Electric’s strategy, the company sold its energy efficiency business unit, Current, to private equity firm American Industrial Partners.
General Electric Co. tumbled the most since 2008 after a prominent financial examiner working with a short seller accused the company of “accounting fraud.” GE Chief Executive Officer Larry Culp called the claims “market manipulation -- pure and simple.”
Harry Markopolos, who had raised concerns over investment manager Bernie Madoff before his fraud was exposed, said GE will need to increase its insurance reserves immediately by $18.5 billion in cash -- plus an additional noncash charge of $10.5 billion when new accounting rules take effect. GE is also hiding a loss of more than $9 billion on its holdings in Baker Hughes, an oilfield services company, Markopolos said. Madoff Whistleblower Harry Markopolos
Harry Markopolos
“These impending losses will destroy GE’s balance sheet, debt ratios and likely also violate debt covenants,” Markopolos said in a report Thursday. “GE’s cash situation is far worse than disclosed in their 2018” annual report to regulators.
GE dismissed the claims as “meritless” without providing a point-by-point rebuttal. That wasn’t enough to stem the share plunge at a company long criticized for its murky finances. Culp, who took the helm in October, has vowed to improve transparency while also seeking to fix the power-equipment unit and halt a slide that erased more than $200 billion from GE’s market value in the two-year period ending Dec. 31.
“The short report accurately depicts a GE culture that historically hid losses and deceived investors,” Scott Davis, an analyst at Melius Research, said in a note to clients. “GE has no credibility at all in responding to the report today as inaccurate. The truth is GE is using a set of assumptions, the short report uses another. We don’t know where the truth lies.”
GE Left Itself Open to Markopolos Critique: Brooke Sutherland
The shares plummeted 11% to $8.01 at the close in New York, the biggest drop since April 2008. The slide had triggered a trading restriction on short-sellers that takes effect when a decline exceeds 10%. GE had climbed 24% this year through Wednesday, following a 57% plunge in 2018.
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