General Electric’s shift is a light bulb moment for economy

Last week General Electric announced plans to drastically downsize GE Capital, for years a key earnings driver, to focus on its core industrial businesses that range from jet engines to medical devices. The company will shift away from running the diversified financial services firm that wiped billions off its balance sheet during the financial crisis and escape the post-financial crisis regulatory burden that has weighed down GE’s stock price.

A company statement noted that “The business model for large, wholesale- funded financial companies has changed, making it increasingly difficult to generate acceptable returns going forward.” In other words, this business is the financial equivalent of a boxer who has taken way too many shots to the head.

Over the next two years they plan on selling off most of GE Capital, the country’s seventh largest bank holding company with about $500 billion in assets. Part of the strategy involves selling off $165 billion of loans and a $26.5 billion portfolio of commercial real estate investments and loans.

As GE CEO Jeff Immelt explained in a CNBC interview, “You really have a perfect market to be selling financial service assets … you’ve got slow growth, low interest rates, lots of liquidity, people searching for yield.” He added: “We think it’s good for the regulatory world, it’s good for investors and that’s been more or less recent. Now’s the time to do it.”

After the 2008 financial crisis, GE began surgically pruning GE Capital, which was founded in 1933 as a subsidiary of the General Electric Co. to provide consumers with credit to purchase GE appliances. The firm sold its domestic consumer finance business last year and earlier this year it sold its lending units in Australia and New Zealand.

Last fall, Immelt announced that the firm planned to reduce the size of GE capital to represent about 25 percent of the company’s earnings, down from nearly half at its peak. Under the new plan, GE Capital will account for less than 10 percent of profits by 2018.

But the company plans on retaining key units like GE Capital Aviation Services, Energy Financial Services, and Healthcare Equipment Finance. These financial operations provide GE with an advantage over its global competitors in these market segments by helping customers finance equipment purchases from the company.

For example, customers want GE CT scanners, MRI equipment and other medical devices because they are high-quality products that offer cutting-edge technologies. But they also want GE’s Healthcare Equipment financing arm to help fund a large capital outlay because it can give customers cheaper access to money. Each GE business benefits from the ability to provide customers with tailored financial solutions.

The firm is reshuffling GE Capital’s financing portfolio with an awareness that certain financial resources are integral to the success of its core businesses.

The firm also announced that it will pass some of the proceeds from scaling back GE Capital on to shareholders in the form of a share buyback program.

The company believes that buying back up to $50 billion of its own shares will help rejuvenate its moribund stock price and regain favor with investors, who have been complaining that GE’s stock has been stagnant for over a decade.

Investors loved the strategic move and sent shares up 11 percent. But even after the bump, GE’s stock price is down 22 percent over the past decade while the market as a whole is up 73 percent.

These returns are a far cry from those delivered so brilliantly during Jack Welch’s two-decade tenure as CEO, when he captured Wall Street’s fancy by delivering a 23 percent per annum total shareholder return and increased the firm’s market capitalization from $18 billion to over $500 billion. As the good times rolled, this performance made GE the most valuable company in the world-by 2000.

Only that great sculptor Time will tell if GE’s latest strategic shift will yield similar returns.

originally published: April 8, 2015