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GE Capital, in Four Easy Pieces

By Diane Brady Things are certainly shaking at General Electric these days. On July 31, Chairman Jeffrey R. Immelt announced a slew of reforms, from starting to expense options this quarter to making senior execs hold exercised shares for at least one year. He and Chief Financial Officer Keith Sherin also jumped the queue in signing off on GE's recent quarterly and annual reports, two weeks before the Securities & Exchange Commission's deadline -- a move that Immelt dubbed "a no-brainer."

The still relatively new chief even voiced support for reforms coming out of Washington and the New York Stock Exchange, pledging to appoint only independent directors to his board. That's in addition to moves over the past several months to disclose more information about GE's complex financials in a form that's easier to digest. "Today, more than ever, it's important to listen to investors," he said.

Yet investors still may be wondering what to make of Immelt's earlier decision to divide GE Capital into four parts. At first glance, it almost looks like Immelt just broke the company's Byzantine finance unit into four easy pieces for his own edification. Saying on July 26 that he "wants more direct contact" with those businesses, he spoke about getting a "clearer line of sight" to the operation -- not to mention more control. The move won't alter disclosure or the fundamentals of the massive unit, which contributes 40% of GE's net profit.

BETTER BENCHMARKS. Even so, the new structure should benefit shareholders down the road. By breaking the behemoth into equipment management, commercial finance, insurance, and consumer finance units, Immelt has made the business somewhat easier to understand and more logical than the categories GE had previously used for reporting. That will make it simpler for people to compare the new divisions to similar finance-sector rivals, providing a better benchmark to gauge performance.

Take GE's insurance operations, which were previously scattered in categories ranging from consumer finance to commercial reinsurance. Now, mortgage insurance, financial guaranty insurance, reinsurance, and various consumer products have been brought under the roof of GE Insurance. Not only does that make it easier to contrast GE's insurance operations with those of other insurers, notes Prudential Securities analyst Nicholas P. Heymann, but it should make the other three units look much better, since reinsurance losses following September 11 have been a huge drain on earnings this year. Isolating the bad news into one division might even be a catalyst for GE to fix and sell its ailing reinsurance business.

After all, this reorganization is bound to create more competition and accountability within GE Capital itself. Each unit head will report to Immelt -- instead of through the now-eliminated GE Capital head office. And each will deal directly with Wall Street. That means explaining weakness in their divisions and facing comparisons with outside rivals. And that's not to mention the always fierce battle for supremacy and attention within the parent company.

"WINDOW DRESSING"? "They're all going to be fighting it out for capital," says GE Vice-Chairman Dennis D. Dammerman. "I love it!" Equally important, he adds, the new structure should mean more clarity in mission, more GE participation in each unit's acquisition strategy, and more public familiarity with day-to-day finance operations. "It's not the great big blob anymore," says Dammerman.

That unflattering perception of GE Capital certainly hasn't helped the company in recent months. Even as the finance unit has grown in heft, its eclectic collection of two dozen businesses remains a mystery to most investors. Many still have a hard time figuring how it makes its money or the extent to which profits are generated from acquisitions rather than internal growth. Others have worried that the unit's success would overwhelm GE, threatening to make it look more like a finance company worthy of a lower multiple than a diversified conglomerate.

Thanks to increased scrutiny and investor demands, Immelt has already offered up more detail on GE Capital's operations than this new structure provides. In fact, GE had previously organized its finance unit into five subdivisions for reporting purposes and broken out even more details on the unit's individual businesses and accounting practices in its most recent annual report. No wonder Standard & Poor's analyst Robert Friedman was quick to dismiss the latest breakup as no more than "window dressing."

LEARNING HIS WAY. Still, clarity means more than just getting a few extra numbers. It involves comprehending the mission and strategic position of a business. In this respect, investors aren't the only ones who need to learn their way around GE Capital.

Unlike his predecessor, John F. Welch, Immelt has never worked in the unit that Welch helped build. The new leader may have sat on the board for five years but, according to Dammerman, he "felt isolated from it compared with businesses like Medical Systems, Power Systems, or Plastics." Now is Immelt's chance to learn the ropes -- and exert more control over its direction.

As the chairman digs deeper into the newly divided GE Capital, investors can only benefit. Long daunted by the labyrinth of disparate finance operations within GE, shareholders now have a better chance of actually figuring out for themselves how to assess the unit's bottom-line results. No one will miss the "blob" method of structuring GE's finance business. Associate Editor Brady covers General Electric for BusinessWeek in New York

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