From GE to HNA, Feeling the Urge to Merge, De-Merge and Re-MergeBy and
As U.S. conglomerates retool, others embrace Welch playbook
Can GE shrink its way into investors’ hearts with Flannery?
No one would confuse Adam Tan with Jack Welch.
Welch, of course, shot to fame by turning General Electric Co. into a model of late-20th century American capitalism, a sprawling industrial conglomerate with a high-octane financial arm bigger than most banks.
Tan, by contrast, runs HNA Group Co., a private giant in China that, outside business circles, is virtually unknown in the U.S.
But Tan is, in fact, something of a Welch fan -- which might seem surprising, given that Welch’s empire-building strategy has fallen out of favor as his successor, Jeffrey Immelt, spent the past 16 years dismantling the House That Jack Built.
Now, a new leader at GE, John Flannery, will have to decide if America’s quintessential conglomerate can really shrink its way back into investors’ hearts. Some analysts wonder if GE might spin off its health business. Others hypothesize about a wholesale breakup.
Thing is, conglomerates have been going in and out of fashion since the 1960s and, depending where you are, still are.
As GE enters its next era, and diversified U.S. companies such as Honeywell International Inc. confront calls to slim down, some multi-industry giants elsewhere are charting courses more akin to Welch’s than Immelt’s.
Take HNA, which started out as a small airline. Immelt undid Welch’s dramatic expansion into financial services. But Tan, in an interview with Bloomberg this month, laid out global ambitions that, a la Welch, include a deep push into financial services.
“We tried to learn from GE for many, many years,” Tan said. “Now we’ve built our own empire, but our teacher’s disappeared.”
Across the globe, there are still companies trying to prove that the diversified model can work. In India, the sprawling Tata Group has built one of the world’s largest conglomerates, with businesses ranging from salt to steel, refrigerators to tea, drugs to luxury cars. Tata has more than two dozen publicly listed entities.
So where does all of this leave GE and its new chief executive?
In the U.S. stock market, at least, multi-industry companies are starkly out of favor. Pressured by activist shareholders that want to see stock prices go up, companies such as Dow Chemical Co. and DuPont Co. are planning to split up into three companies following their merger, while Honeywell is reviewing its portfolio amid calls from hedge-fund gadfly Dan Loeb to break apart.
Nelson Peltz’s Trian Fund Management, the activist investor that took a stake in GE in 2015, has called recently for operational changes such as cost cuts to juice results and boost shareholder value. The firm said it’s keeping management accountable, even if it hasn’t called publicly for a breakup.
Flannery plans to review GE’s portfolio and has said everything is on the table. Some speculate more big changes are coming.
“He gave himself plenty of breathing room before he has to start opining on the priorities and the portfolio and what it means to be a conglomerate,” said Deane Dray, an analyst with RBC Capital Markets. “There’s an underlying trend across the sector that is relentless, and it’s this pendulum that’s swinging toward the urge to de-merge.”
With $120 billion in sales last year, GE is smaller than it was when Immelt assumed the CEO role in 2001, even after making acquisitions to build out the power, oil and health-care divisions. Internally, executives have championed a “simplification” initiative.
But the stock is down 9.2 percent this year to $28.69 after underperforming the markets last year, and Flannery has acknowledged that it’s an issue.
One option: a breakup. Julian Mitchell, an analyst with Credit Suisse, puts the total value of GE’s parts at $34 a share.
“There appears to be a general view that spinoffs work, even if the company that spins off an asset was not viewed as particularly undervalued in the first place,” Mitchell said in a June 12 note. GE may consider separating into two businesses-- utility power and transport -- and divesting the remaining units, he said.
Flannery, for his part, said he would consider all options, even a sale of the health-care unit that he has run since 2014. But he has so far rejected the idea that conglomerates are just plain bad for shareholders.
“The focus of investors is the output, not necessarily the construction of the company,” Flannery said in an interview this week. “They want growth, they want visibility, they want predictability, they want margin rate. That is what drives them.”
— With assistance by Stephanie Hoi-Nga Wong