Internal and External Factors That Motivated GE to Sell off GE Capital

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16th Jun 2020 Business Assignment Reference this

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General Electric (GE) was a company founded in 1892 (Ge.com, 2019). The company was a result of the merger between Houston Electric company and Edison Electric Company (Ge.com, 2019). The merger companies were owned by Thomson Houston and Thomas Edison, respectively (Ge.com, 2019). GE was engaged in producing and selling household electric appliances in the United States. The company made and sold refrigerators, freezers, wall ovens, and cooktops for many years. The company did well in the 20th century and early 21st century. Towards the beginning of the 21st century, GE was generating returns of almost $ 130 billion (Swaminathan, 2019). During that time, GE was a global giant with investments across healthcare, electric appliances, and media. However, GE’s financial situation st6arted deteriorating. The 2008 financial crisis affected the company as the returns continued to drop. Since the financial crisis in 2008, GE was unable to recover and hence was buried in debt and low yields each year forward. Low yields in 2014 and previous years since 2008 prompted GE to sell off some of its capital in 2015 (Swaminathan, 2019). The sell-off included the sale of assets and company shares.

Several internal and external factors led to the sell-off of GE capital by General Electric. The first external factor was the complete transformation of banking. Banking had become less profitable and risky business for GE. Therefore, there was a need to transform GE’s business enterprises completely. The first move to avert the financial crisis was by selling part of the banking division from 2015 over the next two years (Forbes, 2015). The other step was to sell off some of the company’s assets. GE. In 2015 announced that they would sell real estate assets worth $ 26.5 billion (Sec.gov, 2019). The decision was made to avert the financial crisis brought about by massive debts and low-profit returns.

The shifting landscape of the financial world was another factor that led to the sell-off of GE capital (Forbes, 2015). GE was initially a company with a single operating model. The company’s prosperity was attributed to the huge sales of electric house appliance equipment. In the 90s, GE was a leading global supplier in cookware, fridge, freezers, among other household electrical appliances (Forbes, 2015). However, in the years of the 21st century, they experienced intense pressure from clients and financial analysts. The pressure on GE was too diversify its operations and break up into other profitable businesses. Therefore, GE was influenced by the factor to sell off its capital to venture into other productive areas of business (Forbes, 2015).

Investors in the wake of the financial crisis shied away from GE shares. GE shares were seen as risky and volatile, as seen from the GE capital. The move to sell off GE capital was to diversify on their money to attract more investors and shareholders (Swaminathan, 2019). GE aimed at investing heavily in industrial businesses rather than the banking business.  The industrial venture was expected to yield high returns for the company. The company invested in several industrial companies as follows: GE digital was created in 2015 (Swaminathan, 2019). GE Digital was started to venture into Information technology, cybersecurity, and commercial software development (Swaminathan, 2019). GE digital also serves as the company’s software center. Aviation is the other core business of GE. As of 2018, GE was among the most prominent jet engines manufacturer in the world. The company is involved in the manufacture of engines for the Boeing 787, Boeing 747-8, and drivers for other commercial airplanes (Swaminathan, 2019). Besides, GE proclaimed that GE capital aviation services are the leading global lender and lessor for commercial aircraft (Swaminathan, 2019)s. Power is the other industrial division that GE is involved in. The division is engaged in natural gas power plants, grid services, nuclear and steam power generation. Other GE ventures include capital and renewable energy.

GE, since 2015, invested heavily in industrial enterprises. However, the industrial venture was struggling, which made GE lay off 12,000 employees in 2017 (Hansen, 2019). The move by GE resulted in a drop-in share by 69.05 percent. Besides, dividends were slashed by almost half. In August 2018, GE financial returns stood at $ 108 billion, but in November 2018, the value of the company dropped to $ 72.63 billion (Hansen, 2019). The Company made changes in leadership, whereby they replaced John Flannery with H. Lawrence Culp as GE’s CEO (Hansen, 2019). The move was one of the measures to curb the financial pressure that GE was facing. Flannery had promised to cut off GE’s unprofitable businesses, which did not happen.

Financial pressure in GE resulted in a decision by GE in April 2018 to sell its IT business for $ 1.05 billion (Hansen, 2019). The Information Technology business was sold to Veritas Capital, including its financial management, workforce, software assets, and ambulatory care (Hansen, 2019). GE had planned to pull off its investments of $ 20 billion to focus on specific business ventures (Hansen, 2019). The IT sell-off from the company’s healthcare unit proved a success. GE’s stock improved by more than 8 percent. Besides, towards the end of 2019, GE healthcare made a return of more than $ 19 billion, making it one of the most successful healthcare businesses in the world (Hansen, 2019).

REFERENCES

  • Sec.gov. (2019). EDGAR Search Results. [online] Available at: https://www.sec.gov/cgi-bin/browseedgar?action=getcompany&CIK=0000312586&owner=exclude&count=40&hidefilings=0 [Accessed 12 Oct. 2019].
  • Hansen, S. (2019). The Rise and Fall of General Electric. [online] Investopedia. Available at: https://www.investopedia.com/insights/rise-and-fall-ge/ [Accessed 12 Oct. 2019].
  • Swaminathan, A. (2019). Yahoo is now part of Verizon Media. [online] Google.com. Available at: https://www.google.com/amp/s/finance.yahoo.com/amphtml/news/ge-sale-whats-left-212611211.html [Accessed 12 Oct. 2019].
  • Ge.com. (2019). Thomas Edison & The History of Electricity. [online] Available at: https://www.ge.com/about-us/history/thomas-edison [Accessed 9 Oct. 2019].
  • Forbes.com. (2015). Understanding GE Capital’s Exit Plan. [online] Available at: https://www.google.com/amp/s/www.forbes.com/sites/greatspeculations/2015/06/02/understanding-ge-capitals-exit-plan/amp/ [Accessed 10 Oct. 2019].

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