Bloomberg News reports that General Electric Co. (NYSE: GE) has cut the number of its business units from six to four. This change in organization structure should trim its overhead. But it could make it more difficult for investors to compare GE's performance before the reorganization to how it's doing after the change in structure.
The key unresolved question is whether the new structure will boost GE's revenue and profit growth. Bloomberg reports that the four new units will be GE Technology Infrastructure, GE Energy Infrastructure, GE Capital and NBC Universal. GE formerly had six units -- Reuters reports that GE Health Care, which was one of the six former divisions, now falls under the new Technology Infrastructure unit. GE's $13 billion consumer and industrial businesses, which include washing machines and lighting, is not part of the new structure -- in 2009 GE wants to spin those businesses off to shareholders.
Bloomberg reports that in May, GE CEO Jeff Immelt said that he intends to change GE's product mix to about 60% non-financial by 2010 -- far more than it is today. In 2007, GE's finance-related businesses accounted for 44% of net income and 53% of profit from continuing operations. It is not clear whether the new organization structure will help revive GE's revenue and profit growth.
But if Immelt can divest or close its slowest growing units and use the proceeds to invest in ones with the greatest growth potential, then eventually its stock should respond favorably. Since it's lost $81 billion in stock market value since April, GE has a long way to go to return to where it was at its peak.
And if GE's earnings over the next several quarters grow more rapidly than the 0% growth it showed in the second quarter, the stock may in retrospect look cheap today. The new structure looks like it will eliminate some overhead. But its impact on earnings growth is hard to discern.
Investors are either on their way to the Hamptons or they don't think the announcement will move the stock in the near term. GE closed unchanged for the day.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns GE shares.
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Reader Comments (Page 1 of 1)
7-25-2008 @ 5:32PM
bob schick said...
don't be so glib, peter
7-25-2008 @ 10:20PM
Kent said...
I've been with corporations that did exactly what G.E. is doing, but ironically it was patterned after G.E.'s model in the first place. What it does is that it doesn't expose G.E.'s weak sisters by merging them with stronger sisters. It keeps the operations more opaque from shareholders. The divisions are folded under 4 separate profit centers from which to judge performance. Each group leader will be under good deal of pressure to perform. Command and control are enhanced now.
9-20-2008 @ 2:40PM
widollar said...
The new GE structure of four parts makes it much easier for them to spin off the NBC Group in a few months. Then the financial group will be next once the current global meltdown settles down in a couple of years. That leaves them with a manageable company with two Divisions and they can then better focus on making them more productive and this should help restore the share price. Otherwise Jeff Immelt will be thrown under the bus before a year passes!