General Electric (GE) climbed as much as 17% before the market opened on Tuesday after announcing that it would split its conglomerate into three companies. The stock price opened 5.9% when the market opened and extended the rally up to 7.2%. However, GE shares later trimmed gains to just 2.65%.
The industrial giant founded by Thomas Edison in 1892 has decided to separate into three companies. This strategy follows years of lacklustre performance by the company's stock. GE has had a difficult time recouping losses after being hit by the 2008 crash. Furthermore, the firm was focused on fossil fuels. However, the energy market has been shifting to renewable and clean energy technologies. The company spent its investing capabilities on wrong, outdated technology.
GE has been selling off its assets to pay off massive debts since 2018.. Moreover, the company was in a position that forced it to accept bids at a fraction of the prices GE paid for them. The company has been shrinking since its 2001 peak of a market capitalization of more than half-a-trillion U.S. dollars. Currently, the company's value is $119 billion, or only 23% of its value at its height in early 2001.
It came to the point that GE, one of the original components of the USA 30 (Wall Street), when it began in 1896 with just 12 companies, was pushed out of the original Wall Street stock index on June 26th, 2018. On July 30th, the company did a reverse stock split. A standard stock split increases the number of shares in a company. This stock restructuring reduces the price of each stop after the break in proportion to its new size. Companies tend to split stocks after their price rises significantly, in order to enable more investors to buy them. However, a reverse stock split merges shares to form fewer, but more valuable, shares. GE performed a reverse stock split to support its falling prices.
The firm believes it will maximize its value without being slowed down by the limitations of a conglomerate structure.
GE will be divided into three companies, the areas of which will be aviation, healthcare and energy. The split will not be immediate but over several years. This restructuring will allow the firm to focus on areas it considers to have high growth potential. The name GE will remain with the aviation branch of the corporation. Its purpose will be producing jet engines. The company will spin off the remainder of its business, primarily healthcare and energy businesses, into their independent entities.
GE explained its strategy: "As independently run companies, the businesses will be better positioned to deliver long-term growth and create value for customers, investors and employees."
As opposed to the company's misguided investments in the fossil fuel industry, the company will pursue renewable energy in the company's new structure in early 2024.
Impact on Stocks
The details of how the restructured business will impact current stock holdings are not yet public. Some analysts believe that GE stockholders will probably receive dividends of newly-issued stocks in the healthcare and energy entities when they are created. Each of the newly formed three companies is expected to be public, with its own tradable stock.
It is still unclear whether this decision will benefit current General Electric shareholders. As previously mentioned, its stock value has been deteriorating over time. That is probably the chief reason the company came to this bold decision; time will tell.