A General Electric Break-Up STILL a Bad Idea (GE)

The Wall Street Journal is reporting that there is still some shareholder pressure to break-up General Electric (GE-NYSE).  This is partly modeled on the ongoing Tyco (TYC-NYSE) break-up, but the idea is stupid and throws caution into the wind.

A couple weeks ago I was on CNBC noting that this was a bad idea.  That is still the case and a break-up of the conglomerate would be putting roughly 40 to 50 years of work to the wind merely for short-term gains.  The stock is up roughly 6% in the last year, but shares are up more than 50% since early 2003 when the economy started making its recovery.  You can go back and argue that share are flat since Immelt took the helm, but he took over the week before September 11, 2001 and right when the economy went into nosedive mode.  The following 18 months are not at all his fault.

Jet engines are a huge business right now, but it wasn’t that long ago that the jet maker was laying off thousands.  GE’s alternative energy and energy complex operations might not be able to be as robust as a standalone entity, particularly as many emerging market government are late or delinquent in payments.

Trust me on this.  This strategy is actually good if we are in a permanent bull market and if the investment community only wants to invest in growth companies.  But if investors want diversification and safety, this is a horrible idea.  The company is already making attempts to divest operations like plastics, and there are still plenty of acquisitions it can make.  There are some strategies that could unlock values with the issuance of a media tracking stock or the same in other areas, but a wholesale break-up is just not prudent.

Bull markets do always come to an end.  Great economies always fade eventually.  And there are some environments where safety is more important than a break-up to focus on growth segments.  Pressuring Jeff Immelt, who we noted as one of Americas most entrenched corporate leaders (and rightfully so), is not the right idea.

Jon C. Ogg
May 9, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in any of the companies he covers.