How to Fix GE, Quick

The investment world is now worried about how the General Electric (GE) "situation” will turn out.

• Will they lose their Triple A credit rating?
• Will the finance division eat the parent company alive?

Who wants to wait to find out how this movie ends?

The GE Board of Directors would be well served to butterfly the company right now. Spin out the GE Capital business; whatever shared services there are with the industrial divisions… de-tangle them. GE shareholders will still own the two businesses, but the rest of GE proper won’t be dragged down any further.

If GE Capital needs a bank-like, AIG-like, bailout so be it. At least it will be a clean deal. Things are too muddy otherwise.

If GE Capital survives, there will be lots of time to stitch things up if the GE board of directors wants to put the two businesses back together again. It would be interesting to see what shareholders think of that “re-marry” concept a year or two or three from now.

Goldman (GS) and Morgan Stanley (MS) had to make some hard decisions to avoid the fate of Lehman and Merrill Lynch. If the GE Board comes to realize that the days of pseudo banks being subs of industrial holding companies are over (as Corporate Japan did), this decision will be the best one they’ve made in recent memory. Other than the one where they laid out Berkshire Hathaway (BRK.A) with that US$3 billion pref deal — those warrants are struck at US$22.25. GE closed today at an ominous figure: US$6.66 ... The Number of the Beast.

Comments

[Mr. Big:]

GE and GE Capital are tied so tight that you can't easily separate them without triggering a cascade of lawsuits from the major stakeholders... specifically the debt holders and partners that support the finance arm.

Unfortunately, at least at the moment, the fate of the two entities are intrinsically intertwined. My guess is there will be a government bailout in store either in the form of loans or guarantees.

Mar 05 11:17 PM

[oleh from T...:]

best idea so far...sooner the better. Losing the manufacturing arm of GE will hugely damage investor confidence far into the future.

Mar 05 11:30 PM

[lobster:]

How can GE industrial survive without GE capital?
SI uses bribery to compete and what most of the GE products have?


On Mar 05 11:17 PM Mr. Big wrote:

> GE and GE Capital are tied so tight that you can't easily separate
> them without triggering a cascade of lawsuits from the major stakeholders...
> specifically the debt holders and partners that support the finance
> arm.
>
> Unfortunately, at least at the moment, the fate of the two entities
> are intrinsically intertwined. My guess is there will be a government
> bailout in store either in the form of loans or guarantees.

Mar 05 11:31 PM

[Nick Waddell:]

In the past, I think the capital business has demanded a higher PE, so there has been no incentive to separate them. Now that anything finance is an anchor, GE's BOD may actually consider this.

Mar 05 11:43 PM

[367851:]

Just let it go and see what happens.

Mar 06 12:11 AM

[WJK:]

GE has always been forthright when compared to other companies. This is not Enron. If GE says they are not in need of capital and won't be this year there is no reason to disbelieve them. At least not yet, As far as dumping GE Capital, they have begun paring it down. Lets not be so paranoid

Mar 06 01:18 AM

[petetoth:]

All dinosaurs die out eventually. 367851 is right, "Just let it go and see what happens."

Mar 06 08:27 AM

[Fueled By R...:]

I agree it's a good idea but like someone on Fast Money said last nite, it may be very difficult to do right now. If GE industrial assets are worth $12, the market is implying the value of GE Capital is ($6) (i.e. negative 6 bucks.) How can you spin out something like that? What has to happen first is the geniuses in Washington to commit to a plan - any plan - on how they are going to stabilize the banking system. Once this happens, the uncertainty about GE Capital's assets (or lack thereof) will be reduced. If GE Capital can be seen as having a positive net worth, GE should pounce on the spinoff opportunity. If not,.... oh, well.

Mar 06 08:39 AM

[Mad Hedge F...:]

I can't believe this is happening. One out of five stocks in the S&P 500 has a single digit price. General Electric (GE) hit the $5 handle. Amazing. This is a company that has $45 billion of cash, $60 billion in back up government financing, and has already rolled over 70% of its long term debt due this year. GE Capital will be profitable this year, because only 2% of its holdings are subject to market to market rules. CFO Keith Sherin says the only explanation for a share price that is a hat size is the rampant fear now sweeping the markets.

Mar 06 04:03 PM

[a. palmer jr.:]

I think a lot of companies are too big to be efficient. GE is one of them. I believe the auto companies are likewise. If these companies make so much money that they feel the need to expand, why don't they increase their dividend instead? If GE and GM need a bank there's one down the street they can go to.

Mar 07 07:49 PM