By Alwyn Scott and Ankit Ajmera
(Reuters) – General Electric Co’s new Chief Executive John Flannery on Monday outlined steps that will turn the biggest U.S. industrial conglomerate into a smaller, more focused company, surprising some investors who sold the company’s shares to a five-year low.
Flannery’s plan to shrink GE’s multi-industry array of businesses was a reversal of the deal-driven empire building of his predecessors, Jeff Immelt and Jack Welch, and potentially a milestone in the decline of the conglomerate as a business strategy.
Other companies that once emulated the GE model of spreading bets among diverse industries are now unwinding their portfolios as well, something Immelt also did throughout his 16 years as CEO, even as he made acquisitions.
Flannery said he will pare GE down to three core businesses: power, aviation and healthcare. He will keep Immelt’s strategy of building software to complement GE’s machinery, albeit with a narrower focus and reduced budget.
For investors, Flannery’s decision to cut both the dividend and the 2018 earnings forecast by half added up to a whole that was less than they judged GE be worth last week.
GE shares fell to their lowest level in more than five years as investors worried the years-long overhaul would not pare down enough expenses or generate as much cash as they hoped. They closed off the day’s lows, down 7.2 percent to $19.02.
“They need to cut more cost,” said Scott Davis, an analyst at Melius Research. “GE is still a bloated company with duplicate costs up and down the organization.”
GE stock has effectively been dead money since September 2001, when Immelt took over, posting a negative total return even after reinvesting its juicy dividends. Once the most valuable U.S. publicly traded company, GE now has a market value of $168 billion, less than a fifth of Apple Inc .
“You have pessimism around its portfolio of businesses mixed with a pretty harsh cut in the dividend,” said John Augustine, chief investment officer at Huntington Private Bank. “It took them years to get into this mess and it will take them several years to right the ship and get back into a stronger position.”
‘SOUL OF THE COMPANY’
Flannery, who took over as CEO on Aug. 1, said he was “looking for the soul of the company again” and would focus on “restoring the oxygen of cash and earnings to the company.”
He will cut its board to 12 from 18 members, and bring on three new directors early next year.
GE said it already has shed 25 percent…