The G.E. Puzzle, and the Pieces a New Chief Will Have to Make Fit

By STEVE LOHRJUNE 13, 2017 

https://www.nytimes.com/2017/06/13/business/ge-breakup-flannery.html?smprod=nytcore-ipad&smid=nytcore-ipad-share

A classic look on how a CEO looks at his/her corporate portfolio:

John Flannery, who will become the chief executive of General Electric on Aug. 1, has said that he will “take a fresh look at the company.” …..

……Mr. Flannery examines G.E.’s collection of businesses, he must confront several questions. What is the corporate core? What is less so? What is sure to go? What are unknowns?

Here is a look at how the pieces stack up

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The Core: Engines and Generators

These are the G.E. heartland operations — machines representing the most advanced application of the touchstone technologies of the 125-year-old company: materials science and physics.

They also exploit what Jeffrey R. Immelt, the departing C.E.O., has termed the emerging “third pillar” of G.E. technology in the future — data and smart software.

Sensors on a new jet engine, for example, stream data on temperature, fuel consumption, vibration and other measurements so the engine, in its own way, signals that it needs preventive maintenance.

Jet engines and power turbines reflect the most lucrative business model for G.E.: an equipment sale that ensures years of revenue from services. The services revenue over the lifetime of a G.E. jet engine, which can be 30 years or more, is eight times the value of the initial engine sale, analysts estimate. That stream of revenue carries high profit margins.

The two products use similar technology. A new gas-fired generator for an electrical utility fires up at nearly 2,900 degrees Fahrenheit and weighs 950,000 pounds — and it is essentially a giant, stationary jet engine.

Nearly Core: Oil-Field Gear

Depressed oil prices contributed considerably to the pressure Mr. Immelt felt from shareholders unhappy with G.E.’s profit performance. The price slump battered demand for its oil-field equipment, and operating income in its oil and gas business fell 43 percent last year.

Mr. Immelt continued to invest in that business despite the downturn. In October, G.E. announced its plan to merge its oil and gas business with Baker Hughes. It will create a new publicly traded company, and G.E. will pay Baker Hughes shareholders $7.4 billion in a special dividend. The Justice Department’s antitrust division approved the deal on Monday, and the European Union gave its O.K. last month.

Though in a down cycle, the oil and gas business has characteristics in common with jet engines and power generators. It is heavy equipment that brings in a lot of services revenue, and it lends itself to efficiency gains using sensor data and software.

The Baker Hughes deal, analysts say, gives the combined entity a strong lineup of onshore and offshore equipment and services offerings, making it a more attractive property.

 “It allows G.E. to make a staged exit from the oil and gas business in the future, if they choose to do so, much as it did with NBCUniversal,” said Deane Dray, an analyst at RBC Capital Markets, referring to the sale of the media company to Comcast in two steps, in 2011 and 2013.

Transportation — mainly locomotives — is another heavy-equipment business with solid service revenue. It is not a big business for G.E., but it is a solid one.

Another Step: Health Care

The health care business combines medical imaging equipment, like CT scanners, and a life sciences business with technologies for use in the fast-growing fields of molecular and precision medicine.

That business, analysts say, could be spun out in a few years as a free-standing entity with its own stock, which, if successful, could be valuable not only to shareholders but also as a recruiting tool for luring researchers and a currency for acquisitions.

Up for Sale: Lighting

The light bulb is a storied product in G.E. history, but its moment seems to have passed. The company is looking to sell that unit, The Wall Street Journal reported in April, talking to investment banks and seeking a sale of about $500 million.

G.E. wants to sell its business in consumer light bulbs and residential LED lighting, but would hold onto a separate business, Current, which supplies commercial LED light and services to cities and companies. That business involves higher-end technology and the sale of energy-management services.

An Unknown: GE Digital

Mr. Flannery fully backed Mr. Immelt’s strategy of investing heavily to build up G.E.’s software and data-analysis capability.

The future for G.E., Mr. Immelt insisted, is to become a “digital-industrial company,” with sensor data and software a “thread” for delivering greater efficiency in its factories, products and services.

GE Digital, begun in 2011, has been set up as its own unit and employs more than 1,400 people at its headquarters in San Ramon, Calif., east of San Francisco.

“Jeff Immelt has done a lot at G.E. that he’s not getting credit for now, including the digital strategy,” said Robert Atchinson, a founder and managing director of Adage Capital Management, a fund that holds G.E. shares.

“But we won’t know for two years or so whether these new initiatives pay for themselves.”

Mr. Davis of Barclays sees the digital strategy as sound but recommends a less costly, less risky approach. A joint venture, he said, “with someone like Microsoft or Google makes the most sense.”