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General Electric’s share price (NYSE:GE) is bouncing up and down this morning as investors are reacting to the not-so-surprising news that the company is taking the steps it has indicated it would to divest itself of its private equity business. The company confirmed this morning that it will sell its sponsor finance business and a $3 billion bank loan portfolio to the Canada Pension Plan Investment Board for $12 billion. The sell-off includes GE subsidiary Antares Capital. The transaction will be one of the largest of its kind since the 2008 lending crisis.
The Story Behind the Story
GE Capital was, at one time, a financial powerhouse; the entity into which each division of General Electric poured earnings. Those earnings were then used to purchase equity positions and provide operating capital to a wide array of commercial and industrial companies, in effect compounding the profits of its own industrial divisions.
Whilst many today will cite, as we have already done, the impact of the 2008 financial crisis as the underlying cause for the breakup of the GE Capital machine, there is more than meets the eye to this story. Certainly, it is true that post-2008 federal regulations have made it more difficult to GE Capital to operate as a profitable lending institution, its underpinnings had already been dealt heavy blows in 2000 and 2001; blows that made the banking arm of the company more vulnerable to the impact of the 2008 crisis.
September 11, 2001 changed life and business in America far greater than anyone could imagine as a result of a terrorist attack that no one could have imagined. The fallout was especially difficult for GE Capital because only nine months and 12 days earlier, GE Capital had been dealt a devastating blow with the Chapter 7 bankruptcy of the Montgomery Ward retail chain.
The retailer had been struggling for years before GE Capital led a $3.8 billion management buyout of the chain in 1998, including holding a 50% stake in the company. By 1997, GE Capital had pumped another $180 million into Ward and had “lent it far more than that.” GE Capital recapitalized Ward – and continued to loan it millions – until its collapse in December 2000. GE Capital’s losses were massive.
The Untold Story
The enormity of the losses GE Capital incurred with Montgomery Ward have never been highly publicized. The facts were simply too embarrassing. Nonetheless, they quite likely set the table for the years to come as GE had to take “actions to reduce losses going forward.” When GE made those statements, they were not talking about Montgomery Ward losses. They were talking about their own. The fact is, GE had no 30,000 foot perspective on the extent to which they had exposed themselves with the retail chain.
Twelve different components of GE Capital had been lending to Montgomery Ward for uniquely different purposes. The problem at GE was that some of their lending departments knew that Montgomery Ward was in deep trouble, at least with respect to their particular lending function – but there was not integrated conversation between the internal GE entities. The failure of Montgomery Ward was a devastating loss for GE – one from which, in my opinion – they have never been able to fully recover.
GE did their best to find those ways to reduce losses going forward. I know. I was there where, after an initial review of their lending parameters, a GE Capital representative told my partners and I that we needed to find another lender because our company no fit those (revised) parameters.
What Difference Does It Make?
For GE and its investors, it should make a world of difference. Selling off the bulk of GE Capital seems to be the right thing to do. There is no doubt that GE’s decision to return to its core industrial businesses is the right thing to do. GE’s strategy for fiscal 2016 is to reshape the company so that its portfolio is comprised of 75% industrial and 25% capital. In addition to the spinoff of Synchrony, the company’s retail finance business, GE has sold its appliance business to Electrolux, citing the once leading appliance brands as no longer fitting GE’s core strengths nor having a favorable competitive position.
GE is well on its way to being repositioned as “a more focused, high-value industrial company.” That is a good thing.
