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Synergise or Shrink - a lesson in GE's business reorganisation

Management experts are seeing a clear message to conglomerates in the recent move by Boston-headquartered conglomerate GE to "focus on aviation, power and renewable energy" to create "a simpler, stronger, leading high-tech industrial company."

twitter-logo E Kumar Sharma        Last Updated: June 27, 2018  | 20:16 IST
Synergise or Shrink - a lesson in GE's business reorganisation

Management experts are seeing a clear message to conglomerates in the recent move by Boston-headquartered conglomerate GE to "focus on aviation, power and renewable energy" to create "a simpler, stronger, leading high-tech industrial company." That message is the standard management mantra of building synergies to ensure business sustainability and, in its absence, seek divestment and get more focussed. Some of the management experts who spoke to Business Today were responding to the move by GE. A media release issued by GE says that its healthcare business is to become a standalone company. "GE expects to monetise 20 per cent and distribute remaining 80 per cent of GE Healthcare to shareholders tax-free." In addition, it "plans to fully separate Baker Hughes, a GE company (BHGE)." The idea is all about "strengthening the balance sheet with a clear path to reduce debt by $25 billion, achieve industrial net debt to EBITDA of less than 2.5x by 2020 and further de-risking GE Capital."

John Flannery, Chairman and CEO of GE, has been quoted as saying, "Today marks an important milestone in GE's history. We are aggressively driving forward as an aviation, power and renewable energy company-three highly complementary businesses poised for future growth. We will continue to improve our operations and balance sheet as we make GE simpler and stronger." Management experts feel conglomerates need to see in this the need for businesses to continue as conglomerates as long as they can make seemingly different businesses draw synergies and reinforce businesses within the entire entity. For only then would it be sustainable for any vertically integrated entity operating different businesses. For instance, example is often given of ITC's efforts at synergy-building. The master chefs in the hotel business, for example, help in the product development of food products. Or while launching Fabelle, its brand of chocolates last year, it used its hotels and positioned it as an aspirational brand and only this month it has started placing the brand in top-end retail outlets in Bengaluru.

It is therefore with good reason that Flannery is quoted in the note as saying: "Today's actions unlock both a pure-play healthcare company and a tier-one oil and gas servicing and equipment player. We are confident that positioning GE Healthcare and BHGE outside of GE's current structure is best not only for GE and its owners, but also for these businesses, which will strengthen their market-leading positions and enhance their ability to invest for the future, while carrying the spirit of GE forward." The note also adds that "GE will be a focused high-tech industrial company that will be easier for investors to follow and measure with a significantly improved balance sheet to support its remaining businesses."

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