General Electric Co. (GE) - Get Report may sell additional businesses as investor Trian Partners pressures CEO Jeffrey Immelt to meet aggressive performance targets, but there's little chance the 127-year-old American icon will break itself up the way another of the activist's manufacturing holdings did.
Pentair Plc -- the London-based manufacturer at which Trian became one of the largest investors in mid-2015, just months before acquiring a stake in GE -- decided in May to split its largest businesses into two separate companies.
The breakup was announced less than a year after CEO Randall Hogan sold a valves and controls unit hurt by low oil prices for $3.2 billion, and Trian chief investment officer Ed Garden has applauded Hogan's willingness to shrink his company to bolster value.
While the activist investor declined to say whether it might pursue such a strategy at GE, where it holds a 0.9% stake valued at about $1.9 billion, a Deutsche Bank analyst said a breakup would face significant obstacles -- from likely opposition by the board to the potential loss of the manufacturer's tax rate in the mid- to low teens.
"We view the chances that GE busts up to be almost nil," John Inch, a New York-based analyst with the bank, said in a note to clients last week. That doesn't mean Trian won't exact meaningful changes at GE, which Immelt has spent years streamlining by exiting broadcast television, shedding most of its finance business and building digital manufacturing capabilities.
The company said June 8 it has begun talking with prospective buyers for its lighting business, the strongest connection to founder Thomas Edison, who formed the company as a maker of incandescent bulbs in the late 1800s.
It's also selling the water and industrial solutions businesses, and in March, Immelt struck a deal with Trian under which the manufacturer will target industrial operating profit of $17.2 billion this year while cutting operating costs by $1 billion each this year and next.
Achieving the goals would mean a 20% bump in bonuses for Immelt and his senior management team; failure would result in a cut of the same amount, according to a regulatory filing. Trian wouldn't say whether it would push for changes beyond the bonus cuts or whether it stands by its statement earlier this year that there's a path for GE earn as much as $2.33 a share in 2018.
That would be higher than the company's own forecast of as much as $2, which Immelt has since said would be "at the high end," given persistently low prices in resource markets such as oil that curbs GE's energy equipment sales.
While it's not clear how Trian arrived at its $2.33 estimate, many investors don't see even $2 as realistic, Nick Heymann, an analyst with William Blair, said in a telephone interview. The number would be 34% higher than last year.
"We can get to $1.90," Heymann said. "To be able to get to $2, you needed some external factors such as tax reform," which might buoy earnings by 8 to 13 cents a share, he said.
"It's all about confidence right now," the analyst added. "It's really about getting people to believe that the expectations going forward are realistic and will be achieved. If that's the case, then we're likely to see a sea change in sentiment, and the stock, which is down 11% to 12% year-to-date, would be likely to respond very notably."
Editors' pick: Originally published June 9.
While Trian's level of confidence is unclear, it has maintained what GE calls a constructive dialogue with the company.
The investment firm's general silence is consistent with its long-standing preference to work directly with management of the companies in which it invests, rather than taking potshots via the news media or engaging in proxy fights. Garden, the chief investment officer, reiterated at a June 5 conference in New York that the firm views that approach as the most likely to generate long-term value.
"We chafe when people put us under the activist moniker," he explained. "It's now how we invest. A lot of groups think of us as liquid private equity. We take large stakes in companies we think are fundamentally great companies. I define success as really being 'best in class.' Activists tend to be more short-term, balance-sheet-centric and confrontational with management."
Garden pointedly avoided specific comments on GE, whose shares have climbed 9.7% to $27.94 since Trian disclosed its stake, trailing double-digit gains on both the S&P 500 and the Dow Jones Industrial Average.
With that track record, the pressure from Trian behind the scenes is likely to be "extreme," Heymann noted. The firm wouldn't say whether it would seek a seat on GE's board, as it has done at Pentair and other firms.
Trian typically seeks only one directorship, said Garden, who took on that role at Pentair. If Trian has the right plan and can quantify and articulate it, then "the power of the argument will win," he explained.
"If I can't convince 12 or 13 other people of my point of view, then maybe I should listen to why there's an objection," he added. "I always say to the other board members, 'I'm willing to change my mind. If there are reasons we shouldn't be doing this, I'm all ears.'"
In the case of GE, any Trian nominee would have to convince even more: The company has 18 board members this year, including Immelt.
Still, since Trian has now achieved most of its goals with Pentair, it may be in a position to bring more attention to bear on Edison's creation, Credit Suisse analyst Julian Mitchell said in a May 31 note.
Mitchell, who has an "outperform" rating on the stock and estimates GE's individual units might be worth as much as 19% more than the current share price, said the manufacturer could simplify itself into two key units. One might include power, renewable energy and energy connections, and the other might be a transportation unit housing the jet engine and locomotive businesses.
Other divisions, such as GE Healthcare, could be spun off or sold, as is happening with the lighting unit.
While Deutsche Bank's Inch acknowledges the possibility of streamlining, he said there are significant limits on how far it could go. Any business sales would stop well short of a breakup, he emphasized.
Not only does the manufacturer need cash to pay its sizable dividend and meet its pension obligations, "we seriously doubt the board would sanction such a strategy after so many tens of billions spent on mergers and acquisitions in recent years." That coupled with the company's "proud heritage and strong corporate culture" would render a breakup "effectively unthinkable," Inch wrote.
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