The downsizing over the next 18 months is expected to reduce debts by $25 billion, and comes as the storied company falls off the Dow Jones Industrial Average for the first time in 110 years.
GE announced Tuesday it would separate GE Healthcare into a standalone company and use the proceeds from the sale to pay down its debts.
Untangling the healthcare subsidiary from a conglomerate at this scale would generally take two years or longer, so GE's 18-month timeline is aggressive, said Brad Haller, managing director in M&A practice for the consulting firm West Monroe Partners.
The spinoff decision could offer an opportunity for the separate entity to funnel its energy into the most promising areas in which GE Healthcare currently operates, Haller said.
"The laboratory supplies business in particular is a crowded market, but as a standalone business we would expect the new company to focus its R&D efforts on supplies for the burgeoning genomics field," he added.
- As part of a restructuring, the storied company said it would also sell its stake in the oil and gas company Baker Hughes and refocus on core high-tech areas of aviation, power, and renewable energy;
- The strategy is expected to reduced debt by $25 billion, and create a "leaner corporate structure" with $500 million in savings by the end of 2020, GE said in a media release.
- GE said it expects to generate cash from the disposition of approximately 20% of its interest in the GE Healthcare business and to distribute the remaining 80% to GE shareholders.
- Today's announcement came on the first day in 110 years that GE was not on the Dow Jones Industrial Average, CNN reports. It was replaced by Walgreens Boots Alliance in the elite 30-stock index Tuesday.
- GE Healthcare generated more than $19 billion in revenues in 2017 and posted 5% revenue growth and 9% segment profit growth, and accounted for 16% of the company's total sales.
- GE has seen its stock value drop precipitously in the past year. However, GE shares jumped 6.4% to $13.57 in early trading Tuesday.
S&P Global Ratings responded to the news by placing GE's "A" long-term rating on CreditWatch with "negative implications."
"GE's divestiture of its core healthcare segment leaves the company with less business diversity, earnings and cash flow and as such, potential for heightened volatility in profits and cash flow. However, debt reduction and substantial cash balances will reduce balance sheet risk," S&P said.
John Flannery, chairman and CEO of GE, said in a media release that the spin-offs would "improve our operations and balance sheet as we make GE simpler and stronger."
"Today's actions unlock both a pure-play healthcare company and a tier-one oil and gas servicing and equipment player," Flannery said.
"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," he said.
Kieran Murphy, president and CEO of GE Healthcare, will continue to lead the standalone company under the GE brand.
"As an independent global healthcare business, we will have greater flexibility to pursue future growth opportunities, react quickly to changes in the industry and invest in innovation," Murphy said.
"We will build on strong customer demand for integrated precision health solutions and great technology with digital and analytics capabilities as we enter our next chapter,” he said.
GE Healthcare's core business is medical imaging, monitoring, and other high-tech hospital equipment. The company does business in 140 countries.
The sell-offs are expected to be completed over the next 12 to 18 months.
John Commins is a content specialist and online news editor for HealthLeaders, a Simplify Compliance brand.