General Electric is exiting from its finance business by shedding GE Capital. Separately, GE is repatriating back $35 billion of its foreign earnings, which will cost it $6 billion in taxes back home in the US
On 10th April, General Electric (GE), the venerable company founded by the Light Bulb inventor Thomas Alva Edison, announced that it was exiting finance business, by shedding GE Capital.
First off, a brief look back at the history of GE's acquisitions in the last 30 years. During Jack Welch's 20-year stint at GE, close to 80% of his acquisitions were finance companies. The reasoning given was that finance companies earned more per employee
and therefore made GE look more profitable.
GE also announced one of the largest stock buybacks in history, planning to buy up $80 billion. Little wonder that the stock zoomed up by 10%!
So why is GE getting out of such a lucrative market? Is the investor bubble about to burst again? Or is the real reason due to the fact that Dodd-Frank act requires GE Capital to maintain higher reserves since it was deemed a systemic unit, meaning its failure can have far reaching consequences?
If GE does not provide the financing to highly burdened developing countries (HBDC is a new acronym for the Third World) to buy their aircraft engines or nuclear reactors, who will?
Is this a one-off phenomenon or will automakers such as Ford and General Motors follow suit? After all, GM has just emerged from Chapter 11 and Ford came perilously close to going bankrupt and neither can afford to take a hit from their financing arms.
has a different take on GE and thinks that GE has been under-owned by institutional investors and that will change now. GE's dividend is currently around 3% and it would be interesting to see if this gets raised too, which will be good news for the long suffering investor.
President Barack Obama has been criticising US companies for shifting their operations overseas to avoid paying taxes in the country and perhaps, GE felt that it was a patriotic thing to do.
GE has bought back stock several times in the past to shore up its stock price, only to see it fall further. Let us hope that history does not repeat itself, in this case.