GE’s finance arm, GE Capital, is getting smaller. In an update this morning, the financial services unit provided wary investors with an update on changes to its business, which has weighed down the Dow component’s stock as investors fretted about its exposure to the credit crisis. While some of what they heard wasn’t good news—GE expects to book charges of $1 billion to $1.4 billion on GE Capital’s restructuring and other losses, and the company set its fourth quarter earnings guidance at the low end of its previously announced range—other announcements gave investors some measure of solace. GE again said it will pay its dividend in 2009, reaffirmed its commitment to preserving its AAA credit rating, and announced changes to the GE finance unit. The stock, which has been battered this year, was up 9% in early trading on Dec. 2.
GE gathered an army of finance managers to relay the changes. For one, the company is reorganizing GE Capital into three segments—a core finance division that will include its mid-market corporate lending and equipment leasing units, a “GE Banking” division that includes its European and emerging market banks and joint ventures, and a restructuring unit for the businesses it plans to exit that have high leverage and tend to compete with banks. CFO Keith Sherin said GE expects the move will save $2 billion through business exits, re-sizing of certain units, cost-cutting and, of course, layoffs, both at GE Capital and on the industrial side. He did not specify how many people the company expects to cut.
GE Capital also announced plans to diversify its funding sources and reduce the size of its overall portfolio. Between the third quarter of 2008 and the fourth quarter of 2009, it expects to reduce its long-term debt funding from $391 to $354 billion, its commercial paper balance—one of the big concerns among investors in the credit crisis—from $88 billion to $50 billion, all while increasing its funding from deposits and other alternate sources from $11 to $18 billion.
Executives also repeated their now-familiar refrain that GE would preserve its AAA rating and pay a dividend—albeit one that’s flat from the year before, the first time GE hasn’t raised its dividend in 30-odd years. The company set a debt-to-equity target of 6-to-one for 2009, down from 7.7-to-one in the third quarter of 2008, which the credit ratings agencies should welcome. With much higher credit losses—$7.2 billion are expected in 2009, up from $4.4 billion in 2008—it’s also building up its reserves. While the company outlined key risks—particularly unemployment that reaches over 8.5%—GE Capital CEO and President Michael Neal expects any further credit impact to be “incremental.”
One thing that’s a given: GE Capital will get smaller. Already, the company stated, it’s targeting financial services to be about 30% of GE earnings in 2009 and 2010, with its infrastructure businesses making up 60% and NBCU another 10%. Its 2009 earnings outlook for GE Capital is just $5 billion, down from $9 billion in 2008. Though it expects the unit to return to double-digit growth by 2010, the house that Jack built—GE Capital initially bulked up during Welch’s tenure—will be much smaller.
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