NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Friday, April 10, 2015

Shares surge in reaction to radical restructuring for the world’s fourth-most valuable company as it returns to its industrial roots.

General Electric Co. GE 7.68% is to get rid most of its GE Capital unit to create a “simpler, more valuable company” focused on its core industrial operations, in a landmark decision for both the company — and, perhaps, the economy too.

GE said it will shed over four-fifths of its in-house bank–the seventh-largest in the U.S.–over the next three years, drawing a thick line under the days when it depended on the freewheeling unit’s financial engineering skills to generate half of its profits.

For the most part, it’s going to give the money it gets for those businesses back to shareholders, mainly through a $50 billion share buyback program, the second-biggest in history. The company’s shares, which have badly lagged the S&P 500 over the last couple of years, rocketed over 8% early Friday, closing in on a seven-year high.

However, Moody’s Investor Service downgraded the company’s debt by a notch to A1 from Aa3, saying the “more aggressive” new plans favored equity holders over bondholders.

GE’s share price has underperformed the S&P 500 by more than 20% since the start of 2014. Source: Yahoo Finance

The buyback is intended, among other things, to soften the blow of a $16 billion charge related to the restructuring. Around $6 billion will go in taxes as the company repatriates earnings from operations around the globe.