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GE to Separate Digital Assets, Build an Independent Company

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Dec. 14 2018, Published 1:09 p.m. ET

Separate digital business

On December 13, General Electric (GE), going ahead with its business restructuring and realignment initiatives, announced that it will spin off its digital assets and build an independent company. The independent company will focus exclusively on the IoT (Internet of Things) software portfolio.

The spin-off announcement along with a rating upgrade from JPMorgan Chase (JPM) analyst Stephen Tusa drove General Electric stock higher during trade on December 13. The stock closed 7.3% higher on December 13.

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The entity will be a wholly-owned subsidiary of General Electric, but it will be operated independently. The company will have a new brand and identity. The company will also have its own management and equity structure. General Electric expects the separated business to initially generate annual revenues of $1.2 billion with the help of its existing global industrial customer base.

Apart from the spin-off announcement, General Electric’s chairman and CEO, Larry Culp, announced that General Electric entered an agreement to sell 90% of its stake in Service Max to private equity firm Silver Lake for an undisclosed amount. Service Max, which provides cloud-based software productivity tools for field service technicians, was acquired by General Electric in 2016 for $915 million.

Justifying his moves, Culp said, “As an independently operated company, our digital business will be best positioned to advance our strategy to focus on our core verticals to deliver greater value for our customers and generate new value for shareholders.”

Restructuring initiative

General Electric has been evaluating sales and spin-off options for the last few years to streamline its businesses, strengthen its balance sheet, and shore up cash. In June, General Electric announced a massive restructuring plan. The company zeroed in on divestment and spin-offs of certain assets to focus on three sectors—renewable energy, power, and aviation.

On December 13, the upswing in General Electric stock and JPMorgan Chase’s rating upgrade suggest that Culp has been able to gain analysts and investors’ confidence. With Culp’s quick actions, he’s expected to bring the company back to a growth trajectory.

With YTD (year-to-date) fall of over 58%, General Electric stock has been the most battered stock in the industrial sector (IYJ). The stock’s YTD loss was also much higher than the fall in peers’ share prices. Honeywell (HON) and United Technologies (UTX) have lost 5.6% and 6.5% of their respective value YTD.

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