General Electric (GE) was down as much as 15% in early trading, as the market is still unconvinced that the company can stand under the weight of its massive debt load at GE Capital. The market is betting that GE is not viable in its current state. The really interesting thing about GE is the fact that it is basically two different companies. There is GE Capital which has way too much leverage and has made some very risky plays in real estate and debt obligations, and then you have the other side of GE which makes everything from medical equipment to appliances to alternative energy solutions. One business is on death watch as the other business, while struggling, is in nowhere near the dyer condition of the other.
Bill Gross, founder of Pimco, was interviewed on CNBC’s Squawk on the Street and he was asked, “How do you restore the confidence in GE that they are so lacking right now?” To which he said:
“The problem is in GE Capital. General Electric itself is a strong industrial corporation with major exports and a major production base. It is the heart, in addition to the auto companies, I suppose, of industrial manufacturing in this country.”
The fact is that GE does have particular parts of the company that justify a better valuation than selling for little more than 3 times trailing earnings. However, the extreme leverage of GE Capital is toxic enough to bring those parts of the company down with it. The massive debt load will come due at some point, and further write-downs of GE’s balance sheet are looking like an inevitability.
So, GE needs to find a way to break out of this free fall before they begin to attract the “too big to fail” bailouts that are all the rage these days. The options from here are not pleasant but options are becoming more sparse by the day. Perhaps the company could spin-off or sell certain units, but getting GE Capital off the companies balance sheet could be too good to be true. They could hold a secondary offering, which would be highly dilutive to shareholders as shares are down so much already, but at this point it seems to be more about survival anyway. Or a shakeup in leadership could go part of the way to restoring confidence. Immelt was the in charge when GE pushed to expand its exposure to finance with GE Capital; he has been in charge as the ship began to sink. His efforts to restore confidence in the company have been little help, and claiming the dividend was safe and other gaffes actually did the opposite of restoring confidence. The board must at least be considering the possibilities of sending him packing.