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Wednesday, August 23, 2006

Changing Management Won't Help GE

Stocks: (GE)(HD)

GE lost one of its vice chairman as he moved to the CEO's job at Dutch research and publishing firm VNU.

GE promptly promoted the head of its industrial unit to run the company's largest operation, infrastructure. Infrastructure makes jet engines and power generating units. The industrial unit make kitchen equipment and lighbulbs. Together, the two divisions are about 50% of GE's revenue. And, therein lies the problem.

GE still has trouble convincing Wall St that it makes sense to have a company that makes light bulbs and jet engines. That leaves out the financial services business and NBC Universal.

It may be that GE's top management ranks are going to thin more. Its stock has gone nowhere for several years, so the opportunity to make "Google money" is not there. Better to go to a slightly smaller company, turn it around, and make big dollars. Or, as former GE exec James Nardelli did at Home Depot, go to another company, don't turn it around but still make a lot of money.

A show of hands among analysts who cover GE and institutions that own it would probably indicate that GE makes sense as three companies and not one. The entertainment unit should stand on its own, as should the financial unit. That would leave the industrial and infrastructure pieces as the third company.

Having three companies would certainly give a level of financial clarity to what each business produces in operating income and net profit. However, GE has $262 billion in long-term debt, and how that would be distributed among separate companies is a Rubik's cube level puzzle. According to Morningstar, most of this is from GE Financial Services and is supported by cash flow from the industrial segments of the company. Not an easy nut to crack.

Changing faces at GE is not going to solve the company's stock price issue. It will take something more radical than that.

Douglas A .McIntyre can be reached at He does not own securities in companies that he writes about.

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