Friday, June 19, 2009

New Financial Regulation May Finally Unwind GE's Pointless Diversification

I've argued in prior posts that GE is an organizational anachronism. It's my belief that current CEO Jeff Immelt is likely to be the company's last.

In past years, I honestly thought there was a chance that a private equity hunting party, composed of several of that breed, would team up to bring GE down, buy and quickly dismember it, unlocking value in the better industrial units, while minimizing the value loss in its financial and media properties.

Now, however, the unwinding may come from a totally unexpected source- regulation. It appears that the newly-proposed financial services regulations will sweep up corporations with significant finance units. Thus, what analysts, irate shareholders and private equity shops could not accomplish, Congress just might- the beginning of GE's dissolution.

From what has been written in the Wall Street Journal, it appears that the GE finance unit's leverage, asset quality, and financial structure might all fail to pass muster, once explicit allocations of the parent are made. The regulatory compliance nightmare may just be enough impetus to cause the company to shove its troublesome financing business out the door via a spin-off.

Funny how that may work, isn't it? After so much braying about the value of diversification, which, by the way, has been empirically disproven for over twenty years, Immelt may be forced to begin dismantling the failed conglomerate that is GE for regulatory reasons, rather than to avoid either being ousted or bought for salvage value.

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