GE Digital on the Chopping Block

by Vince Lundy and Jim Lundy

In a recent strategic review that was announced on June 26th, 2018, GE indicated that it will focus on three areas going forward: aviation, power, and renewables. What it didn’t announce then but is news today in the Wall Street Journal and other publications, is that it will sell all or part of the GE Digital business unit, which is based in San Ramon, CA.

This move is part of its overall restructuring of GE to improve its balance sheet and to reduce its net debt by $25 billion by 2020. This blog is about GE’s plan to sell its digital business unit.

New CEO, New Direction

Former CEO Jeff Immelt was the primary sponsor and incubator of GE Digital, but he left last summer. Immelt spent billions acquiring assets (e.g., ServiceMax) to build up the GE Digital portfolio.

John Flannery is now at the helm and is restructuring to be more focused on its three major operations which include aviation, power, and renewables.

The Flannery GE Makeover

John Flannery’s plan is to first reduce expenses within the company by reducing corporate management—which is valued at $500 million—and cut $2 billion in overall expenses. Second, he wants to reshape GE’s labs to be more profitable, which we think has an element of risk since it looks like a pure cost-cutting move. Finally, Flannery plans to shed GE’s other operations and investments worth $20 billion in assets. For example, he plans to sell GE’s 62.5% stake in Baker Hughes and spinout GE Healthcare.

The Flannery Vision for GE Digital

While Flannery wants GE Digital to be more profitable and to align with GE’s new business model going forward, GE has reportedly hired an investment bank to assist in selling all or part of the GE Digital business unit.

In the meantime, GE Digital will continue to offer its services, but its focus will be on software (i.e., Predix) that aligns with its core business focus areas of aviation, power, and renewables. This new emphasis, Flannery believes, will hopefully make GE Digital break even by 2020.

The Digital Market Is Competitive

Nearly every company that is focused on digital has more of a heritage in cloud and software. GE was neither. It is known for finance, healthcare, locomotives, and engines—not for software. While it bought a number of firms, like Meridium and ServiceMax, and generated $4 billion in revenue, software is not part of the Flannery plan going forward. Aragon feels that some of the recent acquisitions such as ServiceMax could make for a quick sale.

The Impact of Scaling Back

GE changed its CEO, who in turn, changed its strategic direction. GE should be strong in its three strategic business units—aviation, power, and renewables—which accounted for $60 billion or two-thirds of GE’s total revenue last year. However, don’t expect healthcare, oil, transportation, or digital operations to be part of the GE portfolio in the near future.

GE had a chance to become part of the digital future, but its new direction takes it back to its industrial roots. The Digital Era is still young and to us, they gave up too early. Developing…