BusinessMar 12, 2024
GE Is Breaking Up With Itself… Again: Why the Company Is Spinning Off Its Most Valuable Business
Equity Unlocking
Noah Weidner
Discover
Jack of all trades, master of none. That’s the mantra Wall Street has taken for years to build up giant companies filled with red tape. But what worked in the early 2000s doesn’t work today, and investors are prioritizing quality over quantity.
This shift has led companies with many business units to trade at a discount — known as the “conglomerate discount.” Take 3M, which has over 60K unique products, as an example. It’s trading at a measly forward price-to-earnings ratio of 10.3x — while tech companies with similar revenue and growth often command higher valuations.
Mind the gap: To close this gap (and bolster their stock prices), executives are turning to a tried-and-true method: breaking up into smaller, separately traded entities — and one of 2024’s best-performing stocks is repeating this formula. General Electric saw success last year with its spinoff of GE HealthCare, which has rallied over 53% since its demerger. Now, it’s looking to do the same with two of its largest business units, GE Aerospace and GE Vernova.
2021 and 2022 were already two of the busiest years for spinoff deals — and 2023 was on pace to be busier. Giants like Johnson & Johnson, 3M, and Pfizer conducted their own spinoffs in recent years.
But will these spinoffs pay off? While they theoretically should help boost stock prices, the Invesco S&P Spin-Off ETF, a collection of split-off companies, has far underperformed the S&P 500 in the past five years. Success often hinges on a strong balance sheet and growth potential, with spinoffs that perform well in the first year tending to outperform in the following years, according to Boyar Research.
