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General Electric (GE)
GE's New Strategy for Domestic Bliss
After over 100 years of toiling away in America's kitchens, General Electric is about to pull the plug on its appliance division. The company announced today that it is seeking "strategic options" for the division but has not confirmed whether it's leaning more towards a spin-off, sale, or merger. For many Americans, GE's appliance business is the most recognizable part of the company's operations, making it a valuable contributor to the strength of the GE brand. This reputation is also an appealing factor to potential suitors who may begin vying for the chance to take over its legacy. The power of the GE name could spur a bidding war among interested investors, but will GE's brand strength be the same after splitting from the appliance division?
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Look up the word "conglomerate" in the dictionary, and you may find the GE logo. General Electric is the second-largest U.S. company by market capitalization with business in every sector from lighting to locomotives. It may have its fingers in a diverse range of industries, but its appliance division is what has made it a household name. Compared to other parts of the company, though, the appliance unit is a relatively small business and its competition is on the rise. GE falls behind Whirlpool Corp (WHR: Charts, News, Offers) as the number 2 U.S. appliance maker and has suffered from international competition from such rivals as South Korea's LG Electronics. In addition to threats from competitors whose focus is more on the appliance business, the state of the U.S. economy has taken a heavy toll on GE in recent quarters, forcing GE leadership to consider what to make of its future.
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GE's appliance unit is responsible for making such products as dishwashers, refrigerators, air conditioners, and ovens. Many of the appliances GE manufactures go directly into new home construction or are otherwise sold in the U.S. Last year, the division contributed just 4 percent of the company's $173 billion in revenue and its profitability is declining as a result of its dependence on the U.S. housing market. The appliances division is also a component of GE's industrial business, which posted a 16 percent drop in profit during the first quarter and was a leading cause of GE's unanticipated decline in profit and subsequent stock sell-off. With so much of this division's success being dependent on the shaky housing market, GE decided it was time to reflect on the value in staying in business. "This review is consistent with the strategy we have been executing to transform our portfolio for long-term growth," said Chairman and CEO Jeff Immelt. "Since 2003 we have exited slower growth and more volatile businesses, generating $52 billion in gross proceeds from dispositions."
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Will the same conditions that are causing GE to consider selling also deter potential buyers? Analysts note that the housing and credit market conditions might make GE settle for less than it could receive for the unit but this concern might be mitigated by international suitors who would want to capitalize on bringing the GE brand abroad. The idea of someone else using the GE name to sell products it manufactured brings up another obstacle for GE. Even though the appliance division is not the most profitable for the company, it is responsible for a major part of the brand recognition and trust from the American consumer base. It remains to be seen if the entire company could suffer with any compromise of that quality. Investors have expressed their feelings on the news by selling off shares in early trading.
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