A round up of some of the week’s most significant corporate events and news stories.
Flannery admits downsides to radical break-up of GE
General Electric announced a radical step this week, presented as the final stage in a long process of simplifying and focusing the group begun under previous chief executive Jeff Immelt, who stepped down last year, writes Ed Crooks.
GE is planning a spin-off of its healthcare division, which makes medic equipment, and an “orderly separation” of its 62.5 per cent stake of its oilfield services group Baker Hughes. Together with the previously announced merger of the transport equipment division with Wabtec, the businesses being shed accounted for 33 per cent of the company’s revenues and 30 per cent of its industrial profits last year.
The earnings of the remainder of the company will be less diversified and more volatile. Once the spin-off of healthcare is completed, and dividends are reset in line with industry peers, the total payout is likely to be smaller.
Mr Flannery argues, however, that those drawbacks will be outweighed by the benefits to all the companies involved, in terms of increased transparency, flexibility and management accountability.
Rather than a break-up, he says, the separations represent a “rejuvenation” of the businesses that GE owns.
Mr Flannery’s strategy reflects a sharply different assessment of GE’s strengths and weaknesses compared with his predecessors Jack Welch and Mr Immelt, who believed GE’s corporate centre played a critical role.
Mr Flannery is creating a smaller and leaner corporate core that will focus on “strategy, capital allocation, talent and governance”. The spin-offs of healthcare and Baker Hughes are the ultimate conclusions of that strategy.
Meanwhile, the remaining core business can deliver growth as the world’s markets for aviation and renewable energy expand rapidly, he said. Finally, Mr Flannery is “exploring every opportunity” to cut GE’s exposure to its legacy insurance business.
The news that Athene Holding, the life insurance affiliate of private equity firm Apollo Global Management, has expressed interest in acquiring all or parts of the troubled business suggests that, for a price, Mr Flannery may be able to make some progress on that issue, too.
US megadeals push global dealmaking to $2.5tn
Global dealmaking reached $2.5tn in the first half of 2018, breaking the all-time high for the period and underscoring the intense nature of mergers and acquisition activity despite increasingly bitter geopolitical tensions, write James Fontanella-Khan and Arash Massoudi.
A wave of megadeals led by the US media and telecoms sector helped to lift worldwide deal volumes 65 per cent from the same time a year ago and the most, on a nominal basis, since Thomson Reuters began keeping data on M&A in 1980.
The record-breaking pace of dealmaking contrasts with the threat of a trade war between the US and China and renewed fears of political instability in the eurozone.
Enriched by corporate tax cuts from the Trump administration and stronger economic growth, US boardrooms have sought deals that allow them either to consolidate their industries or compete against a tide of powerful digital disrupters.
“Technological disruption continues to be a big driver behind large M&A,” said Blair Effron, co-founder of the advisory firm Centerview Partners. “Big shifts in technology are forcing companies across all industries to be creative and forge more strategic combinations. Adding in economic tailwinds and a continuing strong financing environment makes the current robust M&A market unsurprising.”
Scott Barshay, partner at law firm Paul Weiss, said: “The M&A market has continued to be extremely robust in the first half of 2018 and current indications point to that continuing into the second half of the year
BofA begins shift in trading operation to Paris
The US bank has chosen Paris as the main alternative hub to London for its investment banking operations. It is refurbishing a new office in the centre of Paris to house hundreds of staff in its sales and trading operations, many of whom are likely to move from London.
Sanaz Zaimi, BofA’s head of global fixed income, currencies and commodities (FICC) sales, will transfer to Paris to assume an additional role as head of the US bank’s expanded French operation, according to an internal memo seen by the Financial Times.
The appointment indicates how global banks are pressing ahead with moving people and activities out of the UK as business leaders grow increasingly frustrated at the lack of progress in political negotiations on the terms of the country’s exit from the EU next March.
BofA, which employs about 4,500 people in London, has chosen Dublin as the main headquarters for its post-Brexit EU operations and named former group chief financial officer Bruce Thompson to lead that office, which will mostly house staff working in finance, risk, compliance, audit and wholesale credit.
One senior BofA executive in London said the bank appeared determined to move faster than its rival US banks in pressing ahead with its Brexit plans. Goldman Sachs told the FT last month that it had already moved more than half the 100-200 investment bankers and professionals due to leave the City after Brexit.
John Lewis profit warning prompts call for bold action
Not even upmarket retailers are immune from the structural and cyclical pressures on British high streets, as John Lewis showed with a profit warning this week, writes Jonathan Eley.
The company, which is owned by its 85,000 “partners”, said profit this year would be below last year’s and that it would continue to invest heavily in online capability, service and own-label ranges. There will also be adjustments to the property estate of 50 department stores and 350 Waitrose supermarkets — starting with the sale of one supermarket in London to German discounter Aldi and four convenience stores to Co-Op.
Sir Charlie Mayfield, the former McKinsey consultant who chairs the partnership, said that bold action was necessary in the face of “generational changes” in the retail landscape. “This is not the time to bring the legions closer to Rome.”
Analysts said focusing on points of differentiation rather than scale made sense, and that the group’s ownership structure made it easier for managers to take a long view. The group’s small estate of department stores, located mainly in prosperous major cities rather than struggling provincial towns, is also a competitive strength.
However, not all partners may feel so reassured. Lower profits and a commitment to a strong balance sheet are likely to mean low bonuses; these have already fallen sharply in the past two years. There may also be more changes to the generous pension scheme. The addition of “and Partners” to both company names, in recognition of their contribution, may not prove much consolation.
Uber wins London licence court battle
Uber scored a big victory this week in its battle to shed its reputation for an aggressive corporate culture ahead of a planned initial public offering next year, writes Aliya Ram.
The car-booking app was in court to fight for its right to operate in London, its biggest European market, after it had its licence revoked by the city’s transport authority last September.
Transport for London had said the company was not “fit and proper” because of its approach to safety and attitude to regulators. In a 21-page litany of complaints, it accused Uber of misleading authorities in written communication and failing to accurately answer questions about its model for accepting trips. TfL also raised concerns about its approach to safety and its use of Greyball software to avoid scrutiny.
Uber appealed against the decision and had continued operations pending the ruling. It introduced changes to placate TfL, such as reporting violent incidents involving its drivers to police and making a multimillion-pound investment in a call centre to handle questions.
Uber also now provides public access to its data on traffic and travel conditions and has capped the number of hours UK drivers can work before they take a break — both specific requests from TfL.
The changes paid off. A judge at Westminster magistrates’ court on Tuesday granted Uber a probationary 15-month licence, on the condition that the California company’s London business submits to regular audits and does not employ senior managers who were aware of Greyball.
Get alerts on General Electric Co when a new story is published