What's going on?
Industrial conglomerate General Electric (GE)’s stock rose 15% on Monday, despite the company warning investors that its annual profit would be less than expected. Plus, it announced that a new CEO’s taking the reins.
What does this mean?
Once one of the largest companies in the world, GE’s been on a downward slide for years. As a big, sprawling conglomerate, GE has been slow to adapt, failing to sever the struggling limbs of its businesses before the whole thing became sick. Under the previous CEO, GE’s value dropped by more than half – investors are likely hoping that a new CEO will speedily turn things around.
GE was the only remaining original member of the Dow – a stock market index that started tracking the performance of 30 public companies in 1896 – but, since June, has no longer been included (its stock has been going in the opposite direction to the Dow).
Why should I care?
For markets: Nothing tastes as good as slim feels.
Conglomerates aren’t cool anymore. They’re all shedding the deadweight, shooting to be leaner, meaner profit machines (including GE). Some investors believe that complex companies should be cheaper (in something called a conglomerate discount) – so smaller companies that focus on fewer areas tend to be more valuable. And other conglomerates – like DowDuPont, Europe’s Siemens, and Maersk – have been slimming down and focusing their businesses.
The bigger picture: Two is better than one.
A conglomerate with a complicated name (if not business), Germany’s ThyssenKrupp is splitting in two. Activist investors at the company thought it was too complex and needed a more agile structure to be able to jump on opportunities as they come. ThyssenKrupp’s inability to do so thus far has led to weak profit growth. So the simplified structure is slated to be a good thing for both newly-formed companies, and give shareholders the best value for their money.