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It's Time to Break Up General Electric Company (GE)

General Electric Co (NYSE: GE) shares plunged today, losing 4 percent after announcing that its insurance business -- a part of the slimmed-down GE Capital -- would take a $6.2 billion charge for the fourth quarter.

But that's not even the day's most shocking company development: Apparently, the legendary American industrial giant is seriously mulling a breakup. The diversified blue-chip conglomerate may split up its businesses as soon as this spring, according to breaking reports from CNBC and Bloomberg.

Zooming out a little bit, this becomes easier to understand. GE stock's recent performance, its $6.2 billion insurance loss, longtime efforts to shed the risks and assets of GE Capital, and comments from the new CEO on Tuesday all make clear that a breakup may be imminent and necessary.

"We are looking aggressively at the best structure or structures for our portfolio to maximize the potential of our businesses," GE CEO John Flannery says.

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[See: 7 of the Best Stocks to Buy for 2018.]

This strategic breakup may result in "separately traded assets really in any one of our units, if that's what made sense," Flannery said. The most likely way that would happen is if GE spun off certain divisions that then became their own, independent, publicly traded companies. GE shareholders would likely receive stock in the newly independent public companies in proportion to the number of GE shares they own.

While spinoffs might seem like an artificial financial magic trick, they can create quite a lot of value for shareholders.

First, a bunch of GE spinoff companies would each have their own management, laser-focused on that business only, resulting in greater concentration and less red tape. An intangible but real cost for a global conglomerate of GE's size is the inability to move faster.

Secondly, and perhaps even more importantly for shareholders: Wall Street is much more efficient at evaluating individual companies, each with different specialties, business models, margins and growth prospects, than one sprawling company that owns a load of diverse businesses.

If GE's top brass feels strongly enough about a breakup that it could happen by spring, it's likely that the board believes GE stock is undervalued, trading for far less than the sum of its parts.

The number of different GE divisions is dizzying. The company is in power, oil and gas, aviation, health care, transportation, renewable energy, and energy connections and lighting. And that $6.2 billion charge proves the multi-year effort to shed GE Capital assets and reduce financial risks still has a long way to go.

[See: 7 of the Best Blue-Chip Stocks to Buy for 2018.]

Though shares are plunging on the massive quarterly insurance loss, patient long-term shareholders who wait for the dust to settle could be well-advised to buy GE shares before the breakup happens -- if and when the rumors are confirmed in more detail.



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