GE returns to its industrial roots

General Electric has launched a radical plan to dispose of most of its financial services operations and return to its industrial roots, in one of the biggest shake-ups in the 123-year history of America's best-known conglomerate.

Jeff Immelt, who succeeded Jack Welch as chief executive more than 13 years ago, said GE would sell or spin off most of GE Capital, the division that dragged the group into trouble in the financial crisis but provided almost half its 2013 earnings.

His attempt to improve investor returns sent GE's shares up 10.8 per cent on Friday - their biggest swing since the 2009 crisis - but follows years of criticism for the stock's underperformance.

Under Mr Immelt's tenure, GE's share price has fallen nearly 30 per cent, while the S&P 500 index has risen 93 per cent and shares in leading competitors Honeywell, United Technologies and Siemens have more than doubled.

The move also marks a decisive break from the model Mr Immelt inherited when he took over from Mr Welch in 2001. Mr Welch, who has at times been critical of his successor, wrote to CNBC on Friday: "I like the package. It looks like a smart move and right for the changing financial landscape."

GE now intends to dispose of businesses that account for about three-quarters of GE Capital's assets, in areas such as commercial lending for "middle market" small and midsized companies.

That process was accelerated on Friday with the sale of $26.5bn of property assets to private equity firm Blackstone and Wells Fargo, the US bank.

The only financial operations to be retained will be the leasing operations that are directly tied to GE's manufacturing businesses, which make equipment ranging from aircraft engines to medical scanners.

Wall Street applauded the plan. Nigel Coe, an analyst at Morgan Stanley, said the disposals would be positive for GE's shares, because earnings from the industrial businesses were more highly rated by investors than earnings from financial services.

By 2018, GE expects its industrial operations - which make everything from jet engines to X-ray machines - to generate 90 per cent of profits.

The financial services disposals are expected to release enough capital for the company to return up to $90bn to shareholders through a mix of buybacks and dividend increases over the next three years.

By slimming down GE Capital, the company also hopes to lose the designation of being a "systemically important financial institution" that US regulators have given it.

Mr Immelt said the decision to shed GE Capital was "emotional" for the company's executives.

"We love GE Capital, we grew up with it. These things are always emotional," he said.

However, he added, since the financial crisis of 2007-09 he had made it clear he was open to cutting back GE Capital when the timing was right.

Selling and spinning off the bulk of the business was a "classic capital allocation move" that would enhance returns for GE's investors, he said.

GE, which traces its origins back to inventor Thomas Edison, has been in financial services since the 1930s, when it began providing consumer credit to help finance sales of its appliances. It became increasingly active in the 1960s and 1970s, entering areas such as aviation leasing, property and commercial lending.

In recent months GE executives have highlighted the company's relatively poor returns on capital in financial services compared to its industrial businesses, and suggested that there could be more large disposals, but the process is moving much faster than outside observers expected.

GE shares were up 8.7 per cent at $27.96 by lunchtime in New York.

JPMorgan, Centerview Partners and Bank of America advised GE on the shake-up. Legal advice was provided by Weil, Gotshal & Manges, Davis Polk and Sullivan & Cromwell.

Timeline - from Thomas Edison to the unwinding of GE Capital

1890 - Four companies representing inventor Thomas Edison's interests merge to form the Edison General Electric Company.

1932 - GE Credit Corporation begins to offer credit to customers to buy General Electric appliances.

1981 - Under chief executive Jack Welch, GE Capital begins a dramatic ascent. Between 1986 and 1993 profits double to $1.5bn and assets to $155bn. GE Capital becomes the world's largest car-leasing company, the world's largest ship container leasing company and the biggest private mortgage insurer.

2004 - GE Capital buys Dillard's credit card unit for $1.25bn.

2008 - As the credit markets seize up, GE announces its first fall in quarterly profits for five years. In September, chief executive Jeff Immelt calls Henry Paulson, the then Treasury secretary, to say GE "was finding it very difficult to sell its commercial paper for any term longer than overnight".

2011 - GE buys MetLife Bank, an online retail banking arm.

2013 - Mr Immelt sets a target that GE Capital should provide no more than 30 per cent of group earnings.

2014 - GE Capital has $7bn of net income, assets of $499bn and more than 35,000 employees. It operates in 40 countries. In the US, GE takes Synchrony Financial, its store credit card arm, public in a $2.88bn initial public offering.

2015 - Mr Immelt announces plans to sell the bulk of GE Capital over the next two years and return the company to its manufacturing roots.

Compiled by Malcolm Moore

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