What’s the Chance of Iconic GE Going Bankrupt? by Leonard Hyman and Willian Tilles

The possibility of a GE bankruptcy isn’t that far-fetched, considering the company came pretty close during the last financial crisis. From Leonard Hyman and Willian Tilles at wolfstreet.com:

Three titans of invention dominated the dawn of the electric age: Thomas Edison, the founder of General Electric, Werner von Siemens, whose industrial conglomerate still bears his name, and George Westinghouse, inventor of compressed-air railroad brakes, and more importantly, the man who made alternating current the electric industry standard.

Toshiba-owned Westinghouse already filed chapter 11 bankruptcy. In less dramatic fashion, Berlin-based Siemens Corp. has been struggling mightily with downturns in its major business lines, particularly power generation. Meanwhile Boston-based GE not only has to deal with declining profits at a number of its businesses but also with largely self-inflicted financial missteps.

Of these three corporate entities, GE’s fate seems the most uncertain. Siemens may have already “turned the corner” so to speak, even talking smack about its Boston-based trans-Atlantic rival on its last conference call with financial analysts. And Westinghouse recently exited financial reorganization with a new, large private equity parent, Brookfield Energy Partners, and presumably more modest expectations.

GE’s shares are down almost 75% from their all-time highs in Sept. 2000 despite a raging bull market over the last 8 years.

GE’s underlying problem is the immutability of debt. That is, corporate managements have a relatively free accounting hand with respect to writing down asset values when things go “pear-shaped.” However, all the debt from these financially ill-fated ventures typically remains. In GE’s case the assets of GE Capital were approximately $157 billion at the end of 3Q 2017, and we suspect much of this is supported by debt rather than equity.

If we subtract GE’s “goodwill” – goodwill is an accounting entry that parks expenses temporarily on the balance sheet as an asset to be expensed on a later date – from equity (like Buffett says to do),  we get a negative $40 billion. Back up and think about it. An almost $400 billion conglomerate with $40 billion in negative equity.

To continue reading: What’s the Chance of Iconic GE Going Bankrupt?


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