Trian, the $13 billion activist hedge fund run by Nelson Peltz, on Monday unveiled a roughly $2.5 billion investment in General Electric.
"We invested in GE because it is undervalued and underappreciated by the market despite what we believe is a transformation that will allow its world-class industrial businesses to drive attractive shareowner returns, "Nelson Peltz, CEO and a founding partner of Trian, said in a statement. "Our recent discussions with Jeff and his team have solidified our belief that they are highly motivated to fully deliver on GE's transformation and share much common ground with Trian on ways to improve long-term shareowner value."
The GE investment is the largest in Trian's history, but unlike many of the fund's more combative positions, the stake in GE and Trian's approach towards it is being described as supportive of current management.
Trian, which has been in active discussions with GE's chief executive Jeffrey Immelt, has not asked the company for a board seat and has made it clear it supports the current strategy being pursued by Immelt.
That strategy has focused GE as an industrial infrastructure company that will derive more than 90 percent of its earnings from those businesses once the divestment of GE Capital is completed in the next two years.
Trian believes GE's share price does not reflect the drastic change in its profile or the consistent earnings growth that change will bring.
Ed Garden, Trian's chief investment officer and a founding partner, said in a statement: "Trian believes GE has significant long-term potential and that its implied target value per share, including dividends,could be $40 to $45 by the end of 2017 based on our view that GE can deliver EPS of at least $2.20 in 2018."
GE's stock price continues to trade well below the level it was at prior to Immelt's ascension to CEO more than fourteen years ago and has a offered total return of only 10 percent over the past 10 years. (Get the GE latest quote here.)
Those lousy numbers are not lost on Immelt, who has been frustrated with the relatively tepid response GE shares have received from investors since the company announced its decision to largely exit its financial business last Spring.
It was GE's decision to divest most of the assets of its GE Capital unit that attracted Trian to its stock.
Trian's investment, while welcomed by GE, is not without risk for current management. While Trian has taken a number of so-called friendly positions through the years, it is far better known for its fights.
Its most recent battle, with chemicals giant Dupont, left Trian without any board seats after a bruising proxy fight that could be revisited in the not too distant future.
In its paper explaining the GE investment, Trian asks that management continue cost reductions so that operating margins reach at least 16 percent by 2018. It asks management to commit to roughly $20 billion of incremental leverage and explore share repurchases beyond GE current guidance and it notes that, while it did not ask for a board seat, it "expects management to deliver on its commitments."
GE has not publicly shared margin targets for 2018 or discussed further repurchases of its shares beyond the current plan.
In a statement on Monday, GE's Immelt said: "We welcome Trian's significant investment in the Company. GE maintains an open dialogue with our shareholders and enjoys productive, collaborative relationships with them. I have known Trian Principals Nelson Peltz and Ed Garden for many years. Trian has a strong track record of working with companies to build long-term shareholder value, and has been an engaged shareholder. We appreciate their perspectives and look forward to a constructive ongoing dialogue with Trian as we execute our strategy to reshape the Company.
Immelt added: "GE is focused on improving margins and returns,reducing costs and the size of corporate, returning capital to shareholders and realigning our portfolio, most recently with the announced exit of most of GE Capital. Significantly, we have a plan to return more than $90 billion to investors through 2018 and are on track to complete our goal of closing $100 billion of GE Capital asset sales in 2015. We are transforming GE into a focused infrastructure and technology company, leading the intersection of the physical and analytical worlds. "Our businesses are performing well in a volatile environment. In the second-quarter earnings announcement, GE raised its full-year Industrial operating earnings per share guidance to $1.13-1.20 and is on track for that goal. We are confident our strategy will further enhance shareholder value and continue to position GE for long-term growth and success."