1. General Electric: The downfall of the behemoth
The corporate governance failure and company’s wrong bet(s) to move away from
core wiped off company’s ~$400bn market cap in just over two decades
General Electric (GE) is an industrial conglomerate founded by Thomas Edison 125
years ago in 1892. The company, incorporated in New York state and headquartered
in Boston, started with electrical goods before expanding into areas such as power-
generation equipment, locomotives, industrial plastics, and aviation. Making high-end
medical scanners and other upscale equipment, it also established a thriving
business in the healthcare technology sector. Jack Welch, who led the company
from 1981 to 2001, rapidly (and dangerously) increased GE's presence in the
financial services industry, which by 2000 accounted for more than half of the
revenues. Investors perceived the company to be considerably more valuable
because of the diversification away from its core competencies, but this turned out to
be a fantasy. The financial engineering was based on unreasonably risky bets, and
the complications and politics of that company distracted managers from the
lingering issues on the industrial side.
GE was the 14th most profitable company in the Fortune top 20 list in 2011 but
afterwards underperformed the market significantly as its profitability fell. About two-
fifths of its share price has been lost this year alone. What went wrong at one of the
oldest and most renowned businesses in America? The company's persistent poor
performance highlights glaring governance shortcomings at the top of GE. Where
were GE board of directors, who approved hundreds of transactions, the majority of
which resulted in losses for shareholders? What qualifications did they have to
assess these deals? Were the correct questions even bothered to be asked?
GE’s majestic beginnings
Since Thomas Edison began the business in the 19th century, it quickly became a
household name. GE has been hailed as a pioneer of invention on multiple fronts,
from becoming one of the 12 businesses to get listed on the Dow Jones Industrial
Average in 1896 to producing the first gas turbine for electricity production in 1939
and the first US jet engine in 1941. The company thrived under the aegis of Jack
Welch, who led the company for two decades from 1981-2001 and made it the most
valuable company in the world. The company’s market capitalization zoomed from
less than $15 billion when he started at the helm in 1981 to a peak market value of
$594 billion in the year 2000. Things got a little out of hands when the fantasy world
created by Mr. Welch got exposed to external turbulences and lack of corporate
governance under the leadership of Jeffrey Immelt, who assumed the role of the
CEO in 2001 and remained in the role for 16 years, until 2017. Mr. Immelt continued
the aggressive shuffling of businesses that his predecessor popularized, but never
managed to stop the stock's decline.
2. Lack of governance came to fore
While Mr. Immelt’s career as CEO got off to a rough start (with 9/11), the companies’
miseries were further exasperated by his investment/acquisition bets that didn’t pay
off. In the ensuing years of 9/11, as countries and companies obsessed over
security, Immelt saw an opportunity of investing in Security, which went bust. The
company pumped in over $1billion in this area and had to eventually exit with barely
half of the amount invested in pocket. The company’s high hopes of piggybacking on
rocketing US home prices led it to shell out half a billion dollars to buy WMC, a
mortgage company, which eventually lost ~$1 bn two years hence with home prices
sharply falling. In the Oil & Gas vertical, a $30bn acquisition of over 60% stake in
Baker Hughes in 2017, reversed two years later, at a cost of $10bn to GE’s
shareholders.
The utter failure of the company in consecutive M&As for over several decades,
highlights a fundamental problem in the company’s corporate governance. Given the
crucial role that board members play, they must be familiar with the procedures that
businesses should implement to maximize value generation after an M&A. Members
of the board of the purchasing firm must, however, proceed with prudence and
refrain from going overboard. Further exposing holes in the company’s culture and
governance, a US SEC investigation into GE found that the corporation had
neglected to properly disclose Mr. Welch's retirement benefits, which were worth
$2.5 million a year and included free use of a corporate plane and a multi-million-
dollar apartment in New York City.
The reigning CEO (Jeffrey Immelt) mishandled capital in other ways too. He spent
$93 billion repurchasing stock, which isn't necessarily a bad thing, but he had a
horrible habit of doing so at exorbitant costs. From 2008 to 2011, when the stock
price was primarily in the teens, GE only spent $7 billion of that $93 billion; the
corporation spent nearly $80 billion repurchasing shares at prices over $30.
The biggest reality check was the 2008 financial crisis that severely impacted the
company. During the year, the company's stock dropped 42%, and after Welch left, it
was obvious that GE was stretched and bloated. During the Great Recession, GE
Capital's financial segment's losses nearly brought the corporation to its knees. In
the subsequent year, the company’s yearly dividend was slashed from $1.24 to
$0.82 per share.
Unlike one man’s greed that we saw case of Satyam, a collective inability of the
board and the CEO led to the downfall of this behemoth. Quite apparently, lack of
corporate governance, amalgamated with inefficient management of human capital
was the frontline contributor to GE’s collapse.
3. Radical shake-up
After stumbling under the reign of Jeffrey Immelt, who retired in 2017, the company’s
top management underwent a dramatic overhaul never seen before in the US
history. In addition to numerous top management changes, under the new CEO,
John Flannery, the company’s board witnessed departure of eight directors and
nomination of three new members, cutting the size of the board to 12 from 18.
Flannery himself was ousted in October 2018 due to the company’s slow pace of
turnaround and mammoth $23 billion write down in GE’s power division. He was
replaced by Larry Culp. A year later, COVID-19 pandemic hit, resulting in further
blows to the company’s financial turmoil.
Welch vs Immelt vs Flannery vs Culp
Source: Bloomberg
4. New beginnings?
Ever since taking the big job, Lawrence Culp has focused on reducing debt and
improving cash flows by cutting overhead costs and streamlining operations. As part
of this effort, in November 2021, Culp announced to bring the company’s
conglomerate era to an end with a plan to split it into three public companies that
would focus on – healthcare, energy, and aviation.
Conclusion
GE’s assumption was that the seemingly natural fix to performance problems was to
acquire something. Instead, perhaps the issue was more straightforward and related
to ineffective organisational structure and customer centricity. The GE narrative
demonstrates how frequent mergers and acquisitions and deal-making may be
beneficial for expert portfolio managers; nevertheless, in businesses, it merely allows
for distraction and the concealment of underperformance!
References
What happened to GE, Gates Notes, June 14, 2021
Why GE is making a dramatic overhaul to its board of directors, The Washington Post,
February 27, 2018
GE: Corporate Governance Lapses Exposed, Uninvestable, Seeking Alpha, January 3,
2019
GE: Its Corporate Culture Is A Stumbling Block To A Sustained Recovery, Seeking
Alpha, May 20, 2018
General Electric ousts its CEO as it seeks a path forward, Los Angeles Times, October
1, 2018
Jeff Immelt Oversaw the Downfall of G.E. Now He’d Like You to Read His Book, The
New York Times, February 5, 2021
Charting GE’s Historic Rise and Tortured Downfall, Bloomberg, January 30, 2019
From Edison to Welch to Culp: the rise and fall of GE, Reuters, November 10, 2021
General Electric breaks up, The Economist, November 13, 2021
What the Hell Happened at GE, Fortune, May 24, 2018
What the decline of General Electric can teach us about M&As, Board Agenda, 6
January 2023
GE’s decline is the story of corporate BS, Reuters, April 4, 2016
