GE’s $100B stock market wipeout heralds reckoning for a U.S. icon
Mounting cash flow problems among trying challenges for once-mighty firm
NEW YORK Few under the age of 30 might remember, but General Electric Co. was once a model of corporate greatness.
Back in 1999, when Steve Jobs was still fiddling with iMacs, Fortune magazine proclaimed Jack Welch, then GE’s chief executive officer, the best manager of the 20th Century.
Few people — of whatever age — would lavish such praise on the manufacturer these days.
GE, that paragon of modern management, has fallen so far that it’s scarcely recognizable. The old GE is dead, undone by an unfortunate mix of missteps and bad luck. The new one now confronts some of the most daunting challenges in the company’s 125-year history.
The numbers tell the story: This year alone, roughly US$100 billion has been wiped off GE’s stock market value. With mounting cashflow problems at the once-mighty company, even the dividend is at risk of being cut. The last time GE chopped the payout was in the Great Recession — and before that, the Great Depression.
And yet the hit to the collective psyche of generations of investors and managers is incalculable. For decades, GE-think infiltrated boardrooms around the world. Six Sigma quality control, strict performance metrics, management boot camps — all that and more informed the MBAs of the 1970s, ’80s, ’90s and into this century. GE, in turn, seeded corporate America with its executives.
Now, John Flannery, GE’s new CEO, is struggling to win back the trust of anxious investors. He’s set to detail his turnaround plans on Monday — and has said he’ll consider every option.
“There’s nothing less than the fate of a once great, great company on the line,” said Thomas O’Boyle, the author of At Any Cost: Jack Welch, General Electric, and the Pursuit of Profit. “Some of the fundamental notions about its status as a conglomerate and whether it can succeed in a world of increasing complexity are really being challenged right now.”
In hindsight, the seeds of this struggle were planted decades ago. Welch expanded and reshaped GE with hundreds of acquisitions and demanded every GE unit be No. 1 or No. 2 in its industry. He also culled low-performers ruthlessly, earning the nickname Neutron Jack. By the time he retired, in 2001, GE’s market value had soared from less than US$20 billion to almost US$400 billion.
But all that manoeuvring, plus GE’s increasingly complex financial operations, obscured the underlying performance and put the company in peril during the 2008 financial crisis. Welch’s successor, Jeffrey Immelt, soon embarked on a plan to undo much of the House that Jack Built. He would sell NBC and most of the finance operations — two of the businesses that defined Welch’s tenure — along with units such as plastics and homeappliances.
The moves narrowed GE’s focus, yet it remains a collection of somewhat disparate manufacturing businesses, ranging from jet engines to oilfield equipment.
Unfortunately for GE, that industrial conglomerate model has fallen sharply out of favour on Wall Street. And the rise of activist investors such as Nelson Peltz has encouraged companies to try to boost their stock prices however they can, rather than focus on the long term. GE recently welcomed one of Peltz’s partners at Trian Fund Management to the board.
“The reckoning had to come,” said Jack De Gan, chief investment officer of Harbor Advisory, which has been a GE shareholder for more than 20 years before selling most of the shares in the past few weeks.
GE’s leaders have long defended the multi-business strategy by pointing to the benefits of sharing technology across product lines — jet engines, for instance, have a lot in common with gas turbines. In an interview with Bloomberg in June, Flannery dismissed concerns about conglomerates, saying investors care more about outcomes.
“They want growth, they want visibility, they want predictability, they want margin rate,” Flannery said. “And there are a multitude of models to produce that.”
The new CEO has already said he’ll divest at least US$20 billion of assets. He’s coming under pressure to do even more.
“Anything less than a sweeping plan to ‘de-conglomerate’ the portfolio would be viewed as disappointing,” Deane Dray, an analyst with RBC Capital Markets, said this week in a note to clients. The potential moves include unloading its transportation, oil, health-care and lighting operations.
To be sure, GE’s issues run deeper than the composition of the company. One of the Bostonbased company’s biggest divisions, power-generation, is in the early stages of a deep market slump — just two years after bulking up with the US$10 billion acquisition of Alstom SA’s energy business. GE’s cash flow is light, potentially putting the dividend in jeopardy and driving investors away from the stock.
Flannery has spoken of the need to change GE’s culture and instil a sense of accountability. He’s reined in excessive spending — on corporate cars and planes, on the new Boston headquarters — and replaced top executives.
But the sudden changes, combined with Flannery’s relative lack of public reassurances, have spooked investors. In the days after Flannery’s first quarterly earnings as CEO, when he called GE’s performance “completely unacceptable,” the stock fell and fell. And fell some more, closing at the lowest level in five years on Nov. 2.
The shares added 2.5 per cent to US$20.49 in New York trading on Friday, bringing the 2017 loss to 35 per cent.
“You think about a company like Kodak. Will GE become that?” said Vijay Govindarajan, a professor at Dartmouth University’s Tuck School of Business who served as GE’s professor-in-residence in 2008 and 2009.
Some investors may be throwing in the towel, but Govindarajan isn’t giving up. “I will put my bet that GE will weather this and come back,” he said.