Does GE’s breakup signal demise of the conglomerate?
General Electric made an announcement last week that might once have been startling but proved ultimately somewhat anticlimactic. The 129-year-old industrial conglomerate founded by Thomas Edison will be splitting into three distinct, highly focused public companies beginning in 2022. The breakup represents the final step in dismantling the ungovernable behemoth that was once the world’s largest corporation.
The move is anticlimactic since it was the inevitable culmination of an ongoing restructuring involving shedding dozens of disparate, non-related business divisions and trimming the company’s massive debt. The announcement might once have been startling because at one time, GE was the very prototype of the industrial conglomerate.
Many large corporations have been de-consolidating, hiving off unrelated or loosely related divisions to focus on core strengths. The great conglomeration boom of the early 21st century was already running out of steam, but the formal surrender by GE serves as an exclamation point. For most of its first 90 years, General Electric specialized in developing innovative products deriving from its original expertise: electricity. Owing to its history, familiarity and reliable dividend, GE stock was widely held by individual investors who fretted little about the stock’s moribund performance knowing their income was secure. Everything changed in 1981 with the appointment of a new CEO named Jack Welsh.
The 45-year-old engineer set about recasting GE in search of rapid growth by acquiring companies, often with little or no strategic connection. Welsh believed that a sufficiently talented management team could pull disparate business units into a coherent whole and was relentless in his assessment of subordinates. Executives under Welsh were imbued with the attitude that “it doesn’t matter what we make; it’s how we manage.” He earned the epithet “Neutron Jack” for his penchant for eliminating employees while leaving the buildings standing.
The strategy appeared to work during his 20-year tenure. Aided by low interest rates and the tailwind of a bull market, GE made more than
1,000 acquisitions, including RCA and its subsidiary NBC, and grew its market value from $25 billion to $130 billion in 2000, becoming the biggest company by market value in the world. By the time he retired in 2001 (with a nearly half billion-dollar payout), Welsh was feted as a management genius, receiving notoriety as a consultant and author before his death in 2020.
It was only during the tenure of Welsh’s handpicked successor, Jeffrey Immelt, that the cracks in the foundation began to show. Welsh had created a monster at GE’s financing company, GE Capital, that nearly toppled the enterprise in 2008. Formerly a backwater lending arm for retail appliances, Welsh dramatically expanded the scope to include a wide array of unrelated and increasingly risky ventures, from financing railcars to subprime mortgages. By 2007, GE Capital contributed over half of the conglomerate’s profits. Welsh also use GECAP as a black box piggy bank to manipulate quarterly corporate earnings, assuring that GE consistently and reliably beat Wall Street estimates by exactly one penny.
In 2008 the financing arm nearly collapsed, requiring assistance from the U.S. Government as well as a $3 billion bailout from Warren Buffet. Immelt began the downsizing of GECAP and was forced to sell NBC, but otherwise persisted in following Welsh’s acquisition model with a disastrously ill-timed purchase of Alstom Power in 2015. By 2016, GE was forced to sell off it vaunted small appliance business. Immelt retired in 2017 with a $200 million payout. In 2018 GE, one of the original 12 companies in the Dow Jones Industrial Average, was removed from the index. By 2020 its stock price had tumbled nearly 90% from the peak.
Immelt’s successor John Flannery began downsizing but was soon replaced by H. Lawrence Culp to oversee the final breakup. GE had already dumped its locomotive, plastics, oil and gas, and aircraft leasing units and stripped down the remaining GECAP holdings to a minimum. Culp’s announcement of the final split into three companies is an anticipated denouement rather than a surprise ending.
In the aftermath of the financial crisis, GE Capital was declared by regulators to be a “Systemically Important Financial Institution”: Too Big To Fail. But in reality, GE, like so many other leviathans, had become Too Big To Manage. The company had grown too unwieldy and opaque to be understood by investors or even its own board. When Immelt retired, it was discovered that he had two private jets, one that often traveled empty as a backup. Directors were unaware.
GE is hardly alone: Johnson and Johnson, Siemens and Toshiba are just the latest in a string of announced breakups. DowDuPont split into three parts in 2019; Merck and Pfizer jettisoned their large consumer products divisions; the list goes on. But the final dismantling of the House that Jack Built seems especially symbolic as the end of an era.