GE changes CEO as stock price, profits stall
New leader pledges comprehensive review
NEW YORK: General Electric Co, the 125-year-old industrial giant whose jet engines propel air travellers around the globe and whose electrical generators light millions of households, declared on Monday that it would be installing its first new leader in 16 years.
Jeffrey Immelt, 61, the departing chief executive, transformed GE over the past decade, jettisoning most of its once-huge financial business, which seemed to threaten the company’s survival after the 2008 economic crisis.
Wall Street applauded those moves, but investors grew disenchanted as the company’s stock price and profits stagnated in recent years.
His successor, John Flannery, 55, is a longtime GE executive who has spent much of his career in finance and deal making, raising expectations that he might look to sell off pieces of the sprawling company.
Flannery told analysts that he would embark on a “comprehensive review” of all GE businesses “with speed, urgency and no constraints.”
His tenure may well determine the shape and the economic role of conglomerates like GE — expansive companies with seemingly limitless business ambitions — that once defined an American industrial era. Now, GE is among the last of the breed.
The company’s roots reach back more than a century, to the laboratories of the storied inventor Thomas Edison. GE today sells magnetic resonance imaging machines, provides financial and data services, manufactures light bulbs and performs drug research, among myriad other activities.
But as a rule, Wall Street does not like conglomerates. Instead, investors tend to prefer the clarity of companies with simpler product lines and fewer moving parts.
Immelt had spoken in the past of stepping down this year. But no successor had been formally named, and in recent months, GE’s lagging stock performance brought increasing pressure from investors and new urgency to questions about when he might depart.
Those questions were being addressed by the GE board on May 13 at a trendy hotel in downtown Manhattan, a location selected in part because it was a place where people seemed unlikely to recognise GE board members. There, four contenders for Immelt’s post lined up and made their case to claim the top job.
GE said its succession planning had been in the works for about five years, with a target of this summer. Activity accelerated in the past year, once the leading candidates had gathered wider experience across the company.
The company’s lead independent director, Jack Brennan, said there had been an “ongoing dialogue” about the timing but that, in the end, everything “happened to marry up with the schedule we had in place,” which Immelt had agreed to.
Brennan has fielded calls recently from frustrated shareholders, according to two people familiar with those conversations.
In an interview, Brennan — former chief executive of Vanguard Group, a large mutual fund firm — said: “I talk to investors all the time. And given my background, I get a lot of unsolicited advice.”
Investors’ calls for change increased noticeably two years ago when Nelson Peltz, an activist shareholder, and his investment firm, Trian Fund Management LP, bought a $2 billion stake, making it one of GE’s largest shareholders.
In an 80-page presentation at that time, Peltz and his team called on management to cut costs, buy back shares and further shrink GE’s finance business, GE Capital.
Trian said its plan would sharply increase GE’s share price, to $40 or more by the end of 2017.
GE has taken some of the proposed steps, and its shares have risen more than 10% from the beginning of Trian’s campaign through Friday. Still, rival industrial firms did far better over the same period: United Technologies Corp shares rose 43%, and Honeywell International Inc’s stock is up 46%.
On Monday, GE closed at $28.94 a share, up 4% but still below Trian’s target range.
Trian was not consulted on the leadership change, and learned about it Monday morning when the company made its announcement.
Even investors who praise Immelt for drastically reducing GE’s dependence on finance and shedding its nonindustrial businesses — like the media company NBC-Universal — welcomed the change.
“Frankly, it’s the right thing to do,” said Robert Atchinson, managing director of Adage Capital Management, a $30 billion fund that holds GE shares. “GE needs to go to the next level of change.”
Immelt had to guide GE through significant shocks during his tenure. Just after he became chief executive, in 2001, the terrorist attacks on Sept 11 battered the airline industry and other buyers of its equipment.
Later, the global financial crisis of 2008 delivered a severe blow, one partly selfinflicted. For years, GE had chased the seemingly easy profits to be made in everything from American home mortgages to credit-card financing in Japan. In some years, that business made up as much as half the company’s income, and GE became one of the largest lenders in the United States.
In the past few years, GE profit performance has suffered because lower oil prices have hurt the company’s big oil-field-equipment business. In October, GE agreed to merge its oil-and-gas unit with Baker Hughes Inc, in an effort to create a stronger business that could benefit from a recovery in oil prices.
A major part of Immelt’s strategy to unify the company’s many businesses was
to invest heavily to transform GE into what it has called a “digital industrial company.” He has said he wanted GE to be “a top 10 software company” by 2020.
The idea would be that, for instance, software could harness the data produced by a jet engine to predict when the engine needs maintenance, saving time and money. The technology could be used across GE’s businesses, whether medical equipment or wind turbines.
“It’s an open question as to whether that pays off,” said Karim Lakhani, a professor at Harvard Business School.
Like Immelt, Flannery is a company veteran, having begun at GE Capital in 1987 with a focus on evaluating risk for big corporate lending deals. In 2013, he took over business development at the corporate level, and he was involved in GE’s sizeable acquisition of Alstom SA’s energy businesses and the shrinking of GE Capital. Flannery joined GE Healthcare in 2014, overseeing a turnaround of that business, the company said.
In an interview, Flannery took issue with the characterisation of him as a financial engineer. Much of his time in finance, he said, was assessing businesses, their managements and whether to make investments.
“It wasn’t trading derivatives,” he said. On May 13, Flannery was one of the four candidates who made presentations to the board at a private meeting at the Beekman Hotel in Manhattan. Their day started at
7.30 a.m. and lasted till 4 p.m.
The other three competing for the job were Jeffrey Bornstein, chief financial officer (he will become vice chairman, GE said on Monday); Steve Bolze, president of GE’s power-generation business; and Lorenzo Simonelli, president of GE’s oiland-gas unit, according to a person briefed on the meeting, who was not authorised to speak publicly.
Before the meeting, the board members received folders of documents detailing the history, track record and executive reviews of the candidates. One by one, each made a presentation of more than an hour and a half on the subject “the road forward for GE,” Brennan said.
The board knew them all well. In the past few years, GE board members, in groups of three to five, visited each of the executives in their businesses. One visit to Flannery was in Uppsala, Sweden, where GE Healthcare has a life sciences unit, doing biological research for new therapies.
On Friday morning, the board met again to vote, this time at the Boston Harbor Hotel. The conference room had been swept for listening devices the night before, and security guards were stationed outside overnight.
The vote, Brennan said, was unanimous in favour of Flannery. He got the call a bit after 1 p.m. in Chicago, the headquarters of GE Healthcare, to tell him he would be the next chief executive.