25 Oct 2018 20:37 IST

General Electric: the end of an era, or the beginning?

Can GE recreate its legacy after it lost its place in the Dow index earlier this year?

General Electric (GE) was part of the Dow Jones Industrial Average Index for more than 120 years — it was the oldest member of the Dow. In June 2018, GE was replaced by Walgreens Boots Alliance. This development is historic and represents the moment when the curtains fell on a legacy.

GE enjoyed an extremely unique position in the US and the world. Considered a hotbed for grooming good leaders, its managers eventually took over most of corporate America; that was the prowess GE enjoyed in creating world-class leaders. Harvard has written several cases that showcase GE and its managers’ leadership capabilities.

In 1889, Thomas Alva Edison — who had many patents to his name — along with JP Morgan (which brought in financial power) made a series of acquisitions that eventually became the Edison General Electric Company. After more acquisitions and mergers, GE was founded in 1892 and, in 1896, it became one of the original 12 companies listed on the then newly-formed Dow index.

Post 9/11

Unfortunately, GE’s performance in recent years has been deteriorating and it was no longer considered a good representation of the large capitalised stock. When removed from Dow, its share price was close to $13 and its influence on Dow was less than 0.5 per cent. Why did such a historic company reach this state?

Business executive Jeff Immelt inherited GE from Jack Welch, as the CEO of the company, in 2001 — four days before 9/11. Immelt took over a highly diversified conglomerate whose portfolio included industrial businesses comprising aircraft engines, turbines, transportation, oil and gas, and medical imaging, as well as unrelated businesses like financial services. All these businesses were, in combination, performing wellas a conglomerate. However, things started to change dramatically post the 9/11 crisis.

With the terrorist attack on New York’s twin towers on September 11, 2001, the global economy went into a spin. GE’s businesses were one of the worst hit, most of them facing a steep slow down, which they did not recover from for the next 24-36 months.

Immelt tried hard to unwind the excessive diversification of the companyfrom the Jack Welch days; he divested the plastics, home appliances and financial capital businesses. This was considered a good and bold move as it made the company more focused. Such divestitures were imminent and challenging and, as expected, they incurred the wrath of shareholders, employees and the markets, all of whom did not appreciate the downsizing of the company.

Expensive acquisitions

Immelt made a number of technology acquisitions to support the industrial capabilities, including the Alstom acquisition. However, some of his smaller acquisitions were criticised for being expensive. In particular, his acquisition of Ion Track, an explosive detection company; WMC, a subprime mortgage company; and the many oil and gas acquisitions including Baker Hughes. The company has recently written down large sums of goodwill on such acquisitions, primarily pointing to the fact that Immelt had overpaid for them.

With large scale divestments, high priced acquisitions and underwhelming performance resulting from poor cash flows, exerted severe liquidity issues. In total, Immelt had executed deals worth $100 billion of buying and divesting businesses, which no other CEO would have ever done.

It is well known that the risk in such deals is quite high and despite many of them being celebrated and moving the company in the right direction, some of them got the wrong end of the stick and captured the dissatisfaction of the shareholders. The performance of the company in difficult market conditions did not give the benefit of doubt to Immelt.

The markets were also unhappy that under Immelt, a succession plan was not transparent. Especially since he had been leading the company for over 16 years, everyone wanted to know who was being nurtured to take over. John Flannery took over from Immelt with the belief that GE might be more valuable in pieces. A clear task was cut out for him to divest the healthcare and oil and gas businesses, which were identified as liabilities.

Unfortunately, Flannery was unable to move at the speed with which the GE board and its shareholders expected; he was booted out within a year. The choice of making Flannery the CEO and his ousting show the poor planning that went into such a vital component of GE’s strategy; succession planning, especially given GE’s stature and its track record of choosing right CEOs.

Going forward

When Immelt left, shareholders, investors and the market celebrated and GE stock prices went up for a day. Such was the dissatisfaction!

Although it is a sad moment for GE, these events are learning opportunities for corporates and management students. Your past success is by no means an indicator of your future well being; companies have to strongly reinvent themselves over the decades, coping with changing market conditions, addressing new customer requirements and embracing evolving technologies, ahead of the competition.

The GE board has now brought in Larry Culp, the first outsider in GE’s history to take charge as CEO; Culp comes with a very successful tenure at Danaher, a company positioned in manufacturing, healthcare and bunch of other businesses. He created enormous value to shareholders in a short span of a decade and has a track record to prove it.

GE is still capitalised at close to $100 billion, a large and challenging canvas to play around for Culp. The GE board has structured his compensation such that there is a variable component that kicks in if he is able to turnaround the company and pull the share price up. The markets reacted positively to Culp’s appointment. Can he rewrite history and prove critics wrong — that this is not the end of a legacy, but just the beginning?