GE’s $100 Billion Wipeout Heralds Reckoning for an American Icon

Share prices have fallen about 40% this year and the company recently announced it was slashing its dividend ahead of a massive restructuring

GE logo on a plant in France. (Photo: AP) GE logo on a plant in France. (Photo: AP)

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 $100 billion has been wiped off GE’s stock market value. With mounting cash-flow 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.

Anxious Investors

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 $20 billion to almost $400 billion.

But all that maneuvering, 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 home appliances.

The moves narrowed GE’s focus, yet it remains a collection of somewhat disparate manufacturing businesses, ranging from jet engines to oilfield equipment.

Out of Favor

Unfortunately for GE, that industrial conglomerate model has fallen sharply out of favor on Wall Street. And the rise of activist investors like 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.”

$20 Billion

The new CEO has already said he’ll divest at least $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 its biggest divisions, power generation, is in the early stages of a deep market slump -- just two years after bulking up with the $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 instill 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 slid less than 1 percent to $19.99 on Thursday, bringing the 2017 loss to 37 percent.

“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.

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