- KPB & Co Research
In less than 2 months, General Electric (GE) stock has gone up by about 48% to US$10.1 per share, on the back of renewed optimism about the company's prospects. In spite of the rapid rise in price, the stock is still 30% of the high established when Jack Welsh retired as CEO of the company in 2001. Jack Welch bowed out of the game with the reputation as one of the greatest CEO in history, and since then has been the subject of many business school case studies. At the same time GE embarked on one of the greatest value destruction in history. Perhaps the value that accrued under Jack's time was an illusion or it could be that his successor destroyed value, no one knows for sure, but there have been finger pointing back and forth between Jack Welch and his lieutenant - a person he hand picked for the job - which speaks volumes about his club. Most value investors see Jack Welch as the destroyer, labeling him as a master earnings manipulator and his successor Jeff Immelt as the guy that tried to put the pieces back together. After all, Jack was the guy that came up with the idea of extending GE's reach into financial services (GE Capital ) which went on to destroy billions in shareholder value. Surprisingly, after almost 18 years, a new CEO in charge and he is still trying to put the pieces back together.
a vast conglomerate, hard for managers to keep track
General Electric is a complex conglomerate that had its hands, and still do today, in many businesses such as aviation, banking, healthcare, lighting, Television and the list goes on. With such an expansive portfolio of businesses it is no surprise that every time a manager of a division of GE is promoted to CEO, skeletons pop out of the closet, and the ex-CEO then publishes an article about his great achievements at the company. In 2001 there was a transition in leadership from Jack Welch (then Chairman and CEO) to Jeff Immelt (then Senior Vice President, GE Medical Systems) and within 3 months, a division of GE Capital (remember this name) filed for bankruptcy. The stock fell from US$31.5 in August 2000 to US$13.3 by January 2003. Jeff Immelt went on to run GE for 16 years and after much publicized "success" retired in 2016. Jeff built the reputation as the hero who came in and radically transformed the company from a conglomerate to a high tech industrial enterprise, and by the time of his retirement in 2016 the stock landed at US$30.5 per share. Of course by the time management transitioned the company went back into crisis.
The Disaster in Succession Planning Continues
With the C-Suite now vacated by Jeff, John L. Flannery took over and he immediately began to make aggressive changes in the C-Suite, by releasing the three Jeff Immelt appointees from their roles: two vice chairs of innovation, and the CFO. He also came up with a transformation plan to divest US$20Bn of GE's businesses in 2 years. John L. Flannery was the saviour in Jeff Immelt's eyes as according to Jeff:
John is the right person to lead GE today. He has broad experience across multiple businesses, cycles and geographies. He has a track record of success and led one of our most essential businesses. Most important are his strong leadership traits - good judgment, resilience, a learner, team builder and a tough-minded individual and competitor. He will be trusted by investors, our customers and the GE team.
Unfortunately, this turned out to be a grossly inaccurate assessment of his talents. Like Jeff Immelt, John L. Flannery is a member of the Jack Welch club. According to the company:
Mr. Flannery, 55, began his career at GE Capital in 1987 where he focused on evaluating risk for leveraged buy-outs. In the 1990s, he was a leader in the corporate restructuring and workout group, where he was known for his negotiating skills and ability to improve companies' operations. In 1997, he moved to Argentina where he successfully led GE's Equity business in Latin America and the overall GE Capital business for Argentina and Chile. In 2013, he was tapped to lead business development at GE Corporate where he focused on capital allocation for the company and led the acquisition of Alstom, the largest industrial acquisition in the company's history. He also worked on shrinking GE Capital, the Synchrony Financial IPO, and the disposition of GE Appliances. Since joining GE Healthcare in 2014, Mr. Flannery has led the turnaround of the business, increasing organic revenue by five percent and margins by 100 bps in 2016. (Source: Corporate Website)
After 13 months on the job, John Flannery was fired for being too slow in implementing the rescue operation, which is incredulous in our eyes. He was then replaced with the former CEO of danaher Lawrence Culp, and at the same time the company recorded a US$23Bn write down in the goodwill of its power division. The write down is due to a series of unprofitable acquisitions the biggest of which (US$17Bn) is for the 2015 purchase of the energy businesses of Alstom of France for $10.1Bn (sounds familiar). As outlined before John Flannery was the key architect of the Alstom acquisition that saw the erosion of shareholder value, he is also a GE Capital alumni which eventually turned out to be a massive value destroying play. Similar to Jeff Immelt's career he also ran the Health Services division before taking over the CEO role.
NEW CEO New STrategy, MORE DEAL MAKING
Lawrence Culp has a storied background in the industrial space where he led Danaher (NYSE: DHR) from 2000 to 2014. He oversaw a 5X increase in revenues as he transformed the company from an industrial manufacturer into a science, technology and health conglomerate. Danaher's market capitalization grew to over US$50Bn during his tenure.
The new CEO has been busy implementing changes to the company's structure to reduce leverage and boost cashflow. His first action was to reduce the quarterly dividend, he then accelerated the sale of GE's stake in Baker Huges ( which provided cash of about US$10Bn), he completed the US$20Bn asset disposition program in the GE industrial segment initially started by John Flannery, completed US$8Bn of asset sales in GE Capital, and paid down debt by US$21Bn. A number of changes were made to the C-Suite including the appointment of a new chief human resources officer, a new CEO of GGO, a new CEO of Gas Power, a transformation leader for Gas Power, and a chairman of Gas Power.
The Transportation Business Spin-OFF
In addition to the deleveraging of the balance sheet, the company is expected to close the restructured merger agreement for its transportation business with Westinghouse Air Brake Technologies - Wabtec (WAB) on February 25th. This transaction will see the company spin-off the transportation business and immediately merge the business into Wabtec, creating a vertically integrated freight car business that is owned ~24.3% by GE stockholders, ~50.8% by WABTEC stockholders and ~24.9% by GE. The restructuring of the deal will provide GE with more cash as GE will unwind its ownership in the combined company over the next three years.
Judging by the increase in the stock price, many investors may have in mind that "this time will be different" as the company embarks on a new path under a new CEO. Perhaps there is some merit to that belief as it is the first time that the board of directors has gone for an outsider to lead the company. Furthermore, the new CEO has developed a track record of success at Danaher where he created substantial value for shareholders in a similar industry as GE. The new CEO has also brought in fresh managers who may have a fresh perspective to provide. Nonetheless it is still early days, and one can only wait and see if the changes actually lead to more value creation. If the situation is as bad as we expect, there will have to be a full cleaning of the house before investors get a true picture of where all the "bugs are". Given the size of GE this may take a few years.