There is a temptation to attribute the end of the once powerful GE corporation to the late Jack Welch.
After all, he was the main architect who turned the company into a multi-faceted giant that its founder, Thomas Edison, would not have recognized.
But it’s not true. It ignores GE’s chaotic corporate history from the time Welch retired in 2001 to this week – when GE announced it would be split into three separate entities.
Yes, Welch has pushed GE to its limits in terms of size and scope. But don’t forget, pushing companies to their limits was something the market rewarded when such organizations were well run. Getting into entertainment, television programming, and dog insurance while making profits through financial products and managing your revenues has been particularly attractive to Wall Street. . . until it was no more.
And now Larry Culp, the new CEO, is betting that he will be rewarded for doing the opposite. Because that’s what investors have wanted for some time.
The question we should ask ourselves is why, in the intervening years, did GE’s management ignore what its investors wanted and instead choose the near-stasis that nearly brought a large American institution to its knees.
The idea that parts of GE were bigger than the whole is not new. I’ve reported for years that Welch convinced the opposite when he drove the company to a market cap of $ 600 billion – the largest in America just before he left as CEO.
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But then, not long after he was outside, the herd went in the opposite direction.
Welch’s successor, Jeff Immelt, appears to agree that GE’s corporate structure wasn’t out of date long in his tenure as CEO. In his book “Hot Seat” he tries to convince the reader that from the day he was taken over in 2001 he was given a business model that Rube Goldberg would be proud of: unbalanced companies with little or no synergies that he needed to be able to function and the urgency to dismantle much of it.
Immelt has sold a lot, namely NBC Universal. Still, he continued to rely on the conglomerate to try to really get it to work, even when evidence showed it wasn’t. He got involved in ill-fated deals (the Alstom power deal cost $ 10 billion with little return) and continued to rely on GE Capital for support. Until GE Capital turned into an albatross during the 2008 financial crisis when investors worried a company that had its bones in lights, refrigerators, and jet engines was pushing into underwater financial derivatives.
According to GE insiders, Immelt had two chances to radically transform the company without Wall Street putting up much resistance. The first was after the September 11, 2001 attacks, when the company was under severe pressure because its jet engine business – one of GE’s largest units – was in dire straits for obvious reasons.
OK, you can give him a pass for not wanting to blow up the house Jack built not long after he became CEO, but why not after 2008, when the company needed government support because of GE Capital to keep his To extend commercial paper? Exposure?
Immelt certainly knew things weren’t working; the share price and earnings growth tell the story.
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Belatedly and under pressure from an activist investor, the GE board of directors had enough of Immelt in 2017 and replaced him with a long-time company insider, John Flannery. It was more like the same, and Flannery was thrown away a little over a year after the takeover.
Again, Flannery just had to listen to the same people I spoke to: smart investors and a lot of GE professionals who liked both Welch and Immelt but saw the company falter and someone had to realize the whole thing was worth less than the parts.
The current CEO, Larry Culp, now said he came to that conclusion after speaking to investors. But why did it take three years? Yes, Culp cut overheads (no more corporate jets getting Immelt in trouble). He got out of more business.
But the markets weren’t that impressed. GE stock price has bounced back a bit from its Immelt Flannery lows, but consider this: The crypto exchange Coinbase, which went public in the summer, already has a market cap of $ 70 billion. Compare the $ 117 billion stock value of GE’s after it was more than 100 years old and you will get the picture.
I know what you’re saying: the Coinbase comparison is a cheap try as cryptos are a bubble phenomenon and GE will be here for years, even if it’s just a clam on its Welsh scale.
Yes, but investors also see value and a future in Coinbase; You don’t see any of this in GE.
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For all his imperial building mistakes, Welch knew what the markets wanted, as his career shows. He would have seen the tide turn against his business model, just as he saw GE needed to get a lot bigger after years of being a steadily growing electronics company with a nice dividend.
He would have thrown the stuff overboard as quickly as he had set it up because he couldn’t bear to watch its existing crater for weeks, let alone years. If you knew Welch, you also knew that he was far more loyal to the company than the trappings of the CEO job.
Immelt, Flannery, and yes, even Culp seemed to have a stronger stomach for ignoring investors while trying to get something to work that clearly wasn’t working. Or they just enjoyed running something big like GE. Either way, the belated split came at a high cost: hundreds of billions of dollars of market value turned to dust, one of the biggest asset wrecks in recent financial history.
I’m sorry, Jack Welch would never have let that happen.