Wednesday 18 September 2019

GE's nightmare on Wall Street prompts reminders of Kodak's corporate moment

New CEO John Flannery
New CEO John Flannery

Richard Clough

Few under the age of 30 might remember, but General Electric was once a model of corporate greatness.

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 would lavish such praise on the manufacturer these days.

GE, that paragon of modern management, has fallen so far that it's scarcely recognisable.

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, roughly $100bn (€85.7bn) 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 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.

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 $20bn to almost $400bn.

But all that manoeuvring, 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, sold off 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.

Unfortunately for GE, that industrial conglomerate model has fallen sharply out of favour 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."

The new CEO has already said he'll divest at least $20bn 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, healthcare and lighting operations.

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. 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 instil 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 November 2.

The shares slid less than 1pc to $19.99 on Thursday, bringing the 2017 loss to 37pc.

"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. (Bloomberg)

Irish Independent

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