GE ousts CEO John Flannery as it announces $23b writedown
Financial problems at General Electric Co. prompted the long-ailing company on Monday to tap the first outsider CEO in its 126-year history to lead yet another turnaround.
The Boston-based industrial conglomerate ousted John Flannery as chairman and chief executive after just 14 months, a dramatic and unexpected move aimed at reversing a deep slide in the company’s fortunes and restoring investors’ faith in a stock that lost roughly half its value during his tenure.
His replacement is H. Lawrence Culp Jr., the former head of Danaher Corp., who has been praised as one of the most successful CEOs in corporate America.
Culp had only been appointed to GE’s board in April, as lead director. Thomas W. Horton, who once led American Airlines, will replace Culp as lead director, the top board member who is not a GE executive.
The biggest factor in Flannery’s sudden downfall was GE’s long-troubled power business. As part of the change in leadership, GE said it would take a massive writedown of the power unit — as much as $23 billion — to reflect its declining value as a business. GE also said it would fall short of its previously announced earnings forecast for the year.
Wall Street indicated that the change at the top outweighed the additional bad corporate news, pushing shares in the company up 7.1 percent on Monday, to close at $12.09 a share.
“GE did something unexpected, and the market applauded,” said Mark Williams, a finance professor at Boston University. “They fired an insider and hired an outsider. . . . We’ll look back on this as an inflection point. I think GE has finally gotten religion, that they’re in crisis and they have to change.”
GE’s stock during Flannery’s time as CEO plunged some 56 percent . Earlier this year, GE was dropped from its longtime perch on the Dow Jones industrial average.
The board’s intervention follows Flannery’s attempts to reverse GE’s tailspin. The roughly 300,000-person company has struggled with persistent weakness in its business of making gas turbines for power plants, and from lingering problems at the remnants of GE Capital, a once-mighty lending unit that nearly collapsed during the financial crisis a decade ago. Flannery was forced to cut GE’s dividend in November for only the second time since the Great Depression.
As the CEO of Danaher from 2001 to 2014, Culp had already done what GE has long promised Wall Street: transformed an industrial conglomerate into a leading science and technology company. During his tenure, Danaher’s market capitalization and revenue grew fivefold.
“People are welcoming the news of a fresh take, fresh blood,” said Joshua Aguilar, a stock analyst at Morningstar. “People were just frustrated with the lack of progress” under Flannery.
Flannery, a 30-year GE veteran, had taken over the top job amid growing concern about predecessor Jeffrey Immelt’s radical attempts to transform the company for the Internet era. Immelt spent heavily on software and other digital initiatives, while doubling down on GE’s big power generation and oil and gas businesses. He relocated the company’s headquarters to Boston from suburban Fairfield, Conn., two years ago, a move that was hailed by local leaders as a confirmation of this region’s reputation as a hotbed for innovation.
But Immelt lost the faith of many investors as costs climbed, profits fell, and the stock tumbled.
After his appointment, Flannery aggressively stepped up efforts to simplify GE’s sprawling corporate shape and trim expenses.
Most notably, he embarked on a plan to divest at least $20 billion worth of business lines and in June settled on a plan to focus on three major areas: aircraft, power, and renewable energy.
But the century-old power business continued to suffer from a prolonged global downturn in demand for turbines fired by natural gas; GE executives kept it, in part, because they saw synergies that could be gained with the jet-engine and wind-turbine businesses.
Many observers believe the $10.6 billion Immelt paid for Alstom’s power business in 2015 was too high, and the French business proved to be much tougher to integrate than expected. Revenue at GE’s power unit declined 19 percent in the second quarter of 2018 from a year earlier, while profit fell 58 percent.
In 2017, the power business had accounted for nearly a third of GE’s $122 billion in revenue.
Meanwhile, Flannery moved to spin out GE’s health care business, a subsidiary he is credited with turning around. The locomotive business will be merged with Wabtec, a Pennsylvania-based maker of train equipment. There have also been several smaller divestitures.
“When Flannery was CEO, he seemed to be doing a good, if depressing, job of finding all the problems but did not highlight the opportunities for growth, which is why anybody would want to buy the stock,” said Peter Cohan, a management expert who teaches at Babson College. “Flannery was Bad News Bear, but never came up with the other side of it.”
For now, at least, GE remains committed to separating its health care business as an independent company and fully divesting its majority stake in its oil-and-gas joint venture with Baker Hughes.
GE is also officially sticking with its plans for a new headquarters complex in Boston, though Flannery’s departure is bound to raise more questions. GE is renovating two brick buildings in Fort Point, a few blocks from the company’s temporary offices, and expects to move into those buildings by the end of 2019.
GE has said it then plans to begin building a 12-story tower next door.
The City of Boston pledged $25 million in tax breaks over 20 years to bring GE here, but the company needs to hire 800 employees in Boston by 2025 to fully benefit. As of August, GE had 235 employees as its headquarters.
The commonwealth of Massachusetts provided $125 million in grants to help with the headquarters campus, and the two brick buildings are owned by a quasi-public agency, MassDevelopment, as a result.
Speaking to reporters on Monday, Governor Charlie Baker said he’s not concerned about the latest changes.
“We did not write a big check to GE based on job projections or anything like that,” Baker said. “The company is still worth about $100 billion. It still has a huge footprint here in Massachusetts.”
Culp’s experience reshaping a sprawling conglomerate probably appealed to GE’s board.
He led Washington, D.C.-based Danaher as it went from a manufacturer with many discrete product lines to a company focused on diagnostics, life sciences, dental, and environmental markets. Despite the changes, Danaher still has more than 20 operating companies, and Culp’s experience managing a sprawling organization should come in handy at GE.
Not everyone was sold on the benefits of bringing in an outsider to steer the ship, however.
“Hitting the master reset button might be the best thing,” said Bill Aulet, a professor of entrepreneurship at MIT’s Sloan School of Management. “The problem is, someone coming in from the outside, they would have to have the right skills but they also have to be a cultural match with the good people in the organization. That DNA match is very, very difficult.”
Correction: Due to incorrect information provided by GE, an earlier version of this story misstated Culp’s tenure as CEO at Danaher.