There are many ways to illustrate the corporate disaster that General Electric has become — declines in cash flow, increases in insurance liabilities — but here is one that we can all easily understand: $100 of GE stock bought in 1980 was worth $10,670 by Aug. 28, 2000; today, that same stock is worth $2,269.
That nugget comes from a massive story that The Wall Street Journal published Friday morning on its website. Weighing in at over 11,400 words (most front-page stories in the paper run 1,000 to 2,000 words), “GE powered the American Century — then it burned out” is an impressive piece of reporting, offering an inside view of events that Boston readers could never have expected when the company moved from Connecticut to Fort Point Channel in the summer of 2016.
If you can, read the story by Thomas Gryta and Ted Mann in its entirety. (Full disclosure: I previously worked at the Journal.) Meanwhile, here are my initial takeaways, culled entirely from their reporting.
1. It starts with GE Capital
The financial unit provided the fuel that allowed GE to become the most valuable US company at its stock-market peak of $600 billion in August 2000. It also precipitated GE’s downfall when the financial crisis hit.
“The industrial spine of the company gave GE a AAA credit rating that allowed it to borrow money inexpensively, giving it an advantage over banks, which relied on deposits. The cash flowed [from GE Capital] up to headquarters where it powered the development of new jet engines and dividends for shareholders.”
But during the 2008-2009 financial crisis, “The market for short-term loans, the lifeblood of GE Capital, had frozen, and there was little in the way of deposits to fall back on. The Federal Reserve stepped in to save it after an emergency plea from Immelt. . . . The near-death experience taught investors to think of GE like a bank, a stock always vulnerable to another financial collapse.”
2. Welch vs. Immelt
Jeff Immelt succeeded Jack Welch, who ran the company for 20 years, just days before the Sept. 11 terrorist attacks. He had big shoes to fill. Welch was a legend and commanded the respect of Wall Street. The men had much different management styles:
“Welch was known to put his arm around an executive who just missed his numbers, tell him he loved him and if it happened again, he was out. Immelt could lean on executives and their underlings just as hard, cajoling and challenging, but he discouraged dissent by applauding optimistic news.”
3. Immelt’s big mistake
After deciding to shrink GE Capital in a bid to restore investors’ confidence, Immelt doubled down on the power-generation business. He bought a struggling French company, Alstom, arguing that GE’s mangement expertise could restart Alstom’s cash-generating engine and provide GE with the money it would no longer be getting from the finance unit.
But he overpaid, especially after the French government and US and European regulators demanded concessions that made it hard for GE to cut jobs and forced the sale of some of Alstom’s businesses to preserve competition.
“A band of skeptics inside GE Power were hopeful the deal would collapse. When advisers determined that the concessions to get the deal approved might have grown costly enough to trigger a provision allowing GE to back out, some in the Power business quietly celebrated, confiding in one another that they assumed management would abandon the deal. But Immelt and his circle of closest advisers wanted it done.”
4. Loss of power
If GE Capital sparked the company’s fall from grace, its power division accelerated the descent. As customer demand for turbines waned, GE resorted to financial engineering, tweaking customer service contracts and taking other steps to bolster its reported results.
“The accounting maneuvers were legal, if aggressive, GE executives assured one another. But it also meant that the profits were mostly on paper. Rarely was a new dollar of profit flowing in the door.”
Now the Securities and Exchange Commission and Justice Department are investigating GE’s accounting.
5. The Sarasota disaster
The Journal says a key turning point for Immelt was a May 2017 industry conference where the GE CEO was usually the top draw.
“Immelt was an accomplished presenter, his ability to navigate a deck of PowerPoint slides honed over the decades. This year was different. The confident, affable salesman ready with a smile and a joke wasn’t himself as he faced a skeptical audience inside the ballroom of the Longboat Key Resort in Sarasota, Fla.
“He was shaky, racing through the highlights of his slides. On the last one, he defended the company’s 2018 profit goal. Sort of. If the oil and gas markets didn’t improve, he said, the $2 target for 2018 would be a reach, and the company would have to cut even more costs. . . .
“When the grilling [from investors and analysts] was over, Immelt wasted no time getting out of Sarasota. . . . Immelt, his credibility wounded with Wall Street, limped through the rest of the week as frustrated investors called seeking clarity on the state of the company.”
6. Secret succession plan
Immelt was named CEO after a brutal candidate competition orchestrated by Welch.
“The process left Immelt with a sour taste. For years he was clear he wanted his own successor picked in a less public contest, and was true to his word.”
The board analyzed candidates in secret: Jeff Bornstein, the finance chief; Steve Bolze, the head of the power division; John Flannery, the leader of the health care unit; and Lorenzo Simonelli, boss of the oil-and-gas business. Simonelli was too young, Bolze had overseen the decline in the power business, and Bornstein had not run a business unit.
“The process was shrouded in secrecy up until the end. After Immelt informed the board of his intention to step down, a small staff worked out of human-resources chief Susan Peters’ apartment to write the press release and other materials for the announcements.”
Flannery got the nod, though he wasn’t told until the last minute. It was June 12, 2017, three weeks after Immelt’s appearance at the Sarasota conference.
7. Flannery vs. Immelt
The new CEO was different. “Bald and bespectacled, Flannery was nothing like Immelt. He was soft-spoken and analytical. More accountant than salesman, he lacked Immelt’s booming presence and charisma.
“Flannery was [big GE investor] Trian’s ideal successor, a balm for its frustrations with Immelt. He had an investor’s mind-set, crunched numbers naturally and was obsessed with the cash businesses produced.”
8. Flannery’s downfall
Flannery was far more deliberate and analytical than Immelt. “Flannery felt he needed time to better understand the disparate units despite his three decades working at GE. The whole process, invigorating at first after Immelt’s dislike of dissent, quickly became grating to the top executives.”
Then there was a seemingly never-ending string of bad news: Things at the power division were getting worse; several top executives left, including the finance chief, Bornstein; accounting reviews turned up a $15 billion hole in GE’s legacy long-term care insurance business; a restructuring plan that underwhelmed investors; GE’s stock removed from the Dow Jones average.
The final blow came in October 2018 when GE had to disclose a $20-billion-plus writedown, mostly tied to Alstom, which Immelt had bought for $10 billion. Flannery was gone after less than two years.
9. The bitter irony
Flannery was succeeded by Larry Culp, a former CEO of a much smaller conglomerate named Danaher Corp. When Culp joined the GE board, another director told Flannery that if he failed, Culp would take over. Flannery failed; Culp took over.
“To Flannery, Immelt, Welch and the others . . . Larry Culp’s ascension punctured a deep and abiding conviction: General Electric made the greatest managers in the world, who could run anything better than anyone else. When the company they loved needed them most, though, the heirs to Edison’s ingenuity had run out of ideas.
“In the cruelest of codas, the last CEO of America’s last great industrial conglomerate would be an outsider.”