Like Larry Culp announced his plan to split GE Tuesday into three, he concluded a defining chapter in U.S. corporate history, indicating how far from the favor the conglomerate business model has fallen.
With Japan’s most famous industrial group Toshiba also considering divorce under pressure from activist investors and IBM coming out of its service business, everyone is following a path taken by the likes of United Technologies, DowDuPont, ABB and Siemens: distancing themselves further from the time four or five decades ago when conglomerates defined corporate best practice.
“I will leave the look back, the look back, honestly to the academics and the historians. “I have spent my entire career with these models and there are different answers for different businesses at different times,” Culp told the Financial Times.
While one former CEO talked of “the end of the GE we knew”, Culp, who has been CEO since 2018, said the company simply concluded that the healthcare, aviation and energy businesses could take care of themselves with “greater focus, custom capital allocation and strategic flexibility ”was the best way to set them up for the next 100 years.
“Basically, GE tells us that smaller is better and more efficient,” says Sara Moeller, a professor of finance at Pittsburgh University.
The rise of private equity has made it more difficult for industrial companies to compete for the transactions on which conglomerates depended, she added. Now they had to “focus and stay inside [their] job, while becoming more efficient ”.
For years in the late 1990s and early 2000s, GE was the most valuable company in the United States, with a market capitalization peaking in 2000 at nearly $ 600 billion. Jack Welch, its chairman and CEO for 20 years until 2001, has personalized his reputation for being able to run any business.
“There was almost an Elon Musk hype that drove the stock,” recalls Jeffrey Sonnenfeld, a professor at Yale School of Management.
However, its share price history does not capture the extent of its cultural impact. Generations of Americans bought GE light bulbs and GE refrigerators, Ronald Reagan advertised his products before he became president, and Kurt Vonnegut was a GE publicist before he wrote. Butchery-Five.
But the exposition that Culp revealed, which reversed decades of acquisitions, also had its roots in history. Described by Deane Dray of RBC Capital Markets as the longest-awaited dissolution in the industrial sector, it is the latest and greatest step in a painful process of cleaning up and simplifying GE that began after the financial crisis left a near-fatal flaw in its model .
Welch transformed GE Capital, a division that was originally focused on helping clients finance purchases of its aircraft engines and power turbines, into a financial services powerhouse involved in everything from subprime mortgages to insurance. He himself called it “the blob”.
The financial crisis of 2007-2009 revealed how much the GE Capital group was dependent on and how few investors understood the risks involved.
GE Capital was “a cake tin” in which executives could dive to smooth out unequal results from other operating companies, Sonnenfeld said. “Many of them did not do well, but GE Capital offered protection.”
Questions about the quality of GE’s accounting also emerged after the crisis. It later agreed to pay $ 50 million to pay civil accounting fraud charges filed by U.S. regulators.
“GE has bent the accounting rules beyond the breaking point,” said Robert Khuzami, director of the Securities and Exchange Commission’s enforcement department, at the time.
In its 2009 settlement, GE did not acknowledge or deny allegations that it used improper accounting methods to flatter its results. It did not admit or deny separate SEC charges that it misled investors, which it settled for $ 200 million in December.
The process of bringing GE Capital’s risks under control began under Welch’s successor Jeff Immelt, who started a series of sales, including the sale of $ 30 billion of a specialty financing portfolio to Wells Fargo in 2015. By that time, he had also sold NBCUniversal to Comcast. ; in 2016, he also sold GE’s century-old equipment business to China’s Haier.
Immelt, who managed GE from just before the September 11 attacks from 2001 to 2017, sold most of GE Capital but continued with acquisitions. He fatally bought Alstom’s power company in 2015 just as the fossil fuel market was moving away.
It took two more CEOs to fully reckon with GE’s past. Shortly after Culp took over, he wrote down Alstom’s value by $ 23 billion, but he was not Immelt’s chosen successor.
It was John Flannery, a company veteran who started a plan to strip GE to its electricity and aviation departments. It lasted just over a year, before the falling share price forced the board to turn to Culp, the first outsider to run the business.
To explain the importance of GE’s exposition Tuesday, Culp did not focus on history, but burdens. He inherited $ 140 billion in gross debt and will have reduced it to below $ 65 billion by the end of this year, focusing on manufacturing efficiency, improving cash flow and selling more businesses, including aviation and life sciences. Since taking office, GE’s market capitalization has risen from $ 98 billion to $ 122 billion.
His plan will take until early 2024 to complete, after which he intends to stay with the aviation company, which will retain the GE name.
The three separate companies will shape the future of flight, promote precision healthcare and lead the energy transition, he said. But if they fail a remarkable revaluation, they will be dwarfed by today’s biggest innovators, such as Apple, Amazon and Tesla.
This has led to speculation that there may be one or more M&A targets. “The aviation business, in particular, could be better off in the hands of a buyout firm that could turn it around,” a dealmaker close to GE said.
GE’s division could also encourage other conglomerates such as 3M, Eaton and Emerson to simplify their portfolios, Dray said.
Frank Aquila, global head of M&A at law firm Sullivan & Cromwell, agreed. “GE has finally found the key to unlocking the remaining value for its shareholders,” he said. “Given the pressure from activist investors, we’re likely to see more side effects.”
As for Culp, an almost doubling of GE’s share since the depths of the pandemic has already unlocked incentives worth $ 129 million at Tuesday’s closing price. Culp lost an advisory shareholder will vote on his salary in May, but if GE’s share price rises 20 percent from Tuesday night’s level and stays there for 30 consecutive days, he could receive $ 233 million.
“Investors were certainly skeptical about this award,” said Brian Johnson, executive director of ISS Corporate Solutions, a corporate governance data provider. “Nevertheless, the share price has improved since the award was made.”
Asked how the split reflected on his record, Culp did not talk about endings. “Hopefully,” he said, “I’m still in the early days of my time at GE.”
Additional post by Patrick Temple-West
How GE has declined since the financial crisis
Nov: United Technologies acquires GE Fire and Security divisions for $ 1.82 billion
December: GE votes to sell $ 13.75 billion of 51% stake in NBCUniversal to Comcast
Aug: Joint venture lease company sells to HNA Group and Bravia Capital for $ 2.5 billion
Jul: Sells smaller units, including a business property lending division, to EverBank for $ 2.51 billion
March: 49 percent of NBCUniversal sold for $ 16.7 billion to Comcast
December: GE’s advanced sensor business sold to Amphenol for $ 318 million
Feb: GE Money Bank was sold to Sovcombank for $ 232 million
Sep: GE device business acquired by Electrolux for $ 3.3 billion
Aug: Healthcare Financing Unit Sells to Capital One for $ 8.5 Billion
Oct: GE Capital sells $ 30 billion worth of specialty financing portfolio to Wells Fargo
Nov: GE Finance and Insurance and GE Capital Finance Australia sell to a consortium of groups including Deutsche Bank; KKR and Value Partners for $ 6.2 Billion
April: GE Japan sells $ 4.7 billion to Sumitomo Mitsui Finance and Leasing Company
Jun: GE’s US home appliance unit sold to Qingdao Haier for $ 5.6 billion
GE Osmonics sold for $ 3.4 billion
May: Merged transport unit with Wabtec in $ 11.1 billion deal
Nov: Innio sells $ 3.25 billion to Advent International. Later, a portfolio of healthcare equipment leases and loans from GE Capital’s healthcare equipment financing unit was sold for $ 1.5 billion. It also sells a $ 4 billion stake in Baker Hughes
Dec: Sell 90 percent stake in ServiceMax to Silver Lake
Feb: GE Transport sells $ 9.7 billion to Westinghouse Air Brake Technologies
Mar: GE BioPharma sold to Danaher for $ 21.4 billion
Mar: GE Capital Aviation Services sold to AerCap for $ 30 billion
Nov: Larry Culp announces plan to split GE into three companies