AN EMPIRE DIVIDED

Weekly Business Insights from Top Ten Business Magazines

Extractive summaries and key takeaways from the articles curated from TOP TEN BUSINESS MAGAZINES to promote informed business decision-making | Since September 2017 | Week 341 | March 22-28, 2024

Strategy & Business Model Section | 2

AN EMPIRE DIVIDED

The inside story of how GE CEO Larry Culp dismantled a 131-year-old American giant.

By Brooke Sutherland and Ryan Beene | Bloomberg Businessweek | March 20, 2024 

Extractive Summary of the Article | Listen

When Culp became CEO in 2018, GE was far too big and complicated for its own good, and the company’s businesses weren’t bringing in enough money to support its sky-high debts. “We were at risk of not making payroll, in a manner of speaking,” he says. He managed to pay down more than $100 billion of the debt through a series of well-timed divestitures. None of those efforts would’ve been as successful, and perhaps wouldn’t have even been possible, if Culp hadn’t tightened up GE’s operations and turned key businesses into stable, cash-generating entities that could stand on their own.

Today, GE’s stock is near a seven-year high. GE HealthCare Technologies Inc., which split off in 2023, is up about 50% from its debut. The final piece is the electric-grid, gas-power and wind-turbine business, which will become its own standalone company called GE Vernova on April 2.

In one sense, Culp is restoring GE to its original identity as a maker of stuff. But he’s also the guy dismantling a monument to American capitalism.  To be CEO of GE is to be compared with the late Jack Welch. For most of his two-decade reign, Welch made the company bigger, more valuable and more profitable. But the sun began to set on the age of the conglomerate by the time he retired in 2001, and soon other industrial giants were breaking up. Post-Welch CEOs at GE found themselves trying to explain why it made sense to be big for the sake of being big. Jeff Immelt, Welch’s handpicked successor, talked up the benefits of the “GE Store,” a shared repository of technological tools that the whole company could pull off the shelf. In reality, there was no good reason why one company needed to sell MRI machines, jet engines and wind turbines. Even worse, GE’s voluminous sprawl left too many places for problems to hide.

One of the biggest problems was GE Capital, which helped fuel stock growth during the Welch years but proved to be a time bomb. GE had loaded up on debt to support its ventures in corporate lending, real estate, credit cards, mortgages and insurance. When the economic crisis arrived in 2008, GE Capital had more than $500 billion in assets and almost as much debt, which made it the largest financial company in the US that wasn’t technically a bank. As customers worldwide defaulted on loan payments and investors lost their appetite for risk, GE turned to Warren Buffett and the federal government for financial support.

By early 2021, Culp’s turnaround of GE was starting to take hold, but the company was still sitting on too much debt. A solution arrived that March, when AerCap Holdings NV agreed to acquire GE’s aircraft leasing unit. The deal would allow GE to pay off $30 billion it had borrowed, reducing its debt to the point where the company could realistically think about establishing three separate businesses—in aerospace, health care and energy—that investors would actually want to own.

Culp started mapping out a breakup plan and gave it a code name: Project Revere, inspired by a monument to American patriot Paul Revere near Culp’s home in Boston. He liked the history motif. As GE’s board deliberated a split-up, a defining moment came in a PowerPoint presentation. A slide illustrated the degree to which investors were avoiding the stock simply because it was a conglomerate. “When you just looked at the companies that folks who really wanted to bet on the energy transition or on commercial aerospace were invested in, it was not with us,” Culp says.

A breakup was never the only option, but it was the best one. Although modern conglomerates do exist (Alphabet, Amazon, Microsoft), GE’s ye olde smokestack model wasn’t working anymore. Investors were getting burned by its bigness more often than they were getting rewarded. The conglomerate structure is especially limiting when it comes to spending money, says David Giroux, a portfolio manager and chief investment officer of T. Rowe Price Investment Management. Massive companies tend to make the wrong acquisitions and overpay for them.  When there are three GEs, Culp hopes the old name still means something to investors. 

3 key takeaways from the article

1. When Culp became CEO in 2018, GE was far too big and complicated for its own good, and the company’s businesses weren’t bringing in enough money to support its sky-high debts.
2. Culp started mapping out a breakup plan and gave it a code name: Project Revere. Investors were avoiding the stock simply because it was a conglomerate. “When you just looked at the companies that folks who really wanted to bet on the energy transition or on commercial aerospace were invested in, it was not with us,” Culp says.
3. A breakup was never the only option, but it was the best one. Although modern conglomerates do exist, GE’s ye olde smokestack model wasn’t working anymore. Investors were getting burned by its bigness more often than they were getting rewarded. The conglomerate structure is especially limiting when it comes to spending money. Massive companies tend to make the wrong acquisitions and overpay for them.  When there are three GEs, Culp hopes the old name still means something to investors. 

Full Article

(Copyright lies with the publisher)

Topics:  GE, Industry, Manufacturing, USA, Productivity, Efficiency, Quality Controls, Six Sigma