Peculiar_Investor wrote: ↑
Thu Feb 01, 2018 11:20 am
An interesting read for those following GE, How GE Went From American Icon to Astonishing Mess - Bloomberg
Bloomberg article wrote:For most of its 126-year history, GE has exemplified the fecundity and might of corporate capitalism. It manufactured consumer products and industrial machinery, powered commercial airliners and nuclear submarines, produced radar altimeters and romantic comedies. It won Nobel Prizes and helped win world wars. And it did it all lucratively, rewarding investors through recessions, technological disruption, and the late 20th century collapse of American manufacturing.
That long, proud run may have come to an end. It happened, as Ernest Hemingway wrote of going bankrupt, “gradually and then suddenly.” GE hasn’t inspired awe for some time now: The company had to be bailed out in 2008 by the federal government and Warren Buffett, and across the 16-year tenure of recently departed Chief Executive Officer Jeffrey Immelt its stock was the worst performer in the Dow Jones industrial average.
The past year, however, has seen GE enter new territory. Since Donald Trump’s election in November 2016, during a stock market boom in which the Dow is up 41 percent, GE has lost 46 percent of its value, or $120 billion.
Large conglomerates tend to be huge black boxes and I for one cannot fathom how someone can properly run and operate such a vast enterprise. The timing of GE's problems is quite interesting.
Bloomberg article wrote:What’s additionally baffling about GE’s difficulties is that there’s no surrounding global financial crisis, no chorus of sober-minded people fearing for the future of capitalism itself. Rather, the company is flailing while the world’s major economies are all robustly growing. It’s the exact sort of moment when GE’s global scale should be an advantage. “It’s like their sails are all torn when they’ve got the perfect wind,” Heymann says.
As I said, a worthwhile and interesting read.
I think the rot is quite old. Jack Welch old in fact. The problems GE is facing, such as pension fund deficits, are common to all older US industrial companies (and in some other countries, to).
"Neutron Jack" with his "fire the bottom 10% on the curve" undoubtedly shook up a sleepy conglomerate (consider the fate of Westinghouse). And his mantra of "number 1, 2, 3 (in a market) or out" was undoubtedly the right way to go for such a sprawling, diversified company. Conglomerates are not all evil -- consider Berkshire Hathaway and Warren Buffett.
Under Welch, GE’s net income swelled from $1.65 billion in 1981 to $12.7 billion in 2000, even as its workforce shrank from 404,000 to 313,000. But over time, less and less of that income came from technological innovations or manufacturing prowess or even the productivity gains Welch had wrung out early in his tenure. Instead it came from GE’s financial-services arm. From its humble beginnings financing family purchases of refrigerators and dishwashers during the Great Depression, GE Capital had ballooned into a behemoth whose global stable of investments ran from insurance to aircraft leasing to mortgages, giving GE a share of the action during a period when the financial sector was the fastest-growing part of a fast-growing U.S. economy.
However there was this obsession with double digit pa EPS growth. And managers of subsidiary units would know that they would get fired if they did not make their targets.
GE became addicted to:
1. doing acquisitions, often at quite high prices, to maintain growth in sales, profits and EPS. Acquisition accounting then muddies the numbers, not only to external investors, but also it appears to senior management
2. using the financial services arm to keep earnings momentum going. I've talked to GE managers who, having left, more or less admitted that they were doing that, because the alternative for someone (sometimes in a non-financial business that uses a lot of finance) was to get punished or even fired
Immelt inherited this, and the failed merger with Honeywell (prohibited by EU competition authorities). He struggled for 16 years to refocus the business. Acquisitions were also made at what now appears to be quite high prices.
What turned out post 2006 was that the Financial Services arm was not as profitable as it had appeared, and became a major consumer of capital with new regulations. Getting out of that has been a very painful experience -- and one that keeps on giving.
Meanwhile whilst the conglomerate has been much paired down - e.g. exiting appliances and plastics- -it is still a very big business that senior management is struggling to control.
The latest hit is legacy, but it's a painful legacy, and the company does not appear to be able to bottom that liability.
Berkshire Hathaway is also quite opaque about the performance of individual businesses and has a huge insurance business with long tail liabilities. Without accusing Buffett and Munger of any malfeasance, future managers may struggle to generate the performance that B & M have.
And unlike a factory, GE Capital’s highly liquid assets could be bought or sold at the ends of quarters to ensure the smoothly rising earnings that investors loved. The term accountants use for earnings from these sorts of one-off asset sales is “low-quality,” but through the historic bull market during which Welch had the good fortune to run the company, investors tended not to get hung up on questions of quality. GE’s market capitalization grew from $14 billion in 1981 to more than $400 billion when Welch retired in 2001.
The risks became clear only under Immelt, who took over the company in the wake of the dot-com bubble and right before the attacks of Sept. 11 (a particularly acute shock to a company that did billions of dollars in business with airlines). As the years went on and GE’s stock price fell to a third of its Welch-era peak, Immelt came under pressure from Wall Street to do something. He embarked on a series of splashy acquisitions, for example paying $5.5 billion for the entertainment assets of Vivendi Universal and $9.5 billion for the British medical imaging company Amersham. There were bargains such as Enron Corp.’s wind-turbine business, picked up in a bankruptcy auction, but for the most part the deals proved more expensive and less synergistic than promised.