Lights Out

1. GE's Transformation: From Industrial Giant to Financial Powerhouse

"For decades, it was a winning lottery ticket for its hundreds of thousands of employees and a safe bet for shareholders."

Industrial roots to financial focus. General Electric, founded in 1892, evolved from an industrial manufacturing company to a complex conglomerate with a significant focus on financial services. This transformation was driven by the company's desire for consistent earnings growth and higher profits.

GE Capital's rise. The financial arm, GE Capital, grew to become one of the largest non-bank financial institutions in the world. It provided GE with a reliable source of earnings that could be used to smooth out the cyclical nature of its industrial businesses.

Consequences of transformation:

• Increased complexity and risk in GE's business model
• Reduced transparency for investors
• Vulnerability to financial market disruptions

2. The Rise and Fall of Jack Welch's Leadership Legacy

"Jack Welch was a bona-fide celebrity. He was treated like a star at shareholder meetings, where he would be asked to autograph the company's annual reports for adoring investors."

Welch's impact. Jack Welch, CEO from 1981 to 2001, transformed GE into a highly profitable and admired company. His leadership style emphasized:

• Aggressive cost-cutting ("Neutron Jack")
• Rank-and-yank performance evaluations
• Expansion into financial services

Legendary status. Welch's success made him an icon of American business, with his management style widely emulated and his books becoming bestsellers.

Legacy questioned. After his retirement, Welch's methods came under scrutiny:

• Overreliance on GE Capital for earnings management
• Short-term focus at the expense of long-term sustainability
• Creation of a corporate culture resistant to bad news

3. Jeff Immelt's Struggle to Maintain GE's Dominance

"Immelt needed to find pockets of economic growth to solve the first problem. He would have to find new markets for GE's heavy machinery and fund the development of new engines, turbines, and healthcare equipment so that sales would get the company moving again in the United States."

Challenging inheritance. Jeff Immelt became CEO in 2001, inheriting a company at its peak but facing immediate challenges:

• 9/11 terrorist attacks and subsequent economic downturn
• Increased scrutiny of GE's accounting practices
• Pressure to maintain Welch's streak of consistent earnings growth

Strategic shifts:

• Emphasis on organic growth
• Focus on industrial businesses and technology
• Expansion into emerging markets

Persistent problems:

• Inability to significantly raise stock price
• Overpriced acquisitions (e.g., Alstom)
• Continued reliance on GE Capital for earnings management

4. GE Capital: The Hidden Engine of Growth and Risk

"GE Capital had been a source of anxiety and worry for Jeff Immelt since his earliest days at the top of the company. He liked the people and loved the results they produced. He also enjoyed having the accompanying seat at the table with Wall Street power players. But in the end, Capital was always a problem."

Double-edged sword. GE Capital provided consistent earnings and financial flexibility but also introduced significant risks:

• Complex financial instruments and off-balance-sheet entities
• Reliance on short-term commercial paper funding
• Exposure to financial market volatility

2008 financial crisis impact:

• Near-collapse of GE due to GE Capital's vulnerabilities
• Government intervention required to stabilize the company
• Loss of GE's AAA credit rating

Post-crisis changes:

• Increased regulatory oversight
• Gradual reduction of GE Capital's size and scope
• Ultimate decision to divest most of GE Capital under Immelt

5. The Alstom Acquisition: A Pivotal Mistake in GE's History

"Adam Smith was listening to the logic of the deal collapse. Alstom had been worth examining because it was financially imperiled; the value of pursuing it in the first place had been to capture its assets at a bargain, strip what GE wanted, and then sell the rest, like an old car, for the parts."

Strategic rationale. GE's $13.5 billion acquisition of Alstom's power business in 2015 was intended to:

• Strengthen GE's position in the global power market
• Provide cost synergies and increased market share
• Offset declining demand in GE's core power business

Deal execution flaws:

• Overpayment for Alstom's assets
• Underestimation of regulatory hurdles and required concessions
• Misreading of the power market's future trajectory

Long-term consequences:

• Significant write-downs and impairments
• Strain on GE's cash flow and balance sheet
• Contributed to the eventual downfall of Immelt and GE's stock price

6. Digital Ambitions: GE's Attempt to Reinvent Itself

"Jeff Immelt had seen the future of industrial companies: it was in software and hard-core computing."

Digital transformation vision. Immelt sought to position GE as a "digital industrial" company:

• Development of Predix, a cloud-based operating system for industrial equipment
• Creation of GE Digital, a new software-focused division
• Goal of becoming a top 10 software company by 2020

Implementation challenges:

• Difficulty in developing and selling a viable software platform
• Cultural clash between traditional industrial and software development approaches
• High costs with limited returns on investment

Market skepticism:

• Investors questioned GE's ability to compete with established tech companies
• Concerns about the financial drain of digital initiatives on core businesses
• Eventual scaling back of digital ambitions under subsequent leadership

7. John Flannery's Brief Tenure: Uncovering GE's Deep-Rooted Issues

"Flannery painted a dire picture. It would take years to fix some of the company's businesses, with most of the work needed in Power, and he was going to cut the dividend in half, saving $4.2 billion a year."

Honest assessment. John Flannery, appointed CEO in 2017, quickly realized the extent of GE's problems:

• Overvalued acquisitions and underperforming businesses
• Unsustainable dividend payments
• Cash flow shortfalls and accounting irregularities

Drastic measures:

• Dividend cut by 50%
• Plans to divest multiple business units
• Comprehensive review of all GE operations

Short-lived leadership:

• Flannery's candor about GE's challenges shocked investors
• Stock price continued to decline
• Board lost confidence, leading to Flannery's ouster after just 14 months

8. The Long-Term Care Insurance Debacle: A $15 Billion Surprise

"GE needed $15 billion in cash to cover its liability."

Hidden risk. Despite claims of exiting the insurance business, GE retained a significant liability in long-term care policies:

• Underestimated future costs of policyholder care
• Inadequate reserves for potential claims

Devastating impact:

• $15 billion charge announced in 2018
• Further erosion of investor confidence
• Strain on GE's already precarious cash position

Regulatory and legal consequences:

• SEC investigation into GE's accounting practices
• Shareholder lawsuits alleging fraud and misrepresentation
• Increased scrutiny of GE's financial disclosures and risk management

9. GE's Board: From Rubber Stamp to Active Oversight

"Directors had often been chosen to join the GE board without a comprehensive search, or confirmation that they understood how the board worked."

Historical weaknesses. GE's board of directors was long criticized for:

• Lack of independence from management
• Insufficient diversity of expertise and background
• Inadequate oversight of risk and strategic decisions

Turning point. The company's struggles led to increased pressure for board reform:

• Reduction in board size from 18 to 12 members
• Addition of new directors with relevant expertise
• Separation of CEO and Chairman roles

Activist influence. Trian Fund Management's involvement pushed for further changes:

• More rigorous questioning of management decisions
• Greater focus on operational efficiency and capital allocation
• Pressure to consider more radical restructuring options

Last updated: January 24, 2025