Is General Electric the Next Icon to Fall?
The 21st Century continues to be unkind to the great 20th Century corporate icons such as Sears, Kodak and AT&T (a brand in name only). Now, the great General Electric Company (GE) has taken an abrupt turn to the South.
General Electric’s history is legendary—a cultural, as well as corporate icon. Its original company was founded by none other than Thomas Edison, and introduced the first light bulbs and vacuum tubes. It has been one of the world’s largest and most profitable companies for over a century.
In its more recent years, GE’s success has stemmed from its ability to buy, run and sell profitable companies. Its success formula partially stems from its famous product portfolio analysis matrix, called the GE Matrix or the GE McKinsey matrix. This analysis tool measures strategic business units (SBUs) based on two dimensions: Business Unit Strength on one axis and Market Attractiveness. This axis is a refinement of the simpler Boston Consulting Group matrix that classifies SBU’s into Stars, Cash Cows, Question Marks and Dogs,
GE’s model worked swimmingly through the 20th Century and into the 21st Century thanks in a major way to the leadership and corporate insight of the legendary Jack Welch. Under Welsh, net income exploded from $1.65 billion in 1981 to $12.7 billion in 2000.
Welch’s successor was Jeffrey Robert (Jeff) Immelt. However, Jeff couldn’t maintain the momentum. It has especially become pronounced during the last year. Since Donald Trump’s election in November 2016, the stock market, as measured by the Dow Jones Industrial Average, was up 41%. However GE lost 46% of its value—$120 billion in market capitalization.
Soon after Immelt’s departure, GE announced earnings half of what analyst’s had forecast. More daunting news followed including cash shortages and a $6.2 billion write-off related to its financial services business.
What went wrong and can it be fixed?
Basically, what went wrong consists of a series of bad decisions by GE’s Immelt administration. Under Welsh, income came more from financial services and less from technology. GE Capital ballooned to a global force in financing, mortgages, leasing and insurance and enjoyed enormous borrowing power. According to Bloomberg, the terrorist 9/11 attacks took a toll on GE because of its airline business, and its stock price dropped.
Bloomberg further reported that Wall Street started putting pressure on Immelt that led to a series of “splashy acquisitions.” Some of these acquisitions were somewhat contrary to that famous portfolio matrix.
Here are some of those splashy acquisitions: $5.5 billion for the entertainment assets of Vivendi—$9.5 billion for Amersham, a British medical imaging company. Immelt promised to return GE to its industrial roots with cuts to research and development, according to Bloomberg.
Covering up for some of these disappointing acquisitions was GE Capital continued growth, and GE got into some areas where it lacked expertise such as credit cards, subprime lending and real estate. This started coming apart with the 2008 financial crisis. A major downsizing of GE Capital and the lack of performance by Immelt’s decisions formed a double-edged sword that sliced GE apart.
Immelt departed GE as CEO in June 2017, and the announcement of incoming CEO John Flannery led to a 4% increase in stock price. The stock closed at $28.94 on June 12, the day that Flannery took over. It is currently selling for $7.15.
Can GE come back?
According to Luke Longo writing for InvestorPlace: “Over the next several years, GE stock will bounce back from these low prices and re-emerge as a global industrial leader with a stable price above $20.”