What Lead to the Fall of General Electric?

Consider the thorough and well researched video on the fall of General Electric (GE) by “The Market is Open” (video link at the bottom of the article). GE stayed on the Dow Jones from the early 1900’s until 2018. GE had a tremendous growth journey until 2000, but then it demise began. Below is the key points on how this happened.

Key Points

• Thomas Edison founded General Electric (GE) in 1889.
  
  
• The Dow Jones is an exchange that is supposed to represent the 30 most important companies in the US.
  
  
• In 1981 Jack Welch took over as CEO of GE. He increased GE’s market cap from 12bn USD (in 1981) to 456bn USD (2000 end). The GE stock increased an astounding 8000% from 1981 to 2000. Welch was able to grow earnings by double digits throughout the mid 1990s. Welch was even named manager of the century in year 2000.
  
  
• Jeffrey Immelt (former President and CEO of GE Medical Systems) was selected, in Nov 2000, to take over the role and CEO of GE after Welch.
  
  
• Welch tried to setup an acquisition of Honeywell in 2001 (45bn USD), which would be the largest to in the history of the Group. The acquisition was not approved by the EU Commission (competitors had lobbied towards this decision) and the deal eventually failed. This inability to meet market expectations led to a significant drop in GE stock price.
  
  
• Standard & Poor’s (S&P) 500 is supposed to represent the 500 most influential companies in the US.
  
  
• Immelt had his 2nd day as CEO on September 11th 2001. Following the tragic event that day, GE’s stock fell 11%.
  
  
• In Oct 2001 Enron crashed and in 2002 the Tyco fraud was revealed (Tyco said it modeled itself as a mini GE). The ripple effects of these scandals hit GE stock price hard. Investors started to get skeptical as GE had very little organic growth, and most of the growth was based on acquisitions.
  
  
• GE removed its insurance business from around 2005, simplified itself by restructuring its business down to 6 units. However, its most risky insurance policies remained, only to resurface and bite them later on in 2017-2018.
  
  
• In 2006 GE sells its plastics division at a low price to Saubic as plastics is a cyclical business and is now heading for a low, and buys oil business at a high price as it seems to be on the rise.
  
  
• 2007 is great year for GE, although the fall is steep in the wake of the financial crisis in 2008.
  
  
• GE’s bank relied on debt and not deposit (as pointed out by Bill Gross in 2005). Warren Buffet provided much needed capital to GE, but with incredibly favorable terms for himself. In March 2009 GE lost its AAA rating. GE admits to a minor accounting fraud, and during 2009-2010 the GE aura is gone.
  
  
• Mistake #1: In May 2011 GE sells NBC at its low (stock 13$) to Comcast. After this NBC business took off and today accounts for 28% of Comcast revenue. GE gave up the NBC cash cow far too easily, just to please analysts by focusing on the industrial segments. The estimated value of NBC today (2019) would be almost as much as the entire GE Group’s value today (2019).
  
  
• Mistake #2: The 2012 pivot towards oil through e.g. the acquisition of Lufkin in April 2013. After this, revenue shrunk year-on-year, and took a massive hit from 2014 and onwards due to the global oil downturn. GE decided to double down on their oil bet through a partnership with Baker Hughes at 7,4 bn USD, through its Oil & Gas division. This partnership left GE with the option of exiting the deal by carving out BHGE as a separate company. Due to below expectation revenue results and culture crash between the companies, GE sold its position with a huge loss.
  
  
• Mistake #3: GE sold the profitable GE Capital business through an equity carve-out of Synchrony Financial (was the world’s largest provider of private label credit cards), which meant losing a large income provider.
  
  
• Mistake #4: GE bought the French power company Alstom in 2015. This further strengthened GE’s position into fossil fuels, which was a market heading in the wrong direction.
  
  
• Investors did not realize GE’s drastic downturn until 2017, and in June 2017 Immelt announced that he was stepping down as CEO. John Flannery became the new CEO, but was fired only 13 months later, and replaced by H. Lawrence Culp Jr. Culp then cut the dividend to 1 cent. GE had fallen to a historical low.