The Rise and Fall of General Electric (GE)

On June 26, 2018, General Electric's (GE) more than 100-year run on the Dow Jones Industrial Average (DJIA) came to an end: the last remaining original component of the index was gone.

The index publisher was merely confirming GE's diminished state: by the time it was kicked out of the Dow, GE's slumping share price had left it with an weighting of just 0.36% in the blue-chip average. And while many stocks recently removed from the Dow have rallied over the next year GE shares continued to slump in 2018 and more recently, prompting a 1-for-8 reverse share split in 2021. Later that year GE announced plans to split itself into three independent companies, yet the stock soon resumed its decline. By May 4, 2022, the stock was down 65% from six years earlier.

How did this happen to one of America's leading corporations for more than a century, with the bluest of blue-chip stocks? Below, we take a closer look at the rise and fall of a company that has come to define American industry and corporate culture. 

Key Takeaways

  • Jack Welch transformed GE into a diversified conglomerate and stock-market winner, while instilling a focus on short-term performance and financial engineering.
  • GE's decline accelerated during the Great Recession, as the financial crisis revealed it to be overstretched.
  • In 2018, GE—the last original component of the DJIA—was dropped from the index, after years of poor performance and declining revenues.
  • In 2021, the conglomerate announced plans to split into three independent companies specializing in aircraft engines, medical equipment, and power turbines.

1892: GE and the Birth of American Innovation

When most Americans think “GE,” they probably think about light bulbs, televisions, and washing machines. GE was born out of the race to provide affordable light and electricity to fuel the growth of industrial America and quickly became a household name. It was incorporated in 1892 as a result of a merger between the Thomson-Houston Company and Thomas Edison's Edison General Electric Company.

GE’s earliest products were incandescent light bulbs, an electric locomotive, early x-ray machines, and an electric stove. The company began mass-producing electric home appliances in the 1920s and was soon credited for changing the look and function of the American home.

In the years that followed, GE introduced the vacuum tube technology, which enabled the subsequent development of radar tracking systems. GE supplied the military with equipment and executives during World War II, and in 1949 launched the popular J-47 jet engine.

In the 1960s and 70s, GE was a pioneer in laser technology and medical imaging. 

Date Source: Yahoo! Finance

1981: 'Neutron Jack' Welch Takes Over

Under the leadership of former chemical engineer John F. 'Jack' Welch Jr. over two decades starting in 1981, GE acquired RCA and NBC and expanded into the financial services sector. Welch initially moved aggressively to streamline GE, divesting 117 business units and slashing more than a quarter of the company's jobs during his first four years as chief executive. The job cuts earned him the Neutron Jack nickname suggesting that, like a neutron bomb, he eliminated GE's people while sparing its physical assets.

Welch pioneered the practice of annually firing the 10% of the employees with the lowest ratings on internal reviews, which has since been adopted by other companies including Amazon.com (AMZN). His use of aggressive financial targets to evaluate executive performance led to a focus on short-term results across GE managerial ranks. The company became widely known for "managing" its reported earnings: manipulating the accounting to consistently top Wall Street's consensus earnings estimates by $0,01 per share quarter after quarter in its heyday.

While the share price continued to soar Welch was celebrated in the business press and his managerial strategies and teachings widely copied. At his death in 2020, General Electric noted that the company's market capitalization increased from around $14 billion to more than $410 billion during Welch's tenure.

That market capitalization, however, proved to be predicated on overly optimistic assessments of about the sustainability of GE's earnings and the value of GE's financial assets. Jeffrey R. Immelt, the successor Welch chose, continued the aggressive shuffling of businesses Welch popularized, but never managed to arrest the stock's descent.

In 2004, GE settled a U.S. Securities and Exchange Commission (SEC) probe that concluded the company failed to properly disclose Welch's retirement benefits valued at $2.5 million annually, including the free use of a corporate jet and a multi-million dollar New York City residence. In 2009, GE paid a $50 million penalty to settle a wide-ranging SEC accounting probe that alleged the company "used improper accounting methods to increase its reported earnings or revenues and avoid reporting negative financial results." The SEC cited four such instances in 2002-2003. In 2020 GE paid $200 million to settle SEC allegations it misled investors about the underlying profitability of its long-term health care and power units in 2016-2017.

2008: GE in Crisis

The 2008 financial crisis hit GE hard. The company’s stock fell 42% during the year, and after Welch’s departure, it became clear that GE was overstretched and bloated. Losses by the GE Capital financial segment nearly sank the company during the Great Recession. Warren Buffett stepped with a preferred investment lending his reputation to GE’s operations, at a price. But GE’s troubles didn’t end with the financial crisis. Its $9.5 billion purchase of French transportation company Alstom’s power business in 2015 was widely considered a flop.

$3 billion

The sum Warren Buffett invested to stabilize GE’s operations in 2008.

Under Immelt, previously head of GE Medical Systems, the company was forced to strip down GE Capital and return to its roots in manufacturing. GE also divested billions of dollars in loans and real estate while jettisoning NBCUniversal, GE Plastics, GE Water, and GE Appliances.

In 2009, the company slashed its yearly dividend from $1.24 to $0.82 per share. Dividends fell even further in 2010. Immelt served as CEO of General Electric for 16 years and stepped down earlier than expected in 2017. He later accepted the position of chair at Athenahealth.

2017-2019: GE Tries to Weather the Storm

The General Electric Company commemorated its 125th anniversary in 2017. But there was little to celebrate. In January 2017 the company announced it would cut 12,000 jobs, and the stock fell 45% in the course of the year. In November 2017, GE unveiled a broad restructuring and halved its quarterly dividend from 24 cents to 12 cents a share. In December 2018, the company cut the dividend to 1 cent per share.

In November and December 2017, GE laid off thousands of employees across all divisions. On Oct. 1, 2018, GE said H. Lawrence Culp would replace John Flannery as chair and CEO of the company effective immediately.

Culp moved aggressively to reduce GE's debt and divest unwanted stakes and subsidiaries, including GE's stake in oil field services company Baker Hughes and the transportation unit, which merged with Wabtec. Both divestitures raised significant capital. The share price rose 53% in 2019.

2020: COVID-19 Impact

The arrival of the COVID-19 pandemic cut short the rebound in the share price. On May 15, 2020, the stock fell to $43.92, a 28-year low.

GE's aviation unit was especially hard hit by the pandemic. The business segment makes airplane engines for Boeing (BA) and Airbus, and had been GE's most profitable unit. The aircraft engines business generated $32.9 billion in revenue in 2019, more than 34% of GE's total. Amid pandemic travel curbs, demand for aircraft engines and related maintenance plummeted. GE's aviation unit began laying off 10% of its U.S. workforce in March 2020.

Revenue by Segment
 https://www.statista.com/statistics/245430/revenue-of-general-electric-by-segment/

2021: Plans to Split

GE shares rose 9.3% in 2021 amid a tentative global recovery. In March, GE announced a deal merging its GE Capital Aviation Services (GECAS) aircraft leasing unit with AerCap Holdings (AER). The transaction was completed in November, netting GE about $23 billion in cash proceeds in addition to a 46% stake in the combined business.

GE also announced in September 2021 and completed in December a $1.45 billion acquisition of ultrasound technology developer BK Medical by GE's health care unit.

In November 2021, GE unveiled a plan to split into three independent public companies. One will comprise the company's aviation business, one the medical equipment unit and the third the power turbines business. The health care spinoff is planned for early 2023. In early 2024, the businesses that manufacture turbines for power plants and for wind farms will separate. GE will then focus on its remaining aviation business.

On April 26, 2022, GE's share price fell more than 10% to a 17-month low after the company warned fiscal 2022 annual earnings were "trending toward the low end" of the range GE set three months earlier as a result of "inflation and other evolving pressures."

The Bottom Line

Despite GE’s well-publicized decline it remains a force in its three main business sectors, employing 175,000 worldwide and operating in 130 countries. But its size hasn't worked in GE's favor in a long time. Perhaps breaking up will help, though GE investors should know by now restructuring is no panacea.

Article Sources

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