How could one of the largest and most important companies in the world
collapse in just a few years? What could lead a diversified industrial
company with more than 100 years behind it to the brink of bankruptcy? What lessons
can we learn about business strategy from the decline of General Electric?
Well, let's get started.
For decades General Electric was the great symbol of The United States's
prolific and lucrative manufacturing industry. A giant that manufactured
and exported high value-added goods and services all over the world.
From aircraft engines and turbines for huge hydroelectric power plants to small household
appliances and light bulbs, its activities also extended to banking, media and railroads.
The historic company founded by Thomas Edison himself did practically
everything. It had a presence in 130 countries and more than 300,000 employees.
It was during the 80s and 90s when General Electric
experienced its greatest glory. Under the leadership of its popular CEO, Jack Welch,
it became the largest conglomerate in the world and also reaped its greatest financial successes.
We are talking about a company that since the end of World War II maintained
its position among the largest and most valuable companies in the world. In fact,
in 2001 and for several years during the 1990s, this Boston-based company occupied first
place in the global rankings. Exactly the same position that Apple occupies today.
General Electric had a market capitalization of some $600 billion dollars in August 2000.
Today, however, things are completely different. With the arrival of the new century,
this giant began a tortuous path that put it on the ropes.
From the approximately $600 billion dollars at which it was valued at its peak,
at the beginning of the century, today its market cap has fallen to a little above
$100 billion. We are talking about an 80% destruction of value over the last 20 years.
So the question is, how can we explain such a cataclysm? How could the largest
North American company collapse in such a way? Is it not a highly diversified group?
Well... Listen up.
(TROUBLED WATERS)
In the late 1990s, technology companies began to become the stars of the market.
At that time, to regain momentum, Jack Welch made
a decision that would ultimately be the beginning of the cataclysm:
Entry into the banking business.
According to the plans of the then reputed CEO of General Electric,
the financial business would allow them not only to further diversify their activities and obtain
juicy profits, but also to finance their own activities at very advantageous conditions.
So, no sooner was it said than done. In practice, they created their own bank,
General Electric Capital.
To achieve this, Welch transformed what had up until then been a division focused
on financing customers' purchases into a financial platform that did
everything from insurance, subprime mortgages and consumer loans.
Under Welch's successor, Jeff Immelt, during the first years of the 21st century,
this financial division positioned itself as one of the largest banks in the United States.
At that time, no one could have suspected the financial earthquake that would occur in 2008. In
fact, shortly before the crisis, General Electric Capital made one of its last major acquisitions:
WMC Mortgage, a subprime mortgage lender. A company that, as you can imagine,
suffered a lot from the bursting of the housing bubble and the
financial tsunami. It came close to taking the whole group down with it.
And so, in 2008 General Electric's share price collapsed and the hole
created by the financial division was so great that, if it had not been for the
rescue of the federal government and Warren Buffett, the group might not have survived.
That’s right, on 1 October 2008, Warren Buffett announced that he would cover $3 billion of an
urgent $12 billion increase that General Electric had to raise to try to get some liquidity.
Because in 2008 the group's net debt exceeded $500 billion. General Electric alone,
a century-old industrial company, had more debt than most governments in the world.
Years of cash-fueled growth and rampant banking had turned it into a huge mountain of debt.
Of course, that was not the end of the nightmare. It took General Electric
six long years to completely liquidate its troubled financial businesses.
In addition to the enormous debt incurred,
profitability problems began to emerge in many of its divisions due to a lack of strategic focus,
underinvestment in key projects and a lack of agility in adapting to market changes.
All this forced it to auction off many of its business areas to the highest bidder,
such as the media and plastics divisions, among many other sectors.
So look, for example, at how its pre-tax profit has evolved even
before including extraordinary costs and losses.
Finally, in 2017 Jeff Immelt was forced to step down. He passed the baton to John Flannery,
a 30-year veteran at the company but he could do little more than cut the
dividends and continue to auction off units, including two of the company's
historic divisions: the light bulb and railroad businesses.
However, at the beginning of 2018, after a disastrous year in which General Electric
posted losses of more than $6 billion due to the deterioration of its insurance division and
suspicions of accounting irregularities, there was another leadership change.
In October 2018, barely a year after being appointed to the position,
John Flannery passed the reins to Larry Culp.
The current CEO and the architect of a new strategy that represents
a new turning point in the world of corporate
strategies. This is an example of how things have changed in recent years.
From pursuing the creation of industrial giants,
Larry Culp's strategy is to divide the company according to its activities.
Something like, we’re better off alone, separately and focused on each one's own activity,
than together in a large conglomerate. It’s a move from integration to specialization.
And that, that is exactly what they are doing now.
Listen up.
(THE BIG TURNAROUND)
After taking the helm, Larry Culp implemented a crash plan:
He effectively abolished dividend payments, sold off large parts of the business in order to reduce
the enormous accumulated debt, introduced major operational changes, substantially reduced the
conglomerate's structure and sold off most of the financial arm still in the group's hands.
All with the aim of stabilizing the group and recovering cash
generation. But this was only the beginning.
After a long restructuring period and many lurches after being on the
verge of bankruptcy in 2008, General Electric has finally made a decision:
to separate the emblematic company founded by Edison into three different companies:
Specifically, according to the established plan, General Electric will spin off its
healthcare business in early 2023, and the energy business in 2024, with the
remaining company becoming GE Aviation, a company specializing in jet engines.
In this way, the group's three major areas of activity can be managed in completely
different ways. They are following a strategy of specialization as the key to competitiveness.
This marks the end of the decades-long history
that made this company the most iconic industrial giant in the United States.
In this decision, by the way, the pressure exerted by the activist fund,
Trian Fund Management, led by investor Nelson Peltz, played a major role.
Be that as it may, the point is that the decision made by the Boston team is
a sign of how important specialization is. Size is not synonymous with profitability,
especially when that size is made up of very diverse activities.
In such cases, bureaucracy and lack of specialization can come at a significant
cost to shareholders. General Electric's decision was not exceptional; on the contrary,
this move follows what we can already define as a trend in the world of corporate management.
Check it out.
(THE END OF THE BIG CONGLOMERATES)
General Electric's termination of its 130-year history as an
industrial conglomerate was very well publicized at the end of the year,
but it was far from being the only player to follow the "divide and conquer" motto.
In recent times, many companies are betting on splitting each activity
into a different company as a way to be more efficient.
And so in 2021 there was a new push in the so-called Spin-off
operations or segregation of lines of activity. In total,
42 operations were announced with a combined value of about $200 billion dollars.
For example, just three days before General Electric's announcement, another US giant
did the same: Johnson & Johnson announced its intention to split into two separate companies:
one focused on consumer goods and the other on drugs and healthcare equipment.
Shortly before this announcement, IBM carried out its own split by listing
Kyndryl, its technology infrastructure services unit, on the stock exchange.
For its part, United Technologies separated Otis and Carrier from its core business,
and another GE competitor, in this case Germany's Siemens, also spun off its healthcare and energy
units, among others. These are just a few examples of an increasingly long list.
You see, it is often thought that a company always gains economies of scale as it grows,
but this is not necessarily the case. As a company gains in size – especially if
it engages in many different activities – it also generates its own bureaucracy,
with all that this entails in terms of cost and efficiency.
And not only that. It is also often the case that by bringing together very different activities,
strategic focus is lost and decision-making is diluted,
so that in the end no one ends up taking responsibility.
It doesn't always happen,
but these reasons are basically what is driving this increasing specialization.
Be that as it may, this is the story of how General Electric, for decades the most iconic
company in the United States, floundered until it was no more than a shadow of its former self.
In this case, it was the excessive gamble on the financial business that pushed it over the cliff.
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