New York
UJ Business
—
General Electric has engaged an external leader to rectify a situation decades in the making.
Larry Culp, at 55, is recognized for his leadership and hands-on management style. On his appointment as GE’s new CEO, Wall Street greeted him with enthusiasm, reflecting a 10% jump in GE’s beleaguered stock price.
Having become CEO of Danaher at the age of 37, Culp now faces the enormous challenge of revitalizing GE. The historic producer of light bulbs, MRI machines, and jet engines is suffering from the repercussions of ill-timed acquisitions, convoluted corporate structures, and escalating debt.
Over the past 18 years, GE has lost nearly $500 billion in market capitalization, a figure comparable to the total value of Facebook.
GE, which has long prided itself on managerial excellence, is now in such dire straits that it has appointed an outsider as CEO for the first time in its 126-year existence.
“Watching GE has been akin to witnessing a gradual yet disastrous train wreck,” remarked Scott Davis, lead analyst at Melius Research, in a note to his clients on Monday.
“Reversing 15 years of poor decisions will require significant bravery,” Davis commented, adding, “I wouldn’t want to bet against Larry.”
With the infusion of new leadership, GE aims to hasten a turnaround initiative that began under John Flannery, a veteran of 30 years with the company who was abruptly replaced by Culp.
“GE deserves praise for appointing a credible, experienced outsider,” wrote Cowen analyst Gautam Khanna to his clients. He noted that Culp is poised to “more openly and swiftly assess the situation.”
Culp built a remarkable record during his tenure at Danaher from 2001 to 2015, a period in which the company’s revenue and market capitalization increased fivefold.
The Harvard Business School alumnus is credited with transforming Danaher from a stagnating manufacturer into a dynamic enterprise with robust health sciences and technology sectors. He steered Danaher into health care, a field that now offers tools, lighting, and software for dental professionals.
“He possesses the requisite abilities to lead a company of this scale,” stated Jim Corridore, who analyzes GE for CFRA Research.
Khanna applauded Culp’s careful capital management while at Danaher, noting that about $25 billion was allocated for investments during his time there.
Following years of unwise financial decisions that ballooned its debts, GE is in dire need of a competent steward to manage its reduced resources. Analysts indicate that under former CEO Jeff Immelt, GE frequently made high-priced acquisitions while selling assets at losses.
A notable blunder was the $9.5 billion acquisition of Alstom in 2015, a move that pushed GE Power deeper into fossil fuels at precisely the wrong moment. Today, GE Power is so troubled that an accounting write-down of up to $23 billion will be necessary to account for the depreciation of the acquired businesses.
“The scale of the write-down is concerning,” Corridore commented.
Flannery took charge of a disorganized company when he assumed the CEO role last year. While he is owed credit for revealing the company’s “dirty laundry,” he was deemed too slow to reassure the shareholders.
“John Flannery’s challenge was formidable given the adverse situation he faced upon his arrival,” remarked Jeff Sonnenfeld, a corporate governance specialist at Yale School of Management.
In a public statement, Immelt predicted that GE Power would rebound under the new leadership due to its superior technology and workforce.
“Larry Culp is positioned to be a formidable leader for GE and its board. His experience and skills align perfectly with the demands of GE,” Immelt asserted.
Moving forward, Culp will need to determine whether to continue with Flannery’s restructuring strategies. Having joined GE’s board in April, he endorsed Flannery’s framework to rebrand the company around its power division, its flourishing aviation sector, and renewable energy.
This transformation would necessitate GE divesting its health care, railroad, light bulb, and oil-and-gas operations to utilize the proceeds for debt reduction.
Given Culp’s experience in the health sector at Danaher, Sonnenfeld speculated that GE might opt to retain its health care division.
Under Culp’s leadership, GE’s expansive corporate structure, built over decades by Immelt and Welch, may face downsizing.
Culp managed Danaher with fewer than 100 staff in the corporate office, and analysts predict he will likely “streamline corporate activities to essential functions and dismantle unnecessary divisions.”
However, merely cutting costs will not resolve GE’s issues.
Culp must promptly assess the challenges facing GE Power. This division grapples not only with fierce competition from renewable energy but also with recent blade failures that highlight potential quality deficiencies.
Additionally, GE is confronting a significant pension shortfall caused by prolonged inattention and sustained low interest rates.
Lastly, Culp must deal with the legacy of GE Capital, the financial arm that nearly brought the company down during the last financial crisis, all while shrinking it responsibly and avoiding pitfalls, such as WMC Mortgage, the abandoned subprime mortgage operation now under Justice Department scrutiny.
Furthermore, at GE Capital, Culp needs to stabilize the long-term care insurance sector, which reported a $6 billion loss in January, triggering an SEC investigation—GE’s second such inquiry at present.
By hiring Culp, GE may have taken a significant step toward rebuilding its tarnished reputation on Wall Street. Nonetheless, restoring stability and success will take considerable time.
