GE CEO’s Make-or-Break Overhaul Took Shape on a Ski Vacation

The new General Electric Co. began to take shape in the unlikeliest of places.

Stuck last December on a ski vacation with no snow in Park City, Utah, John Flannery said he had “plenty of time to think” about the future of the iconic American manufacturer. After he took over as chief executive officer in August, GE had plunged further into a crisis of cash shortfalls, earnings misses, and outsized liabilities.

It was then and there in that resort town, he said in an interview, that he rededicated himself to the review of GE that culminated in this week’s decision to focus the once-sprawling conglomerate on three key areas: aviation, power and renewable energy. GE will exit the health-care and oil markets and pull back from finance while reducing debt and shrinking corporate operations—the most aggressive plan yet to turn around the 126-year-old company.

“I’ve looked at this every way imaginable, I’ve looked at every combination—pros, cons, balance sheet—everything,” he said. “We’re refashioning the company at every level.”

Investors cheered on the first day, bidding shares up the most in three years. GE climbed another 2.1 percent to $14.03 at 9:42 a.m. in New York on June 27. That provided at least a brief respite from an 18-month rout that has wiped out more than $160 billion in market value and prompted GE’s removal from the Dow Jones Industrial Average after more than 100 years.

Turning Point

Flannery’s plan marks a turning point for GE, alongside earlier moves to sell NBC and most of GE Capital, said Scott Davis, an analyst with Melius Research.

“If you would have told me 15 years ago that GE would be down to effectively aerospace and power, I would have told you, you were crazy,” he said. “That’s really where we’re going to be.”

In an internal review, GE found that its component businesses, including the pieces now being spun off, should justify a share price of more than $20, said a person familiar with the matter. That played into GE’s decision to break off some pieces, said the person, who asked not to be identified because the discussions were private.

GE will immediately begin a spinoff of its gargantuan health-care unit, which specializes in imaging machines and life sciences products. Flannery committed to maintaining the dividend until the separation is complete in 12 to 18 months, at which point it’s likely to be reduced.

‘Grow Faster’

While stopping short of the wholesale breakup some investors have called for, a separation of GE Healthcare makes good on Flannery’s pledge to take a dispassionate look at the portfolio. After all, he’ll be saying goodbye to the business he ran before he was named CEO last year.

As the head of GE Healthcare, Flannery said he had given some thought to the benefits of a separation. As part of the larger GE, the business sometimes suffered from underinvestment, particularly in fast-moving areas such as artificial intelligence and cell therapy, said the three-decade GE veteran.

“I just thought the company could grow faster outside of GE,” he said.

In addition to the constraints on GE Healthcare, he also saw drawbacks from the conglomerate structure during his time running GE businesses overseas. By shrinking GE’s corporate operations and giving more power to individual business units, Flannery said he wants to speed decision-making and enhance investment opportunities.

“It’s a product of a long time in the company, seeing it from many different places, around the world, in-corporate, out of corporate, running businesses,” he said.

Turnaround Hurdles

GE has fallen far from its Jack Welch-era heyday at the turn of the century, and achieving turnaround success will be tough. The Boston-based company is struggling with weak demand for equipment such as gas turbines. It shocked investors earlier this year with a $15 billion shortfall in insurance reserves. Its accounting is under investigation by the U.S. Securities and Exchange Commission.

“Power still remains mired in a protracted secular contraction for the next year or two,” RBC Capital Markets analyst Deane Dray said in a note, attributing the stock gain mostly to “cathartic relief” that a big change was finally announced. “A lot has to go right for this plan to be successful.”

Flannery unveiled a board overhaul and asset sales in November. Not long after his ski vacation the next month — and after GE disclosed the insurance liabilities — he told investors that he was weighing all options, including a possible breakup.

The plan was approved last week in a unanimous vote by the board, Flannery said. Trian Fund Management, which holds a board seat and has invested in GE since 2015, said the initiatives “will create substantial value for shareholders.” The plan echoes similar moves at other companies backed by Trian, which has pushed for greater accountability to improve operating performance and a clearer approach to capital allocation.

Alamo Escape

Flannery has already agreed to unload GE’s century-old locomotive operations. On June 25, he announced the sale of an industrial-engine business to buyout firm Advent International. His predecessor, Jeffrey Immelt, exited most of GE’s banking and consumer operations.

With this week’s announcement, Flannery began clearing away concerns over GE’s debt while laying out a plan to monetize several major assets, said Nicholas Heymann, an analyst at William Blair & Co. The plan will also help GE weather the storm in the gas-power market until it begins to improve in a few years, he said.

“You’re basically reconfiguring the company to bring forward the value-creation opportunities,” he said. “It’s the escape from the Alamo.”

From Bloomberg