Wednesday, October 11, 2017

Lessons from General Electric, an American loser

General Electric or GE, once the symbol of American success in business, is now an American loser.

And the reasons for its demise go to the heart of what has gone wrong with many of Australia’s leading companies.

On Wall Street GE was replaced by new symbols of American success like Facebook, Google, Apple, and Amazon or even GE rivals like Honeywell and United Technologies, which also boomed.

In Australia, apart from CSL, we did not give birth to enormous success stories that went on to dominate our market and replace the struggling icons.

Accordingly our share market has not matched Wall Street.

So let’s look at GE. This week GE shares tumbled to a two-year low. GE has lost a quarter of its value — roughly $70 billion — so far this year. A few months ago the company showed long-running chairman and CEO Jeffrey Immelt the door and other executives, including this week’s surprise exit of Jeffrey Bornstein as chief financial officer, have followed him. The new CEO is cutting costs but he will need to do a lot more than that.

GE has a severe dose of what Australians might call the BHP, Telstra and big bank disease — GE’s dividend has become the most important driver of strategy. Much to the dismay of shareholders who invested for income, BHP and Telstra have woken up that you must reinvest in the business and so have cut dividends and linked future moves to earnings. In time the banks will follow.

GE has not reduced its dividend since the 1930s recession (BHP had similar pride in its dividend record) but GE’s free cash flow has deteriorated for six consecutive years so the market knows the inevitable is ahead — hence the fall in share price. I can remember on several occasions meeting and questioning the legendary Jack Welch, who built GE. Jack’s charisma drove GE but he was a compulsive buyer of businesses, which was always going to give his successor a headache. That successor, Jeffrey Immelt, decided to exit some of Jack’s jewels and in the process presided over GE’s dismantling.

Immelt disposed of GE’s media arm, NBC Universal, and sold off most of GE Capital, which had been a brilliant financial arm. He even sold off GE’s well-known appliance business last year to China’s Haier Group. Now, it’s trying to unload the iconic light bulb business. Just imagine the turmoil that regular selling has created among managers. Who will be next?

The Immelt goal was to focus GE on businesses where it could win, and to get rid of the ones that were so called “distractions”.

Not surprisingly GE’s remaining businesses, which include aviation, transportation, healthcare and energy, are not winning. In fact given the fall in operating cash flows GE actually had to sell businesses to keep up the dividend.

In today’s world, corporate might is no longer enough. Technology is enabling rivals from around the world to enter businesses that were once the province of giants. GE in the Welch era attracted the world’s best and brightest talent. Talents today are also attracted to the exciting companies but GE is low on the list because today’s generation has seen their predecessors trashed in the GE sale process.

The new GE CEO, John Flannery, is getting rid of the corporate jets and executive cars (in former times BHP was big on corporate jets but they have gone and these days you see BHP’s Andrew Mackenzie in the Qantas lounge).

The GE CEO better act quickly on costs because to win he has to bring excitement back to the company by investing in the business on a much larger scale and start recruiting the best people to compete in the new world.

That’s also the task facing many Australian large companies.

Original article ➤ http://www.theaustralian.com.au

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