One of the oldest and the largest companies in the world as of 2008, with their foot in almost everything. You name it, be it Power, Aviation, Healthcare, Technology, General Electric would be there. The company founded by the legendary Thomas Edison had always been a world power until something changed the entire scenario and they were removed from the Dow Jones Industrial Average (DJI) Index and downgraded after having been a leading market representative for over a decade.
Now, why did this exactly happen? What does this imply for this huge company and its stakeholders?
Let’s dwell in to understand the very same.
In the year 1878, Thomas Edison forms the company Edison Electric Light Company. Subsequently, in the year 1879, the scientist Thomas Edison invented the first commercially viable incandescent lamp. Finally, in 1892, The General Electric Company is born, by merging two infant giants at the time, “Edison General Electric Company” and “The Thomas-Houston Company”. General Electric goes on to become one of the leading companies in the sector at the time with history-making feats such as having the world’s largest locomotives in 1895 and building the World’s first X-Ray machine in 1896. Finally, they got listed in the DJI in the year 1907 until they got removed very recently causing a dent in their glorious history.
The Rise of General Electric
As the years passed by, General Electric slowly and steadily made its mark and became a force to reckon with. It started capturing bits and pieces of various markets, leading to great advantages through diversification, a lesser known concept at the time. Eventually, they found themselves in almost everything, which helped them consolidate their position in the market. However, this is what turned out to be detrimental eventually and as stated by leading analysts, they had more than what they could swallow. In the early stages of the 21st century, General Electric lead by making rusty acquisitions, some of which turned out to be a dream, but some others turned out to be damming and how.
The Glamorous Past of General Electric
First, the dot-com bubble then the Financial Crisis made the share price of GE to tumble down to a lifetime low and left them with almost no cash to be able to operationally run their company. On top of this, the criticism of top-level management, and their strategies have been detrimental, with changes of the same, providing testament to the alleged comments. These factors have obstructed the consolidation and have dented the glamorous history of General Electric subsequently leading to their removal from the DJI Index.
What Led to the Decline of GE?
The primary reasons for the decline can be broken down into three parts:
Top Level Management
Inaccurate Acquisitions was one of the primary reasons for the eventual downgrading of General Electric. As stated by the new Chief Executive Officer, John Flannery in an interview with the Wall Street Journal, “We have incredible franchises in many of our businesses, big important end markets, aviation, power, renewables, healthcare, transportation, oil, and gas. There is a tremendous set of assets. We’ll review each of those businesses in the portfolio, how it benefits and contributes to the broader company, and it’s something you expect us to do with speed and with urgency and with no constraints.”. During the previous CEO, Jeff Immelt’s tenure the company made 380 acquisitions that came at a cost of over $175 billion. It further divested 370 assets worth a total of $400 billion. Thus, GE struck an average of 46 acquisitions and divestitures annually during Immelt’s tenure at a value of $35 billion, churning roughly 9% of its total current enterprise value every year. The company paid a total of nearly $1.7 billion in M&A fees since 2001, according to data provided to Forbes by Freeman & Co. Major Acquisitions include Alston’s Power Business, while major divestitures include GE Plastic, GE water, Synchrony Financial, etc. This led to a major decline in stock price and dividends by General Electric.
Top Level Management can be blamed in the essence of it all given the over-decisive characteristics portrayed by them, especially, Jeff Immelt. The stock lost almost 20% in the last one year before it was removed from the DJI in comparison to the index itself which was trading at a 30% high. While comparing prices during his tenure, the stock hit off 27%, versus a whopping 183% by the Dow.
The stock yielded 1.5% annually, which is as low as the inflation rate in comparison to the Dow, which yielded 7.6% annually. In comparison to industry giants such as Emerson Electric, Honeywell International and Siemens, General Electric failed to catch up.
Risk Mismanagement Blunders
Model Risk, Correlation Risk, Event Risk, Project Risk, all of these non-exhaustive measures were improperly being assessed, which were continuously portrayed given its backslash during times of crisis and beyond. Projects and acquisitions were not considered on its merits or rather, were not assessed on an objective basis considering the overall diversification mismatches. Hence, the ripple effect reflected in its tumbling with revenue falling over 100% in the recent years from over 250 Billion Dollars to less than 150 Billion Dollars.
The Future of General Electric
Considering one of the largest companies of the world in the past, General Electric have found their motivation under the newfound leadership of Mr. Flannery, who knows the company better than anybody and has displayed the skills of a leader both with words and action, the most popular example being the resurrection of GE Healthcare under his leadership. With strategic Divestiture plans in his mind and subsequent concentration on profitable businesses, the road ahead is clear if the objectives are not forgotten. The Company as a whole has unimaginable potential and in terms of investment as well, it seems like a right time to get in. With a progressive approach ahead and an unjustified low being reached, the scenario is ideal.