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GE boss exit and $23bn hit stun Wall Street


Running General Electric is one of the most important, most prestigious and best-paid jobs in corporate America.

The company is a bellwether for American manufacturing, employing 313,000 people around the world, a third of whom work in the United States itself.

It is one of the most important payers of dividends to US pension funds and therefore crucial to the long-term retirement savings of millions of Americans.

It is also an absolute beacon of stability as companies go.

Until last year, just four people had held the post of GE chairman and chief executive during the previous half-century: Fred Borch, British-born Reginald Jones, Jack Welch and Jeff Immelt.

So news that the latest incumbent, John Flannery, has been replaced as chairman and chief executive after just 13 months is a considerable shock. His departure was accompanied by news of a $23bn write-down in the value of the assets in GE’s power division.

The company has recruited two renowned turnaround experts to replace Mr Flannery.

Larry Culp, who becomes chairman and chief executive, oversaw a dramatic recovery at Danaher, another large US manufacturer often compared with GE, while Tom Horton, who joins as senior director, restored the fortunes of American Airlines.

It is the first time in its 126 year history that GE, which was co-founded by the legendary inventor of the light bulb, Thomas Edison, has hired an outsider to run it. GE’s battered shares have risen sharply on the news.

Mr Flannery, who succeeded Mr Immelt in August last year, had been at GE for 30 years, most of it in the group’s financial services arm GE Capital, but latterly running its healthcare arm.

He was appointed with a mandate to continue with the extensive restructuring begun by Mr Immelt in his later period in office and, in November last year, announced that GE would be restructured into just three divisions – healthcare, aviation and power – with other operations, such as lighting and transportation, being sold or shrunk.

That announcement was accompanied by news that GE was halving its dividend, only the second time since the Great Depression – and only the third time ever – that the company had cut its payout to investors, sparking anger among some.

Warren Buffett, the world’s most famous investor, said in February this year that he had sold most of his holding in GE. In June this year, GE announced its healthcare arm would be spun off altogether.

GE’s shares have fallen by nearly 55% during the last 12 months and, three months ago, the company was evicted from the Dow Jones Industrial Average for the first time since 1907.

Mr Flannery’s fate appears to have been sealed by his inability to restore to health GE’s power division, its largest business, which builds turbines used in power plants. Sales and profits in the division have fallen this year, dragging down overall group profits in the three months to the end of June by 30%, despite solid growth in both healthcare and aviation. Operating margins in the power business are a fraction of those in healthcare and aviation.

Fresh concerns around the health of the division emerged two weeks ago when GE admitted to problems with some of its turbines that had obliged a power company in Texas to shut down four of its units.

However, there has been a general drumbeat around the company during recent months that the pace of change was not quick enough, with other parts of GE’s sprawling empire still capable of springing unpleasant surprises on investors. These include GE Capital, which is gradually being shrunk, but which Mr Flannery recently confessed would require some $3bn in extra cash next year.

Some will argue Mr Flannery was given insufficient time and that many of the problems afflicting the company are the fault of both Mr Welch, who built up GE into a conglomerate with lots of businesses seemingly unrelated to each other and Mr Immelt, who failed to dismantle that massive and unwieldy structure sufficiently quickly despite getting out of activities such as plastics and film and television via some $400bn worth of sales.

Mr Flannery himself sought to convince his critics on Wall Street that GE had become simply too big and complicated for any executive to get their arms around.

Yet this was not enough for shareholders. They have seen GE fall further behind a number of genuinely world-class American peers, including the likes of Boeing, Honeywell and United Technologies, owner of the turbine and aircraft engine maker Pratt & Whitney.

Some of that can be traced back to a lack of investment in research and development in Mr Welch’s time.

Addressing that decline now falls to Mr Culp who, in his 14 years at the helm of Danaher, grew the company’s stock market valuation five-fold.

He said today: “GE remains a fundamentally strong company with great businesses and tremendous talent. It is a privilege to be asked to lead this iconic company. We will be working very hard in the coming weeks to drive superior execution and we will move with urgency. We remain committed to strengthening the balance sheet including deleveraging.

“Tom and I will work with our board colleagues on opportunities for continued board renewal. We have a lot of work ahead of us to unlock the value of GE. I am excited to get to work.”

That work may involve cutting further jobs. Some 7,000 posts have already been shed this year in the power division alone and they are unlikely to be the last.


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