THE EVOLUTION OF GENERAL ELECTRIC

1. Today we're talking about the technological evolution and fall of GE which is
one of the most epic declines in corporate history. => In the year 2000, GE's stock
peaked at 60 dollars per share but has since decreased more than 75 percent to 13
per share. This is a compounded annual return of negative seven percent per year.
=> GE was a behemoth in its prime. In 2001, it was the most valuable company in
the world => with a market cap in excess of 400 billion dollars. => By 2017, GE had
fallen all the way down to 11th place => with a market cap of just 259 billion. => As
of 2021, GE has shrunk to become the 90th most valuable company=> with a market
cap of just 118 billion dollars. =>

2. In this presentation, we'll look into how GE rose to be the most valuable
company in the world and what factors led to its epic demise. => GE has a very long
history and can trace its roots to some of the most legendary American investors and
industrialists of the 19th century. => In 1889, Thomas Edison turned his invention of
the electric light bulb into a number of business interests. => These businesses
included the Edison lamp company which produced electric lamps, => Edison
machine works which created electric motors and a few others. => Drexel Morgan
Inco, => an investment bank co-founded by JP Morgan approached Edison and
offered to help merge all of his companies under one Corporation. => This merger
created the Edison General Electric company. => In 1896, General Electric IPO =>
on the New York stock exchange was one of the 12 original companies including the
newly created Dow Jones industrial average. => Throughout the 1900s, GE
expanded aggressively through dozens of acquisitions and quickly became the
leading industrial powerhouse not only in the US, but in the entire world. => In the
early 1900s, => GE entered the aviation business and quickly became the industry
leader. => In the second world war, they supplied the US military with over 300000
supercharger engines used to power fighter and bomber planes and => in 1941, the
US chose GE to develop the nation's first jet engine. =>

3. Throughout the 20th century, GE stayed on the cutting edge of technology,

even getting into the computing business to compete with IBM. => GE's business
really started to take off in 1981, => when Jack Welch a former chemical engineer =>
was appointed as the youngest ever chairman and CEO of the company. => Welch
meticulously looked at every single business unit within the company and completely
transformed the company's Structure. => GE was a conglomerate built by
hundreds of mergers and acquisitions. => This led to an extremely complex
corporate structure with dozens of unnecessary layers of bureaucracy. This
made the company inflexible and Inefficient. => Welch immediately started
restructuring the business laying off redundant administrative employees and selling
off the company's underperforming business units. => He laid off more than one
hundred thousand employees, which amounted to roughly one quarter of the
company's Workforce. This earned him the nickname “Neutron Jack”, after the
neutron bomb, that vaporizes people but leaves buildings standing. => While Welch
valued simplicity and divested underperforming business units, he was also not
scared of expanding the business into new growth opportunities. => During his
20year tenure as CEO, he oversaw over 600 acquisitions, => which amounts to
more than one acquisitions every month. => Some of his most significant
acquisitions were NBC universal => in many acquisitions of financial companies, that
were integrated into GE capital. => GE capital was originally formed to finance GE's
customers. For example, if an airplane manufacturer wanted to buy a GE jet engine,
they could borrow money from GE capital to fund the purchase. => The unit was not
supposed to be a profit centre and was only intended to subsidize GE's industrial
customers to stimulate demand. => But Jack Welch realized GE capital could
actually be very lucrative in its own right and aggressively increased the scope of its
operations, expanding to personal loans, automotive loans and other financial
services. This became one of the company's most profitable businesses. =>

4. By restructuring the business and focusing on GE capital, Welch transformed

the company from a slow growing bloated conglomerate to the most valuable
company in the world. => From the time he took charge as CEO in 1981, till the time
he retired in 2001, the stock price increased 40 folds, taking its market cap from 12
billion dollars to 410 billion dollars. During the same period, revenues increased from
27 billion dollars to 130 billion dollars.

5. After Jack Welch, => Jeffrey Immelt took over as CEO of GE => in the year
2001. => Jeffrey Immelt's tenure as CEO of GE was mired in disaster from the very
beginning. => Just four days after he took over as CEO, the 9 / 11 bombings
happened, which disproportionately affected GE Capital. The disaster cost =>
GE's insurance business a total loss of at least 600 million dollars => and
negatively affected GE's aircraft engine business. => The 2008 recession also
hit GE hard, as its industrial businesses suffered dramatic reductions in
revenue. => As a result, GE saw its corporate earnings fall by more than half from
more than =>22 billion dollars in 2007 to less than 11 billion in 2009. => This was a
blow that GE has never fully recovered from. => When Jeffrey Immelt became CEO,
he ushered in a new era of huge mergers and acquisitions as well as divestitures of
large parts of GE's business. => In 2004, Immelt bought Amersham PLC for nearly
10 billion dollars. Amersham was a radio pharmaceutical company engaged in
making products for nuclear medicine procedures. Immelt wanted to acquire it to
strengthen GE's healthcare business. => In 2002, Immelt oversaw the formation of
GE wind energy. The fall of Enron allowed Immelt to buy assets from Enron's wind
turbine business after its candles were revealed. This marked the beginning of
another one of GE's business areas - renewable energy.

6. These acquisitions were very expensive costing GE tens of billions of

dollars and contributing to GE's bloated businesses. => It wasn't long before
Immelt also began selling off parts of GE's businesses. GE spun off most of its
insurance and mortgage insurance business in 2004 as its own company called
Glenworth Financial. => In 2009, GE sold parts of universal to the cable company
comcast. => In 2011, GE Capital sold its Mexico assets to Santander bank and
exited the Mexico market. But Immelt kept investing GE's reserves into new
acquisitions => including the purchase of John Wood PLC's world support
division in 2011 for almost 3 billion dollars. => Immelt's habit of buying and
selling largely unrelated businesses for billions of dollars on an almost annual
basis continued. => Investors increasingly saw GE as a bloated behemoth of a
company engaged in unrelated businesses with little connection or synergies.
=> As a result, GE's stock suffered the conglomerate discount, a phenomenon
whereby companies that are overly diversified are valued at less than the sum of the
values of its parts.
7. There is some disagreement as to why the conglomerate discount exists.
Some economists believe that it is the result of investors preferring to invest in pure
lay stocks. Another reason is that conglomerates provide less disclosure about their
constituent businesses than if they were split into multiple companies. => Whatever
the causes, it contributed to GE's lagging stock price. From the peak under jack
welch, GE's stock price never recovered and its highest point remained under
roughly half its high value from before Jeffrey Immelt's tenure. =>

8. In 2008, the investment bank Lehman Brothers as well as insurance giant AIG
collapsed, causing global markets to tank and freezing up access to capital. => GE
capital had been the crown jewel of the company over the past decade. By 2008,
almost half of the company's profits came from the financial services. => The
company turned into a bank, that sold a few engines on the side. => GE capital's
operations were extremely diversified and leading up to the financial crisis. They
were even in the business of originating subprime Mortgages. => They were also in
the credit card business and provided credit lines for Walmart and lower branded
credit cards. => Unlike traditional banks, which funded their loans through consumer
deposits, GE capital relied heavily on commercial paper funding. Commercial paper
refers to very short-term loans, usually maturing in a matter of days and typically
have very low interest rates. => In 2008, the majority of commercial paper matured in
less than four days. Usually this is not a problem because the borrower can just roll
over their borrowing every four days and, in this way, borrow money Indefinitely. =>
However, with the fall of Lehman Brothers commercial paper, lenders started to
become less willing to land and commercial paper volume fell by more than
two-thirds. => GE capital was especially a hard hit because just like Lehman
Brothers, they were also involved in subprime mortgages. Lenders feared that
GE could go bankrupt at any time, so refused to roll over the Loans. => When
this happened, GE had just a few days to raise billions of dollars of capital to
avoid a default. => The fears around GE's financial situation => heavily weighed on
the share price with the stock falling by more than 80 percent from peak to trough.
=> The company was truly on the brink of insolvency. => In the fall of 2008, they
made a desperate phone call to Warren Buffett, one of the few investors, who had
the financial wherewithal to save them. He agreed to invest three billion dollars into
the company in exchange for preferred shares, that yielded a 10 percent dividend
and an option to buy an additional 3 billion at the low price of 22.25 per share. =>

9. This capital rates gave them ample liquidity to weather the storm and
importantly, gave them a huge vote of confidence from America's most respected
Investor. => The stock price more than doubled in the next year and it looked like the
company was on its way to a full recovery. => After watching his company teeter on
the brink of bankruptcy in 2008, CEO Jeff Immelt decided financial services to be too
risky. He made the decision to spin off GE capital and refocus the company on its
core competencies of Industrial Production. => In 2015, he reached agreements to
sell most of GE capital's business units => to various financial institutions =>
including Blackstone, Wells Fargo and Goldman Sachs for a total purchase price of
26.5 billion. => Immelt was too eager to sell off GE capital and sold most of its
units for a lower price than they originally purchased for It, => leading GE to
recognize a 16 billion write-down => on the closing of the Transactions. => In
2014 Immelt also rebranded GE capital's credit card business as security
financial and spun it off in an IPO in 2014. This turned out to be a mistake as
Synchrony's business far outperformed GE, after the spinoff with a stock
increasing more than 80 percent. =>The only parts of GE capital, that remained to
this day are their aviation finance and energy finance units. These divisions provide
financing for GE's aviation and energy customers. Today GE capital is very small
and is not a meaningful contributor to the company's bottom line. =>

10. GE capital once represented half of the company's total profits with the unit
now gone. Immelt had to find other growth areas to bring the company back to its
former glory. => During this time, oil was booming and he made the fateful
decision to go all in on the oil industry. GE's oil business was a multi-decade
disaster for the Conglomerate. => GE first entered the oil industry in 1994, when it
acquired Nuovo Pignone. Throughout the 2000 and early 2010s, GE oil and gas
continued to add to its portfolio through acquisitions => including the massive
acquisition of the well support division of John Wood Group for 2.8 billion dollars. Jeff
Immelt shifted GE's attention, that used to be focused on GE capital, to GE oil and
gas. By the early 2010s, GE oil and gas had become an energy Behemoth. In 2013
alone, GE oil and gas acquired three major oil companies => including Lufkin
Industries, a Texas oil and gas equipment company, for 3.3 billion dollars. => In
2016, GE oil and gas began its negotiations to combine with Baker Hughes. The
deal was so big that it required clearance by multiple national agencies including the
U.S Department of Justice. => The final deal was worth something in the
neighbourhood of 30 billion dollars=> and resulted in Baker Hughes becoming one of
GE's companies. => GE remained the controlling stakeholder in Baker Hughes,
which was and still is publicly traded under the registered symbol BKR. By
September of 2019, Baker Hughes stock had lost more than half of its value, since
the time GE took over. At this time, GE reduced his ownership in the company to a
non-controlling stake. =>

11. In mid-2020, GE announces plans to sell the remainder of its stake over the
course of several years. This would help GE pay off some of its massive 80 plus
billion debt burden, but incur significant losses due to Baker Hughes's poor
performance over the period, since GE's acquisition of the company. => In the
quarters and years leading up to the sale, GE was already taking huge corporate
losses, in particular, a 22.8 billion net loss in 2018. However, => their long- term debt
position of almost 90 billion dollars at the end of 2018, => was even more dire and
forced GE to liquidate assets, such as the Bakery Hughes stake for billions of dollars
of losses. => Besides the divestiture of GE capital in the disastrous pivot to oil, there
was another factor weighing on GE stock price. That was not Jeff Immelt's fault.
Long before Jeff Immelt took over as CEO, GE accumulated tens of billions of
dollars in pension liabilities, that is obligated to pay to its retired Employees .
=> Every time an employee is paid, a portion of the paycheck is withheld and put into
a pension fund that invests the money over time. Once the employee retires, the
company is obligated to pay him or her a fixed monthly payment to get them through
their retirement. => Back in the 80s and 90s, when Jack Welch was CEO, GE under
contributed to the pension fund, which helped boost reported profits at the time. This
was not necessarily intentional, as the pension's future returns are highly uncertain.
=> But regardless, during Immelt's time as CEO, GE had massive unfunded
pension liabilities that amounted to a total of 44 billion dollars in 2016. This
forced the company to add additional capital to the pension fund, which
caused a major drag on earnings. As of 2020, the company still has 30 billion
dollars of unfunded pension liabilities. => This amounts to more than 25 percent of
the current market cap and is still a drag on the stock price. =>
12. Finally in late 2017, Jeff Immelt stepped down as chairman of the Board of
Directors at GE two months earlier than expected. => He was replaced as CEO by
John Flannery in June of the same year. => John Flannery was a career GE
employee and the Board of Directors wanted to give GE a fresh start to try to return
to profitability by replacing Immelt. The discontent with Immelt came to a head after
GE reported third quarter earnings in 2017. The new CEO was given the herculean
task of turning the company's declining revenue and profitability around. => At the
time, GE was saddled with over 100 billion dollars of long-term debt. The high
interest expense along with the declines in the energy business weighed heavily on
the company's profitability. => Shortly after Flannery look over, the company also
reported a => 6.2 billion dollar write down relating to liabilities => from its old
insurance business. Even though they sold the insurance business a long time
ago, as part of the Sale, they still had to keep some of the long- term care
liabilities on their own balance sheet . Long-term care liabilities are notoriously
difficult to calculate. The fact that GE announced a 6 billion write-down relating
to these liabilities made investors lose confidence in GE's reported balance
sheet figures and caused fear that they may be far greater than the company
was reporting. => Flannery reasoned that the main issue weighing on GE's stock
price was fears about their excessive debt load and legacy insurance liabilities. =>
His plan to remedy the situation was to spin off GE's healthcare and
transportation divisions as well as to stake in oil field company Baker Hughes.
The newly spun off companies would take some of GE's debt burden with
them, thus alleviating GE's balance sheet. => However, it was proved to be
very difficult to find anyone willing to purchase GE's individual business units
when they were loaded with so much debt. So, his plans to break up the
company didn't go anywhere in the first year after he announced it. =>

13. With the breakup not going as quickly as Planned, the only thing Flannery
could do to shore up the balance sheet, was cut the dividend by 50 percent to 12
Cents per share from 24 Cents. => In the year after Flannery took the job as CEO,
=> GE shares fell more than 50 percent, => as he failed to implement a meaningful
turnaround. => On 01 October 2018, GE's Board of Directors unanimously voted to
remove Flannery as CEO => and appointed Lawrence Culp as Chairman and CEO
of GE. He was the first non-internal CEO of GE and in fact came from serving as
CEO of Danaher Corporation for more than a Decade. He had immense success in
his previous role at Danaher => and grew their revenues by five times, while their
stock price increased commensurately. => Bringing in his outside perspective, Larry
Culp over the past two to three years, has steered GE back to a trajectory towards
its former glory. => Since he took the helm of GE in 2018, GE cut its losses from -23
billion dollars in 2018 to only five and a half billion dollars in 2019 and in 2020
reported a profit of 5 billion. => Its stock price has risen commensurately nearly
doubling over the course of 2020 despite the worst global pandemic. => However,
GE is still a long way from achieving its former glory. A 2020 profit of 5 billion is still
less than half of what GE made more than 20 years ago. In 2000, GE made nearly
13 billion dollars which is the equivalent of 20 billion in the year 2020 after adjusting
for inflation. =>
14. GE shares rose 9.3% in 2021 amid a tentative global recovery post COVID
pandemic recovery. In March 2021, => GE announced a deal merging its GE Capital
Aviation Services (GECAS) aircraft leasing unit => with AerCap Holdings (AER). The
transaction was completed in November 2021, netting GE about $23 billion in cash
proceeds in addition to a 46% stake in the combined business. => GE also
announced in September 2021 and completed in December 2021, a $1.45 billion
acquisition of ultrasound technology developer BK Medical by GE's health care unit.
=> In November 2021, GE unveiled a plan to split into three independent public
companies. One will comprise the company's aviation business, one the medical
equipment unit and the third the power turbines business. => The health care spinoff
is planned for early 2023. In early 2024, the businesses that manufacture turbines for
power plants and for wind farms will separate. GE will then focus on its remaining
aviation business. But these are all future plans. On April 26, 2022, GE's share price
fell more than 10% to a 17-month low after the company warned fiscal 2022 annual
earnings were "trending toward the low end" of the range GE set three months
earlier as a result of "inflation and other evolving pressures." => It finally seems like
GE is turning the page on its last decades, but it still has a lot of work to do before it
can achieve the same level of success and admiration it once posted

Conclusion

15. Despite GE’s well-publicized decline, it remains a force in its three main
business sectors, employing 175,000 worldwide and operating in 130 countries. But
its size hasn't worked in GE's favour in a long time.