Why GE just can't catch a break

Farewell John Flannery, we hardly knew ye.

Appointed just over a year ago as CEO of General Electric, Flannery was removed by the board on Monday — the shortest tenure for any CEO in GE's history. It was an ignominious end for an executive who was supposed to revive the fortunes of a once-mighty American company laid low by failures in everything from finance to health insurance to power turbines.

General Electric, it seems, just can't catch a break.

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In fairness to Flannery, the problems began long before he took over the CEO suite. Back in 1981, Jack Welch became GE's chief executive, bringing about a momentous transformation in the company. Welch expanded beyond GE's traditional business in manufacturing, chemicals, and engineering. He laid off workers and acquired new operations in entertainment, finance, and other areas, creating a sweeping conglomerate. Welch's most fateful move was the construction of a giant banking arm, which dabbled in credit cards, insurance, mortgages, and more. For years, Welch was hailed as a visionary.

Jeffrey Immelt stepped in to take Welch's place in 2001. But he continued Welch's legacy: GE bought a majority stake in a movie studio, snatched up a subprime mortgage lender, and entered the real estate market. In 2000, GE's shares peaked at almost $60 apiece, for a market capitalization around $600 billion — one of the biggest valuations in history at the time.

The company took a hit when the 2001 stock bubble burst. But it was 2008 that really did GE in. The financial collapse transformed its banking unit from a moneymaker into a giant lead weight. GE's shares dipped below $10 in the worst of the crisis, and the company began to take on water.

Since then, GE has struggled to sell off the various parts of its financial division before they sink the company. It made the ill-advised decision to buy Alstom in 2015, which got the company into the coal turbine business just as renewables were booming. GE has paid fines to regulators for misrepresenting its books, and still faces investigations from both the SEC and the Justice Department. It's had to massively cut its dividend payments twice since 2008.

The company managed to claw its way back to a market valuation of $300 billion in 2015. But then GE's shares fell off a cliff again starting in January 2017, and its market valuation sat at less than $100 billion as of Friday.

Flannery actually didn't come into the picture until August 2017, after the latest slide had already commenced. But he still faced a few crises of his own.

In January of this year, GE's previous forays into health insurance came back to bite it, when the company discovered it had seriously underestimated the cost of some of its long-term care plans. GE took a $7.5 billion after-tax charge and concluded it would have to reallocate $15 billion to patch up its insurance obligations.

There was also a reckoning for GE's adventures with Alstom, as the company's power division suffered a $10 billion loss in 2017 and just took a $28 billion write down on its value. Then there was the embarrassing failure of a GE natural gas turbine at a power plant in Texas. The September incident forced Exelon, the power company, to shut down the plant, along with another plant that runs the same turbine, as a precaution. This was on top of an earlier incident, when three gas turbines GE was shipping to Pakistan hit project delays. There are 30 of the turbines already in service and orders for 80 more. While GE said it had "identified the solution" to whatever the problem was in Texas, it also admitted the same failure could affect other units.

These power troubles carried a particular sting for Flannery. His turnaround plan was focused on salvaging three key sectors in the company, including power, while selling off everything else. (Aviation and health care were the other two.)

One last throughline in GE's long decline is a slow buildup of debt, which is unsurprising for a company that's suffered so many bad turns. GE's total debt load tripled in size from 2013 to now, and its debt-to-earnings ratio jumped from 1.5 to 3.7 over the same period. The company's pension obligations face a serious shortfall. Immelt and his cohort also didn't do the company any favors by spending $42 billion on stock buybacks between 2010 and 2017 — money that could have gone to shoring up finances rather than enriching shareholders.

Finally, just to add insult to injury, GE was kicked out of the Dow Jones Industrial Average this past June. Up until then, it had been the longest-running company on the index, with a tenure just shy of 111 years.

According to reports, no single issue, not even the problems with GE's power sector, led directly to Flannery's ouster. Instead, frustration simply built up over the last few weeks, driven by "the lack of concrete decision making made in a very short time frame" and "the slow pace of change," as CNBC put it. "The board was unsatisfied with the execution that was taking place under John Flannery's leadership," Andrew Ross Sorkin told the outlet.

Interestingly, the board unanimously picked H. Lawrence Culp Jr. as Flannery's replacement. Culp served as CEO of Danaher from 2000 to 2014, where he earned a reputation for whipping the smaller conglomerate into shape — at least from ownership's perspective. Danaher's shareholder returns were 465 percent while Culp was CEO, compared to 105 percent for the S&P 500 as a whole. Also worth noting is that Culp only joined GE's board in February. Before now, the company had tended to pull its leadership internally.

The hope is clearly that as an outsider, Culp may succeed where previous insiders failed. At least one activist investor with a seat on GE's board, Trian Fund Management, has been a fan of Culp's for a while. Wall Street also seems excited: GE's shares jumped 13 percent Monday morning on the news of the change.

As to whether that enthusiasm is justified, only time will tell.