General Electric - Part 3: After the Party
Two decades after Welch stepped down, General Electric was broken into three independent companies, each going its separate ways. What happened to the iconic American conglomerate?
**This post is not investment advice. Please see the full disclosure on the About page**
Jeff Immelt took over as CEO on 7 September 2001. Four days later, the world changed forever when two planes flew into the Twin Towers in New York. In the immediate aftermath of the terrorist attack, GE sent generators and medical equipment to Downtown Manhattan, raised millions for charities, and advanced $5 billion in financing for its airline customers. NBC cancelled commercials for three days, forgoing hundreds of millions of dollars. GE also took a massive write-off—it had partially reinsured both towers and all four planes used in the attacks. Despite these challenges, in the third quarter of 2001, GE still managed to report a 3% increase in earnings. For some, this vindicated GE’s business model of maintaining a diversified portfolio of companies.
Yet another event that year proved far more consequential to GE—the collapse of Enron. Until its bankruptcy, Enron was a widely respected company, even ranked as one of Fortune's most admired companies in 2000. However, Enron's profits were inflated through financial engineering, accounting manipulation, and off-balance-sheet vehicles. After scrutiny from short-sellers and investigative journalists, along with a formal SEC inquiry, Enron's credit rating was downgraded to junk status. When trading partners withdrew financing, the company faced a liquidity crisis, ultimately leading to its bankruptcy in December 2001.
In the wake of Enron's collapse, financial accounting came under intense scrutiny. Given its consistent earnings growth and a large, opaque financial services business, it wasn’t long before attention turned to GE. While the company’s accounting practices were nowhere near as deceptive as Enron’s, Bill Gross, co-founder of PIMCO, and Jim Grant, an influential financial observer, identified a crucial risk: GE relied heavily on short-term commercial papers to fund its long-term lending. This created a dangerous duration mismatch between assets and liabilities. If the short-term money market were to freeze, GE would struggle to access funding to cover its liabilities, potentially triggering a liquidity crisis. Their warnings would prove highly prescient.
Unlike Welch, Immelt wasn't a huge fan of GE Capital and expressed a desire to return GE to its industrial roots. However, his actions contradicted this stated goal. In 2004, he acquired the subprime mortgage broker Weyerhaeuser Mortgage Company (WMC) for $500 million. Like other subprime brokers, WMC focused on maximising mortgage volume, leading to reckless lending practices. GE's internal auditors later discovered that WMC had violated its own underwriting standards by offering mortgages to unqualified borrowers. In early 2007, Michael Pralle, head of GE's real estate business, warned Immelt that investors were paying record-high prices for real estate assets and advised him to reduce GE's real estate exposure. Immelt dismissed the warning, and by June 2007, Pralle was out of a job. Far from shrinking, GE Capital continued to grow—by the end of 2007, the division’s net income had grown to $10.3 billion, representing 46% of GE's total net income. GE Capital's total assets had ballooned to $646 billion.
Then came the Global Financial Crisis. Between 2004 and 2006, the Federal Funds Rate increased from 1% to 5.25%. Many subprime mortgages, including ones written by WMC, went into default. As the scale of the problem became apparent, the financial market went into meltdown. Lehman Brothers collapsed, AIG was bailed out, and Bear Stearns and Merrill Lynch were forced to merge with JPMorgan Chase and Bank of America, respectively. The commercial papers market froze, causing havoc just as Gross and Grant had predicted.
At the depths of the Financial Crisis, GE flirted with bankruptcy. It required Warren Buffett’s intervention to avert GE’s collapse. In October 2008, Buffett agreed to purchase $3 billion of GE’s preferred stock and received warrants to purchase an additional $3 billion at a later date. Buffett’s investment provided a crucial vote of confidence that enabled GE to raise another $12 billion from the market. A month later, the Federal Deposit Insurance Corporation (FDIC) allowed GE Capital to participate in its Debt Guarantee Program (DGP), effectively giving GE Capital the backing of the federal government. With that support, GE Capital issued $131 billion of debt with FDIC guarantee, helping to ensure its survival. However, the government’s assistance came with strings attached. To participate in FDIC’s Debt Guarantee Program, GE was designated a systemically important financial institution, which brought extra regulatory requirements. GE added two thousand people to ensure compliance, costing the company $2 billion a year.
GE’s harrowing experience during the Financial Crisis finally catalysed Immelt to take drastic actions. In 2014, GE listed its North American consumer finance business as an independent business. In April 2015, Immelt announced a sweeping plan to exit most of GE Capital’s consumer and commercial finance businesses, retaining only operations that were tied to its industrial businesses, such as aircraft leasing and equipment finance. After the transformation, 90% of GE’s profits were expected to come from its industrial businesses. The stock market liked the plan, sending GE’s shares up 11% on the day. In the following years, GE sold its property business to Wells Fargo and Blackstone and its private equity business to the Canada Pension Plan Investment Board.
Like Welch, Immelt had an appetite for making deals, but in contrast to Welch, he seemed less disciplined on valuation. Early in his leadership, he acquired the British healthcare company Amersham for $10 billion—paying a 45% premium. In the midst of the Financial Crisis, GE teamed up with Bain Capital and Blackstone to acquire the Weather Channel for $3.5 billion, only to sell it ten years later for $300 million. Immelt’s most consequential deal was acquiring the French power equipment maker Alstom in 2015. The acquisition appealed to him as a quick way to expand GE’s power business and advance his goal of reorienting the company to its industrial roots. However, Alstom was a failing business, and until GE knocked on its door, its CEO, Patrick Kron, was desperately searching for a buyer for his company. Despite that, GE still ended up paying $10 billion for the acquisition. Alstom was in such a dire shape when GE got hold of it that to make the accounts add up, GE had to increase goodwill by $13.5 billion and intangible assets by $4 billion, essentially creating non-existent assets to offset the liabilities.
Fifteen years into his CEO tenure, GE's share price remained below where it was when Immelt took over, and the company's market capitalisation had roughly halved. Furthermore, the poor performance had attracted the attention of activist investor Trian Fund Management, led by Nelson Peltz, who were demanding more radical changes. GE’s board decided that new leadership was required. On 1 August 2017, John Flannery replaced Immelt as GE’s CEO. Prior to becoming CEO, Flannery led the turnaround of GE’s healthcare business. The board hoped that Flannery could repeat his success on a bigger scale.
To unlock value, Flannery proposed breaking up GE into three independent companies focusing on aerospace, healthcare, and energy. However, he never got the chance to execute his vision. Fourteen months into his job, Flannery was fired. Though some people criticised Flannery for being too indecisive and lacking confidence, he was widely viewed as GE’s “fall guy”, burdened by his predecessors’ mistakes. As those problems surfaced, GE’s share price continued falling. By the time Flannery was ousted, GE’s market capitalisation had halved again, to just under $100 billion. In the end, it was Immelt’s Alstom acquisition that cost Flannery’s job. As demand for gas turbines declined, GE was forced to take a massive $23 billion write-off. The board, impatient for progress, replaced Flannery with Larry Culp, former CEO of Danaher.
It was Culp who implemented Flannery’s vision of breaking up GE and received much of the credit for doing so. In November 2021, he formally announced the plan to separate GE into three independent companies. GE Aerospace became the legal successor of General Electric. GE Healthcare was spun out in 2023, and GE Vernova—comprising GE’s power and energy businesses—was spun out in 2024. 132 years after General Electric was created, the three independent companies went their separate ways.
What went wrong?
Following the break-up of General Electric, people began to question what went wrong at America’s most iconic conglomerate. Between the company’s peak in 2000 and the day that Flannery was ousted, GE’s market capitalisation had shrunk by more than 80%. Unsurprisingly, many people pointed their fingers at Welch. Some accused him of focusing too much on profits at the expense of other stakeholders. Others blamed him for creating a culture that encouraged employees to cut corners or use accounting gimmicks to meet quarter numbers. One author even labelled Welch—somewhat unjustifiably—as the man who broke capitalism.
The reality is more nuanced. Welch believed that “social responsibility begins with a strong, competitive company”. There is little doubt that by hiring top talent, improving productivity, and focusing on innovation, Welch made GE a leaner and more competitive organisation. Without his intervention, GE could have gone the same way as Kodak, crushed by competition from more efficient companies abroad. Whilst making shareholders rich, GE also gave back to society. The company paid more than $50 billion in taxes while Welch was CEO.
However, Welch was not faultless. His obsession with delivering consistent earnings growth drew him to businesses like GE Capital, whose ability to create profits through accounting adjustments helped GE to absorb the ups and downs of its manufacturing businesses. Under Welch, GE Capital’s prominence grew—its share of GE’s profits increased from less than 10% to over 40%. Stripping out GE Capital, the net income of GE’s industrial and manufacturing businesses increased fivefold over Welch’s twenty years in charge—a compound annual growth rate of 9%. While respectable, this performance perhaps didn't warrant Fortune's "Manager of the Century" title. GE Capital also played a major role in the company’s downfall. During the financial crisis, its reliance on short-term funding pushed the company to the brink of collapse. In the end, while Welch created tremendous amounts of shareholder value and built GE into the world’s most valuable company, his legacy didn’t stand the test of time.
References
William D Cohen, Power Failure: The Rise and Fall of General Electric, Penguin (2023)
Bernard Gorowitz, A Century of Progress: The General Electric Story 1876-1978
Jack Welch and John A. Byrne, Jack: Straight From the Gut, Grand Central Publishing (2003)
Thomas Gryta and Ted Mann, Lights Out: Pride, Delusion, and the Fall of General Electric, Mariner Books (2020)