In this MarketFoolery podcast, host Chris Hill is joined by senior analysts Taylor Muckerman and Jason Moser to analyze General Electric's (NYSE:GE) decision to send CEO John Flannery packing after only a year. They also parse Tesla (NASDAQ:TSLA) CEO Elon Musk's settlement with the Securities and Exchange Commission, and consider how much Facebook's (NASDAQ:FB) latest hacking revelation hurts the social media powerhouse.
A full transcript follows the video.
This video was recorded on Oct. 1, 2018.
Chris Hill: It's Monday, October 1st. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Taylor Muckerman, Jason Moser, and, of course, hovering over all three of us, the news fairy!
Jason Moser: [laughs] Plenty of it!
Taylor Muckerman: Sprinkling that pixie dust.
Hill: All weekend long.
Moser: Pixie dust. It's beginning of October.
Muckerman: Pumpkin dust.
Moser: You have to eat candy every day for the entire month, right?
Hill: Yeah, you do. We'll get to the news, hang with us. There's already a plethora of candy corn up near my desk.
Moser: Candy corn, I forget, are you a candy corn fan?
Hill: A little bit. I'll have just a tiny little bit. Just enough to remind me, I don't really want to eat this.
Muckerman: This isn't my thing.
Hill: We're going to get to Facebook. And yes, of course, we're going to get to Tesla. But we have to start with the big pile of dust that was dropped by the news fairy. That is General Electric. Flannery is out.
Hill: The guy's been CEO for just over a year. The board of directors apparently was frustrated by the pace of his decision-making, which I find interesting, Taylor, because given the behemoth that is General Electric and the size of the mess that John Flannery had to clean up, I thought the guy was moving pretty quickly.
Muckerman: Yeah, I figured it was going to take longer than a year. And sure enough, it has. He announced that they sold the Locomotive business, they are planning to sell the Healthcare business, exit their 62% stake in Baker Hughes. Announcements were coming down the pike. Unfortunately, the share price just didn't care. The board ousting him now and replacing him with one of the new board members that they put in place earlier in April.
Hill: We'll get to Culp in a second, the new CEO. Jason, I was really surprised by this news, for a few reasons. One of them, certainly, when I saw this line of reasoning from the board, because, I did think Flannery was moving pretty quickly considering how big that company is. Also, General Electric does not flip CEOs very often. Flannery has been very clear, for all the troubles that GE has had and all of the depths that the stock has hit during his tenure, one of the things we have praised him for, and others have as well, he's been very clear from the outset. He's been a great communicator. He's been very clear about his plan and clear about the fact that this was a plan that was going to take several years.
Moser: Sure. Let's step back to just September 20th. Just a couple of weeks ago on this show, we were talking about GE. I said, if you're an owner of shares today, then you need to take CEO John Flannery's language very seriously when he says that they are in a multiyear transformational journey. In English, I said, you'd better pack a lunch, it's going to take a while. Apparently, these guys at GE don't do lunch.
Muckerman: Power lunch.
Moser: This really, to me, does seem extremely knee jerk. It's hard to not feel like this is just based on the stock getting cut in half over the course of a year. But let's also look at the fact that they're going to write off around $23 billion from goodwill on this Energy acquisition from back in 2015, which was under Immelt's tenure, not Flannery. It's also noteworthy to consider that the $23 billion in goodwill that they're writing off, that's like 30% of the total goodwill on the balance sheet. They still have a lot hanging out there. Now, I mean, in today's day and age, we basically live in a non-GAAP world anyways. Any company can write off any goodwill they want, frame it however they like in the earnings call and just go on about their business. I think this all really goes back to things that Flannery had nothing to do with it.
Muckerman: Same thing with the insurance issue that cropped up earlier this year.
Moser: Yeah! Maybe there's more of the story that we don't know about. But regardless, it seems extremely knee jerk. I don't know that anybody else you put in there is going to be able to get things going any more quickly, any faster. This, as you said, is a behemoth that they're trying to unwind and simplify. That, just by nature, takes time.
Hill: Yeah, he was dealt a very bad hand when he walked in the door. And he knew that. Let's talk about Larry Culp, who is the brand-new CEO and chairman of the board. As you mentioned, Taylor, Culp was brought on to join the board. Was it earlier this year?
Muckerman: Yeah, I believe so. It was February, maybe April, somewhere around there, when they had to bring on new board members out from outside the company.
Hill: Culp was previously the CEO of Danaher. How did he do there? Because it seems like, based on the stock, he did well.
Muckerman: He did very well. The stock up I think around 500%. I just went January 1st of 2000 to January 1st of 2014, didn't use the exact specific dates that he was CEO there, but general range. The market cap went from around $10 billion up to over $60 billion, and the stock followed suit. Definitely a successful tenure there, instituting what he called the Danaher Business System, basically a set of processes and procedures to bring on these acquired businesses that they snapped up over that tenure. It's very well regarded around the world as a business system that maybe he can bring in and infuse within GE and try and turn this ship around.
It seems like some of the groundwork has been laid. See if he continues with the same plans that Flannery laid out. I would imagine that he might, because he was on the board while Flannery was announcing these plans. Familiar with them. Maybe not as familiar with the business as Flannery, because he's the first outside CEO that GE has ever had in 126 years.
Hill: Yeah, this pokes a little bit of a hole in the narrative that we've heard, certainly, for the last 20 years or so of the GE management style and the way that General Electric has groomed its leaders. Flannery was a home-grown guy.
Moser: I have no executive experience but I'm going to offer Larry here just a little piece of advice -- based on what I've seen here up to this point, you might want to steer away from language that includes phrases like "multiyear transformational journey." Apparently, that's just not working out.
Hill: Is that the magic word?
Moser: Apparently! If you say something like that, "Oh, he's just not the right guy for the job. Keep on looking." One thing before we conclude this, I was looking at this earlier, because we just covered Bed Bath & Beyond not too long ago. It started sticking in my mind, these are two very familiar names for all of us, not only as investors but really consumers. And the 10-year charts for these two stocks are just amazingly similar. I mean, over the course of ten years, GE is down 54%. Bed Bath & Beyond is down 52%. When you look at the actual bell curve there, it's something to behold. I think it says a lot to a couple of businesses that were poorly led. One of them, I think, was just out-innovated. One of them just slept at the wheel of innovation in e-commerce. The other one, GE, was just getting outside of its wheelhouse and trying to become too many things.
Hill: But if you had to buy one of those two stocks today, there's no way you're buying Bed Bath & Beyond.
Moser: Oh, no, no, no. I wouldn't buy that with your money. I'm still going to try my hand at General Electric.
Hill: Real quick on the stock, pre-market, it was up about 16%. I'm wondering, Jason, if at least a few people are thinking what you're thinking, that maybe this is a knee jerk reaction. Shares of GE still up around 9% at this point. It's going to be interesting to see, particularly if more information comes out about Flannery's tenure. Based on everything we've heard right now, it seems knee jerk-ish.
Let's move on to Tesla. I think it's important to set the context. The context is that last week, reportedly, there was a deal in place between the SEC and Tesla. Reportedly, Tesla's lawyers had told the SEC, "Elon Musk is going to sign this deal." And he got a good night's sleep and woke up and said, "I'm not signing this thing." And that led to the SEC suing them for fraud.
The deal was reportedly a fine for Elon Musk, a fine for Tesla, a requirement that Tesla add two new independent directors to the board, and a two-year bank on Elon Musk serving as chairman of the board. That's the deal he rejected.
Over the weekend, apparently, he saw the light, because he accepted a deal that basically had those same terms, except for the fact that the two-year ban is now a three-year ban on him serving as chairman of the board.
Moser: I just like to think that Elon Musk is a Motley Fool Money listener. I think we called this on this week's episode, right, Chris?
Hill: It was the lead story.
Moser: We realized his knee jerk reaction, and we thought, "Listen, he has more to lose, he'll come back around and go ahead and settle this." There were too many rea sons to not do that. He had too much to lose to sit there and try to stretch this thing out, particularly when you consider where Tesla is today.
For me, it's interesting to see how many people are having fun framing Musk losing the chairman's role as bad. As investors, we actually love to see that. I do! I love to see that separation of powers.
I mean, if anything, it perhaps gives someone to counter Musk's somewhat impetuous nature. That is, unless they install a puppet. But I don't think that's something that would necessarily happen. I think ultimately, this is a good thing in.
If anything else, this just goes to show you that, as an individual investor like we are, there are forces at play that we cannot anticipate and really can't have any effect on. The market closed Friday, the world was coming to an end. Pre-market today, all is right with the world. There's nothing that we can do to try to be a part of that. That's why we take that business-focused approach of just saying, "Hey, we're going to try to find good businesses that are changing the world with good leaders, and we'll go and hitch our wagon to their stars, and just take the long-term approach there." These are the types of things that we have no control over, can't compete on that field.
Muckerman: Seems like a slap on the wrist to me, even though he is out the chairmanship rile. I appreciate it as a shareholder. I think they originally wanted to ban him from being a director or an officer of any publicly traded company.
Hill: That was the lawsuit. It was basically, "Here's this deal. Go ahead and take this deal and you can put this behind you." And he said, "No." And they said, "OK! Now we're going to sue you for fraud. By the way, here's one of the penalties." If they had proven him guilty of fraud, that was one of the things that they were facing. I'm sure there were people, whether they were other executives or lawyers at Tesla, or large shareholders, who pulled him aside and said, "Hey, you think things are distracting, right now? Imagine this lawsuit and spending the next couple of years on this. And, oh, by the way, if you lose, this is what you're looking at."
Muckerman: Yeah, I think he brought on Mark Cuban's lawyer from his insider trading case. So maybe he had some influence there to be like, "I've been through this before. You might not want to test them."
Moser: Tesla is not 16% better today. It's not like all is now fixed. It still has very much the same challenges as it had on Thursday and Friday of last week. This just clearly erases some uncertainty. And that was some big uncertainty, if he decided to go through that sue.
Muckerman: And he's still tweeting out Naughty by Nature music videos at 04:00 AM on Monday morning, the day after all this breaks, and sending emails to all employees on Sunday to encourage them to close out September with a bang.
Hill: I want to go back to something you touched on, Jason. I also find this interesting, that there are some people out there who are painting this as a big loss for Elon Musk. Sure, he has to write a $20 million check, and Tesla has to do the same thing. But, let's say instead, he just came out this morning and said, "I'm stepping down as chairman of the board. I'm announcing that we're going to be hiring two new independent directors. And, oh, by the way, I realized that I've been tweeting a little bit too much, and now my tweets are going to be reviewed by people before they go out." We would all applaud that! I'm not a shareholder, I would stand up and applaud that!
Moser: It's the difference of someone volunteering to do something vs. being told to do it, right? I think there are a lot of people out there that, whether they're just Tesla bears or they just don't like the way Musk runs his company and communicates, they're glad to see he got his ass handed to him for a round. But, again, you have to love what this guy's trying to do beyond just cars. Not many people out there that can do what he's doing. So, I don't know, I'm not an investor in Tesla, but I certainly do support what he's doing.
Hill: Facebook announced late last week that hackers managed to gain access to nearly 50 million accounts.
Moser: That's a shame!
Hill: [laughs] They say in life, timing is everything. I think that cuts both ways. Right now, the timing really could hardly be worse for Facebook for this type of news. The Cambridge Analytica stuff is still close enough in the rearview mirror. We've got the midterm elections coming next month.
Muckerman: GDPR in Europe.
Hill: Yes, the prospect of, what is it, a $1.6 billion fine? All that sort of thing. They're working with the FBI to try and figure out all of the details here. But this is just... I don't know. I'm sort of tempted to say that, given the strength of Facebook's business, given how dominant the company is, how sticky the platform is, that it's not going to matter. But the optics sure are bad.
Muckerman: I think until someone actually uses this data in a very malicious way, these just keep getting brushed off to the side, at least by the users of these websites. I read an interesting thought that maybe some of the partners that Facebook uses -- when you have these tokens, you're logged in and you can hop into your Spotify account, you can hop into Airbnb, and that kind of stuff using your Facebook login -- if these partners start to get nervous and pull out, maybe that kills a little bit of the functionality in the ecosystem that Facebook has created. But until someone uses this data in a malicious way to affect these 50 million people, I think it's yesterday's news next week.
Moser: Yeah, more than likely so. We've been saying this for a while, this is just the cost of doing business with a company like Facebook and really any of these companies where you're offering up your data in such an explicit fashion. No one's twisting your arm, you're the one going in there and telling people where you are and what you're having for dinner. I think this is going to be something that continues to happen.
You're right, Facebook's business is so dominant because its user base is so big and they have so many different platforms. It's really difficult to change human behavior. I don't think people generally are going to pivot toward not being social and not using social platforms.
You keyed in on a good point there, Taylor, in regard to partners of Facebook. We read not all that long ago about how Facebook had really been courting banks to get more of that data. It's very important to think about that. If you look at something like a bank, a bank has all of the incentive in the world to keep your data private, to keep your data secure. Facebook's business model, actually, they have the incentive to not protect your data. Their business model is essentially based on monetizing your data. So you have to consider that.
For me, I think Facebook continues to exist, no problem. I do think there will be limits on partners that want to do too much with them, because those incentives are not aligned.
Muckerman: They're chasing out the executives of companies that they've purchased. WhatsApp, they were trying to monetize that in ways that the founders didn't appreciate, so they're leaving. I don't know if that's why the Instagram guys are taking off. That's pretty recent news, as well.
Hill: We had Brad Stone, who wrote The Everything Store and The Upstarts, he was the guest on Motley Fool Money last week. One of the things I asked him was about the departure of the Instagram executives, and some of the other executives who have recently left Facebook. One of the things I asked him was, "Does this hurt Facebook in terms of future acquisitions? Because if I worked at Alphabet in M&A, I would absolutely use that as a talking point against Facebook." And Brad said, "No, I don't think that hurts them. I think that what's hurting them more is the spotlight that big tech is under right now, in terms of these data breaches, in terms of Congress, all these sorts of things." If you're a small upstart tech company, a $50 million company, $100 million company, that sort of thing, and Facebook or Alphabet or some other tech giant comes knocking on your door talking about an acquisition, there's part of you that's like, "We kind of like not being in the spotlight, so we're going to say no for now."
Moser: And I don't think this is something that's going to end anytime soon. GDPR was a start, but a lot of these tech companies were here last week, testifying again. It sounds like while lawmakers are not looking to outright regulate them, there is going to be legislation crafted to protect consumers more. That, of course, is going to take forever to craft. There are going to be a lot of conflicts of interest there to try to make this all work for everybody involved. It's just another way of saying that this is going to take some time.
It's certain that the legislative outlook here, it'll look far different a year from now than it does today. I don't know that necessarily bodes well for these businesses.
Hill: Jason Moser, Taylor Muckerman, thanks for being here, guys!
Moser: Thank you!
Muckerman: Thank you!
Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!