The release of former General Electric (NYSE:GE) CEO Jeff Immelt's book Hot Seat is naturally drawing attention to the company, and GE's future under current CEO Larry Culp. One of the key questions it raises is the role of luck in management. To be fair, Immelt has been putting much of the blame for GE's downfall on himself, but he's also acknowledging the unfortunate headwinds he suffered during his 2001-2017 tenure. Let's take a look at what happened, and more importantly, what it means for GE investors right now.
A troubled beginning
Immelt certainly had his unfair share of bad luck as CEO of GE. After inheriting a sprawling empire of businesses ranging from NBC, household appliances, and plastics to gas turbines, aircraft engines, and a huge finance arm, GE Capital, Immelt was immediately hit by the impact of the Sept. 11 terrorist attack on aviation.
Moreover, the 2000-2010 decade proved to be a moderate one for spending on power, and GE Plastics found itself suffering cost increases due to the surge in the price of oil over the decade. At the same time, GE's lack of significant oil and gas business meant it missed out on the boom.
Immelt spent much of his first decade trying to grow the financing arm of the business in order to generate the earnings necessary to support investment in the industrial businesses. History, and specifically the 2008 financial crisis, would not be kind in assessing the wisdom of that strategy, and GE took another major hit during the financial crisis.
Moreover, the long-term negative ramifications of bulking up GE Capital with unfavorable deals would be felt for years afterwards. For example, in 2018 (Immelt left the previous year) GE was forced to take a $6.2 billion charge relating to its insurance portfolio.
After the financial crisis
It gets worse. Turning to the industrial side. Immelt spent the period recovering from the financial crisis by disposing of non-core businesses and pivoting the company toward its industrial businesses.To his credit, Immelt was an early adopter of digital technology and the Industrial Internet of Things (IIoT). One of his big ideas was to grow GE's industrial scale in specific businesses, apply GE's IIoT solutions, and offer customers more productive solutions.
It was a rather simple, and compelling, big-picture strategy. Industrial businesses in GE's wheelhouse grow scale, then sprinkle on the magic dust of IIoT from GE Digital (the company's IIoT business) and watch as GE generates more profitability from the assets.
Unfortunately, it didn't work, and it's only in 2021 that GE Digital is set to start generating profit.
Having been underexposed to the rising price of oil in the previous decade, Immelt decided to acquire a slew of oil and gas equipment and services companies through the 2010-2017 period. Wellstream (a flexible pipemaker), the well support division of John Wood Group, Lufkin Industries (artificial lift technology), and the reciprocating compression division of Cameron International were bought in a multi-billion dollar flurry of activity from 2010-2014. All of it lead to the buyout of Baker Hughes in 2017. Now GE definitely had scale in oil and gas, but it also had a major slump in the price of oil to contend with.
It's easy to criticize Immelt for buying these businesses, but whomsoever predicted the collapse in oil prices from 2014 to 2020 has the right to cast the first stone.
It gets worse. At the same time as GE was buying oil businesses, Immelt oversaw the disastrous acquisition of Alstom's power and grid business for 12.35 billion euros in 2015. Here again, the logic of adding scale in order to attach GE's digital capability made sense. Moreover, before reaching for stones readers should note that Siemens and Mitsubishi Heavy Industries also bid for Alstom's assets. Unfortunately, the market for heavy-duty gas turbines would fall by half from 2015-2020.
It all resulted in Immelt spending the remainder of his tenure in 2017 stubbornly tied to the mast of guiding toward $2 in EPS by the end of 2018. The ship, the mast, and the EPS guidance went down with Immelt in 2017.
So, was it all because of bad luck?
The harder you practice, the luckier you get
Aside from Immelt's admission of his own failures at GE, the strongest argument against pinning the blame on luck is that GE has been unlucky since Immelt left as well. However, Culp is doing an admirable job, under far worse circumstances than Immelt had at his outset, in building a resilient company.
I have two examples for you. The sale of the biopharma business to Culp's former company Danaher (NYSE:DHR) looked like a great deal for Danaher at the end of 2019, but it now looks like a fantastic one after COVID-19 boosted its sales. While GE needed the cash from the biopharma sale, it probably would have got a much better price for it after the pandemic hit.
Second, the collapse in air travel has crushed earnings at GE's most profitable business, aircraft engines and aftermarket sales and service for engines.
That said, GE's stock price somehow sits 8% higher than when Culp took over in October 2018, and the company looks positioned to embark on a multi-year recovery in 2021. Much of this is a result of Culp's actions to reduce debt, the selling off of non-core assets, and the focus on lean management techniques to generate every bit of margin improvement he can out of GE's businesses.
Meanwhile, GE is now building a recent history of under-promising and over-delivering on guidance. Unlike Immelt, Culp is not betting the farm on big-picture strategic bets that could go wrong if end-market circumstances change.
There's no luck in all of that.