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Geoff Colvin | 2018-05-29 21:30
It’s a bad day for a CEO when he announces he’s retiring and the stock goes up. That was Jeff Immelt’s day on June 12, 2017. The news of his departure was in one sense no surprise—some investors and analysts had been urging his ouster for years—but it was also a shock.
He’d been General Electric’s CEO for almost 16 years, and outsiders were unaware of any specific succession plans or that ¬Immelt, at age 61, had any intention of stepping down. Suddenly they were told that in just seven weeks he’d be gone as CEO (he remained nonexecutive board chairman an additional two months), to be succeeded by John Flannery, head of GE’s health care business and a 30-year employee. Investors didn’t need long to decide this was good news. The market was flat that day, but they bid GE stock up 4%.
Their optimism was at best premature. The stock closed at $28.94 on June 12 and has not reached that price since. As economies boomed worldwide and U.S. stock indexes soared, GE has collapsed in a meltdown that has destroyed well over $100 billion of shareholder wealth. Pounded by a nonstop barrage of bad news, investors are traumatized and disoriented. “They just can’t figure it out and don’t want to invest,” says analyst Nicholas Heymann of William Blair & Co. “This isn’t like surveying the landscape. It’s spelunking with no lights and no manual.” Analyst Scott Davis of Melius Research says some investors have become permanently disillusioned: “Many have told us they will never own GE again.”
这一乐观情绪来得似乎有点太早了。6月12日，GE的股价以每股28.94美元收盘，但自此之后再也没有触及这一价位。随着全球经济的复苏和美国股票指数的飙升，GE却轰然倒塌，让股东1000亿美元的财富化成了泡影。在受到接二连三不利消息的打击之后，投资者可谓是心力交瘁，不知所措。William Blair & Co.的分析师尼古拉斯·黑曼说：“投资者对此感到困惑不已，而且失去了投资意愿。目前的情况并不是地形勘察那么简单，而是在没有灯光和地图的情况下探索山洞。”Melius Research的分析师斯考特·戴维斯称，一些投资者已经对GE不再抱有任何幻想：“很多投资者告诉我们，他们不会再买GE的股票。”
Retirees and employees who bought heavily into the stock are furious; some picketed GE’s annual meeting in April. Former executives are dumbfounded. “It’s unfathomable,” says one. “You couldn’t possibly dream this up. It’s crazy.” After all, this is GE, a corporate aristocrat, an original Dow component, the world’s most celebrated management academy, now revealed as a financial quagmire with a deeply uncertain future. Its bonds, rated triple-A when Immelt became chief, are now rated five tiers lower at A2 and trade at prices more consistent with a Baa rating, one notch above junk.
In response to this debacle, GE has repudiated its previous leadership with a zeal unprecedented in a company of its size and stature. Gone in the past 10 months are the CEO, the CFO (who was also a vice chair), two of the three other vice chairs, the head of the largest business, various other executives—and half the board of directors. The radical board shake-up “could be one of the most seminal events in the history of U.S. corporate governance,” says a longtime vendor and close student of GE.
Immelt declined to be interviewed for this article but sent Fortune a statement in which he cited accomplishments and said, “None of us like where the stock is today. I purchased $8 million of stock in my last year as CEO because I believe in the GE team. I love the company, and I urge them to start looking forward and win in the markets.”
Flannery’s strongest message is how completely he’s breaking with GE’s recent past. “The review of the company has been, and continues to be, exhaustive,” he told investors last October. Specifically: “We are evaluating our businesses, processes, [the] corporate [function], our culture, how decisions are made, how we think about goals and accountability, how we incentivize people, how we prioritize investments in the segments … global research, digital, and additive [manufacturing]. We have also reviewed our operating processes, our team, capital allocation, and how we communicate to investors. Everything is on the table … Things will not stay the same at GE.”
Inescapable conclusion: This place is an unholy mess.
Flannery has even voiced the unthinkable, that GE might be more valuable in pieces. “The pressure on GE to announce some sort of breakup is very high,” says Davis of Melius Research. Whatever happens, Flannery has a good shot at becoming famous—as the guy who saved GE or the guy who broke it up.
All of which leaves the world asking two questions: What happened? And what’s next? The first question must be answered first. It is inevitably a story about Jeff Immelt, and it starts well before the stock’s recent implosion. As a former GE executive puts it, “The wheels came off in 2017, but the lug nuts had been loosening for a long time.”
Immelt often notes that his CEO tenure got off to a rough start; it began just four days before 9/11. Airplanes, one of them powered by GE engines, crashed into the World Trade Center towers, insured by GE Capital. Air travel demand contracted violently, hobbling GE’s business as the world’s largest lessor of planes. In his first week as chief, at age 45, he faced a once-in-a-lifetime crisis.
He came through it well, forced to make decisions for which no one could be prepared. Should he support and partially backstop a government loan guarantee for America West Airlines, a GE customer? If he didn’t say yes—now—the airline would fail. Never in his career had he touched the airline business. He said yes. “I’m eternally grateful to him,” says Doug Parker, America West’s CEO at the time, and now, through a series of mergers, CEO of American Airlines. “It was a huge risk. He could have said he didn’t understand this and wouldn’t do it.”
In the following months, as countries and companies obsessed over security, Immelt saw an opportunity. GE bought Ion Track, a company with advanced explosive-detection technology, for an undisclosed price. Some 18 months later he bought another explosive-detection company, ¬InVision, for $900 million. But in 2009 he sold a large majority interest in the two firms, packaged as GE Homeland Security, in a deal that valued the unit at just $760 million. His security bet was a bust.
It was the beginning of a pattern, which many analysts and observers say is an important element in GE’s current misery. Immelt followed fads, they say, paying top dollar to acquire the hot businesses of the moment.
For example, from 2010 through 2014, when oil prices hovered around $100 a barrel, GE bought at least nine businesses in the oil and gas industry. Then, in 2016, with prices down by half, it agreed to combine its oil and gas unit with Baker Hughes, a publicly traded oilfield services provider, creating a company owned mostly by GE. Regulators approved the deal last July; Baker Hughes stock quickly fell and has yet to reach the price it hit that summer, even as oil prices have risen. Just days after Immelt left GE’s board, in a telling move, it formed a panel called the Finance and Capital Allocation Committee, whose express purpose is to scrutinize management’s loose control of its wallet. The first thing Flannery tasked them to work on was “evaluating our exit options on Baker Hughes.”
Another example: In 2004, with U.S. home prices rocketing, GE paid $500 million for a subprime mortgage company called WMC. In 2007, with home prices falling, GE laid off most WMC employees and sold the company, which lost $1 billion that year. This past February, GE announced that the Justice Department “is likely to assert” violations of law at WMC when GE owned it, and GE reserved $1.5 billion against a possible penalty.
By no means were all of Immelt’s deals losers. What’s most striking about his acquisitions and divestitures is their staggering quantity. He did hundreds of deals and claims with apparent pride to be the only CEO who has ever bought and sold over $100 billion of businesses. Among those deals were some big winners. GE bought Enron’s wind turbine manufacturing assets for $358 million in a bankruptcy auction, creating the foundation of a business (augmented with several later acquisitions) that brought in $10.3 billion of revenue last year. In his largest industrial divestiture, Immelt sold GE’s plastics business to Saudi Basic Industries for $11.6 billion just before the financial crisis; the price was more than analysts expected, and the deal was widely regarded as excellent for GE.
On the whole, though, Immelt’s shopping skills were not stellar, and it was part of a larger problem. Ask Wall Street analysts, customers, vendors, competitors, former executives, and former directors to explain how GE ended up where it is, and their first words are the same: “capital allocation.” That’s a crucial job for any CEO, nowhere more so than at GE, with its ever-shifting portfolio of businesses. The near-universal consensus outside the company is that Immelt was bad at it.
While Immelt’s biggest industrial divestiture, plastics, may have been his best deal, his biggest acquisition looks like his worst—and it’s still dragging the company down. That was his 2015 acquisition of Alstom, a big French competitor of GE’s largest business, GE Power, which makes and services the huge turbines that utilities use to generate electricity. At a price of $10.6 billion, this was GE’s most expensive industrial acquisition ever. An Immelt spokesman notes that the board reviewed the deal eight times and approved it.
The problems were many. Alstom’s profit margins were low, but GE figured it could raise them. GE’s strategy relied heavily on selling services, but regulators made the company divest Alstom’s service business. The acquisition added more than 30,000 high-cost employees, many in Europe, but GE figured they’d more than pay for themselves. Worst of all, the purchase was spectacularly mistimed. GE doubled down on fossil-fuel-fired turbines just as renewables were becoming cost competitive. Result: Global demand for GE Power’s products collapsed, while GE had bet heavily the other way. GE Power’s profit plunged 45%.
在接下来的几个月中，随着各国和各大公司开始痴迷于证券，伊梅尔特看到了一个机会。GE以不为人知的价格收购了Ion Track，后者拥有高级爆炸物检测技术。18个月后，他以9亿美元的价格购买了另一家爆炸物检测公司InVision。然而在2009年，他将两家公司包装成为GE Homeland Security，并在一次交易中出售了其大部分控股权益，但售价仅有7.6亿美元。他的证券豪赌以血亏告终。
尽管伊梅尔特最大的业务剥离项目——公司的塑料业务——可能是他最辉煌的交易战绩，但他所主导的最大的收购交易似乎却成为了他最大的败笔，而且仍在拖累公司。这次交易就是2015年对阿尔斯通的收购，这家法国公司是GE最大的业务GE Power的有力竞争对手。GE Power致力于生产发电厂发电用的大型涡轮，并为其提供服务。收购价格达到了106亿美元，是GE历史上最昂贵的业内收购。伊梅尔特的发言人指出，董事会曾先后八次对这一交易进行评估，然后批准了该交易。
该交易存在不少问题。阿尔斯通的利润率较低，但GE认为自己可以帮助其扭转这一局面。GE的策略很大一部分依赖于销售服务，然而监管方迫使GE剥离了阿尔斯通的服务业务。此次收购带来了3万多名高成本雇员，其中很多都位于欧洲，但是GE认为这些员工贡献的价值将超过其成本。最糟糕的是，收购的时机差到了极点。GE花重金押注使用化石燃料的涡轮机，而可再生能源的成本竞争力却在不断提升。结果：全球市场对GE Power产品的需求大幅下滑，但GE大量资金的走向却是背道而驰。GE Power的利润暴跌了45%。
The transaction has been a debacle and an embarrassment. A former senior leader recalls that as GE Power cratered, “people looked at us and said, ‘You’ve been in this business a hundred years, right?’ ” GE nonetheless defended the deal stoutly as long as Immelt was around. Then, a few weeks after he stepped down as board chairman, Flannery acknowledged what everyone already knew, telling investors, “Alstom has clearly performed below our expectations, clearly. I don’t need to tell you that.”
Yet Alstom was not Immelt’s worst capital-allocation blunder, nor even close. That occurred years earlier, in increments, as he bulked up GE Capital before the financial crisis. A popular story line holds that his predecessor, Jack Welch, enlarged GE Capital unsustainably, forcing Immelt to deflate it back to sane dimensions. But the numbers show the opposite. GE Capital never accounted for more than 41% of GE profits during Welch’s last decade, while Immelt expanded the business by adding over $250 billion of debt to it, until it accounted for 55% of GE’s profit in 2007. He also allowed it to take greater risks, notably by making direct equity investments in commercial real estate. That worked great until the crisis, when most of GE Capital’s profit evaporated. Immelt cut GE’s dividend for the first time since the Great Depression and had to ask Warren Buffett for $3 billion right away. GE Capital never recovered, and when Immelt announced plans to dismantle it in 2015, investors cheered.
然而，阿尔斯通并非是伊梅尔特在资本配置方面所犯的最大的错误，而且阿尔斯通与之相比还远远不及。这一事件发生在数年前，而且逐渐升级，当时，他在金融危机之前大幅提升了GE Capital的负债规模。一个广为流行的说法是，他的前任杰克·韦尔奇将GE Capital扩大到了一个不可持续的水平，迫使伊梅尔特将其缩减至合理的规模，但数字却指向了相反的方向。GE Capital在韦尔奇最后10年的任期中所贡献的利润从未超过GE总利润的41%，而伊梅尔特则通过让GE Capital背负2500亿美元的额外债务，扩张了其业务规模，直到2007年，GE Capital 2007年在GE利润中的占比达到了55%。他还允许GE Capital承担更多的风险，最明显的举措就是让该公司直接在商业地产市场进行权益投资。此举一开始倒是赚了不少钱，但是在金融危机爆发之后，GE Capital的利润蒸发殆尽。伊梅尔特自大萧条以来首次削减了GE的派息，而且被迫立即向沃伦·巴菲特求援30亿美元。GE Capital自此之后便一蹶不振。当伊梅尔特2015年宣布计划解散GE Capital时，投资者无不为之欢呼雀跃。
He mishandled capital in other ways too. He spent $93 billion buying back stock, which isn’t necessarily a bad idea, but he had an unfortunate knack for buying at high prices. GE spent only $7 billion of that $93 billion from 2008 through 2011, when the stock price was mostly in the teens; the company spent almost $80 billion buying back shares at prices over $30.
Immelt also maintained the dividend even when GE’s operations weren’t furnishing enough cash, forcing him to borrow money and send it directly to shareholders. An Immelt spokesman says, “Jeff cut the dividend once. He did not want to do it twice.” Flannery admits, “We’ve been paying a dividend in excess of our free cash flow for a number of years now.” Days after Immelt left, Flannery and the board cut the dividend by half.
Inept capital allocation can be documented with hard data. Management of human capital and culture is much squishier but at least as important. It too was a contributor to GE’s collapse.
The hardware of GE’s famous talent development apparatus remains in place—the famous Crotonville, N.Y., campus, the Session C management appraisals—but several former executives who worked with Immelt believe the system’s software deteriorated. “There’s no question that the leadership development process lost some of its rigor,” says one, echoing a common view that goes back years. Still, those are only opinions, and an Immelt spokesman notes that the strong performance of GE’s jet engine and health care businesses rebuts the notion of a broad cultural problem. Some executives felt the culture of performance remained powerful. “I had many opportunities to leave and be paid more,” says John Rice, who retired as a vice chairman in March. “I stayed because of the culture. It pushed you to do all you could do, and if you didn’t, you had to explain it and be accountable for it.”
The strongest evidence that human capital and culture need serious attention at GE comes from Flannery’s actions and statements, which reinforce what the critics have been saying. He clearly wasn’t happy with the top team he inherited and has noted that “40% of the team is new.” He constantly reminds investors that “there have been significant changes in the leadership of the company.”
Perhaps his favorite theme is the need to fix the GE culture. “Culture—you’ve heard me say it a hundred times,” he told investors. “Inside the business they’ve heard it a lot. “He’s explicit that GE needs more “rigor” and “accountability—outcomes matter. Effort’s good, outcomes matter.”
Flannery (who declined an interview request) is describing a company that doesn’t execute. In GE Power, he says, “we have exacerbated the market situation with some really poor execution.” Executives who worked with Immelt say he appreciated the importance of execution but felt it was a self-sustaining core competency. “Jeff assumed early on that this company is phenomenal at operational execution and will continue no matter what,” says one. “That was a fatal mistake.”
The most surprising element in Flannery’s critique of the culture he inherited is that it needs “more candor, more debate, more pushback.” Really—more candor? At GE? The place has long been famous as a company where frankness borders on rudeness. An Immelt spokesman says “there was a lot of pushback” in meetings with Immelt. Yet Flannery harps on the point, and executives who worked with Immelt voice the same concern. “Jeff just didn’t listen to his subordinates,” says a former finance executive. “Pushback went away under Jeff,” says a former staff member. “When the top guy is the smartest guy in the world, you’ve got a real problem.”
Jeff Immelt is a big, affable, charming man. People tend to like him. He grew up in Cincinnati, where his father was a manager in GE’s aircraft engine business, though Jeff says that fact didn’t influence his decision to work at GE. Dartmouth recruited him as a football player in the nonglamorous position of offensive tackle, and he thought he might one day play professionally. Schoolmates saw him as a leader; he was president of his fraternity, and one of his fraternity brothers, former Vanguard CEO Bill McNabb, says no one was surprised when Immelt became GE’s chief.
After college he returned to Cincinnati for a job in Procter & Gamble’s famous brand management program. Seated next to him was future Microsoft CEO Steve Ballmer; they worked on Duncan Hines cake mix, and Immelt often recalls with a laugh that they were “horrible employees.” They must not have been too bad. A couple of years later, Immelt went to Harvard Business School and then to GE, where he started as an internal marketing consultant at headquarters.
When he became CEO, he faced the task that confronts every new GE boss: remaking the company. By tradition, the former chief executive leaves the board and leaves the building, giving the new captain free rein to set GE’s direction. Immelt’s changes included two that urgently needed doing. He immediately started making GE more global. Surprisingly for such a big, famous company, it was still doing 60% of its business in the U.S. By the time Immelt left, GE was operating in 180 countries and getting 61% of its revenue from outside the U.S.; annual revenue from emerging markets expanded from $10 billion to $45 billion. Some analysts complain that in certain markets, especially China, much of that new business was bought at too high a price. But the locus of global economic growth was moving, and GE needed to follow it.
2017 Company Profile: General Electric.
Total return to shareholders ：-3.8%*
*Total Return to Shareholders assumes the 2007–2017 Annual Rate.
Immelt’s other major response to a mega¬trend was making GE more digital. It’s obvious in retrospect, but seven years ago the digital opportunities for a big industrial company weren’t so clear. Analysts praise Immelt for prescience, though again they fault the execution. “They were early in figuring out the value of data to indus¬trial businesses,” says analyst Heymann, “but it was dramatically more expensive than envisioned.” In 2015 Immelt even said that GE would be a top 10 software company by 2020. No one expects that anymore, and the company is laying off more than 100 employees at its San Ramon, Calif., software operation. The concept, however, was clearly correct, and GE moved in the right direction. Flannery says, “We’re still deeply committed to [digital], but we want a much more focused strategy.”
Many of these changes happened in the aftermath of the financial crisis, and investors mostly liked what they saw. GE stock tracked the S&P 500’s steady march upward. When GE fell behind in 2015, Immelt confidently predicted the company would earn $2 a share in 2018, a big increase. Activist investor Nelson Peltz’s Trian Fund bought a $2.5 billion stake. Peltz is well known for holding leaders of his portfolio companies accountable, and Immelt was on the hook to deliver $2 a share in 2018. The stock resumed its rise. But the lug nuts were loosening. Late in 2016, the world began to notice.
What it noticed first was cash. GE was spending far more than it was generating. The company could pay its bills, but its cushion was getting thin, and heavy cash requirements loomed, such as restocking a pension fund that was underfunded by billions. From 2015 through 2017, GE generated about $30 billion from free cash flow and asset sales, but it spent about $75 billion on stock buybacks, dividends, and acquisitions. As economist Herb Stein famously observed, if something can’t go on forever, it will stop. GE was headed for a brick wall.
The next thing the world noticed was the magnitude of the trouble unfolding at GE Power. As recently as late May of 2017, Immelt was telling Wall Street the operating profit outlook for GE Power was “++,” meaning very positive. Just two months later, GE reported that Power’s quarterly profit was down, orders were down, and the outlook wasn’t good. As the year progressed, it got worse.
The cascade of grim news accelerated. After GE halved the dividend in November, it announced in December that 12,000 GE Power employees would be axed. In January it wrote off $6.2 billion in connection with a long-term-care insurance business in GE Capital and said that business would require another $15 billion of write-offs over the next seven years. The charge was so big and unexpected that the SEC opened an investigation, still unresolved. Then, in February, GE revealed the Justice Department investigation into WMC Mortgage and in April announced its $1.5 billion reserve. In May it said it might put WMC into bankruptcy.
引发世界关注的第二件事情在于GE Power问题的严重程度。近期，也就是在2017年5月末，伊梅尔特向华尔街透露，GE Power的运营利润展望为“++”，意味着非常积极。仅仅在两个月之后，GE报告称GE Power的季度利润出现了下滑，订单也有所下降，而且公司的展望也不是很好。随着今年时光的流逝，公司的情况不断恶化。
然而，不利消息接踵而至。在GE于11月停止派息之后，公司在12月宣布GE Power裁员1.2万名。1月，GE减记62亿美元，涉及GE Captial长期照护保险业务，并表示该业务在未来7年中需另行计提150亿美元。这笔始料未及的费用异常巨大，结果招来了美国证券交易委员会的调查，该事件依然未得到解决。随后在2月，GE公布了美国司法部对WMC Mortgage的调查，并于4月宣布拨备15亿美元。5月，GE表示可能会让WMC进入破产程序。
Are the bad surprises finally over? No one has the faintest idea. Immelt’s goal of $2 EPS in 2018 is long forgotten (Wall Street’s consensus forecast is $0.94). In its place is Flannery’s stated goal, which is almost pathetically modest: “restoring the oxygen of cash and earnings to the company.”
That answers our first question, What happened? The answer to the second—What’s next?—depends on the various pieces into which GE is disassembled. Its lighting and train-related businesses plus some smaller units are publicly for sale. If that’s as far as it goes, a still recognizable GE would remain, comprising the power, aviation, and health care businesses. Rehabbing that troika into a thriving company would be a multiyear effort because of GE Power’s decline; the health care and aviation units are doing well.
But some investors, especially Trian, might not want to wait so long. Trian’s Ed Garden joined the GE board in October, and Trian is well known for often urging the breakup of its portfolio companies. In January Flannery explicitly raised the option of a breakup and has said nothing to dampen speculation. If even one of the three main businesses were to be separated from the others, GE as we know it would end. An entity by that name would surely persist, but its meaning would be lost. The analog would be ITT, once an imposing global conglomerate, now an assortment of diminished pieces on their own journeys of merging and subdividing.
Most in danger of extinction is GE’s reputation as a superbly managed company. Unlike most marks of character, this one has a start date: April 24, 1900, when the Wall Street Journal declared, “General Electric is entitled now to take rank as one of the … best managed industrial companies known to investors.” That reputation survived economic ups and downs until sometime in the past decade. It’s now on life support.
Whether its storied corporate brand can be revived has become the largest question about GE. The company faces no crisis of survival. Its main businesses will likely carry on in some form. The tension surrounding the company is of a higher nature, befitting GE. It’s whether this extraordinary company will regain its lost luster or descend, at last, to mediocrity.
This article originally appeared in the June 1, 2018 issue of Fortune.
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