GE unexpectedly removes its CEO

General Electric, mired in a deep slump, has ousted CEO John Flannery after barely a year on the job....

Posted: Oct 1, 2018 4:45 PM
Updated: Oct 1, 2018 4:45 PM

General Electric, mired in a deep slump, has ousted CEO John Flannery after barely a year on the job.

Flannery was replaced on Monday by Larry Culp, a respected executive who becomes the first outsider to lead GE in the company's 126-year history. Culp, the former CEO of industrial manufacturing company Danaher, joined the GE board in February.

GE has been hobbled by years of poorly timed deals and needless complexity that predate Flannery's tenure as CEO. Flannery launched a turnaround plan this year that would narrowly focus GE on aviation and power, but the makeover wasn't fast enough to restore confidence among investors.

As it announced the leadership changes, GE revealed more bleak financial news: The conglomerate warned that its 2018 profit will "fall short" of guidance because of "weaker performance" at its struggling power division.

GE further warned it will take an impairment charge related to GE Power. The company said the charge, which is still being finalized, will likely total nearly $23 billion.

"GE remains a fundamentally strong company with great businesses and tremendous talent. It is a privilege to be asked to lead this iconic company," Culp said in a statement. "We will be working very hard in the coming weeks to drive superior execution, and we will move with urgency."

'Proven CEO'

The stock jumped 14% as Wall Street cheered the leadership change. Thomas Horton, the former CEO of American Airlines, was elevated to the role of lead director.

"We hold Mr. Culp in the highest regard" given his "operational and strategic excellence" at Danaher, RBC analyst Deane Dray recently wrote to clients.

Scott Davis, lead analyst at Melius Research, hailed Culp as a "proven CEO with pedigree and the support of Wall Street."

Culp, 55, is credited with leading a turnaround at Danaher, which makes everything from dental tools to consumer packaging. GE said that during Culp's 14-year tenure, Danaher's sales increased fivefold and the stock price raced ahead of the S&P 500.

In other words, exactly the opposite of the situation at GE. Despite the strong economy and booming stock market, GE's stock price has crashed by nearly two-thirds since the end of 2016. Longtime CEO Jeff Immelt was replaced by Flannery, a 30-year GE veteran, in August 2017.

To pay off debt and jump-start the stock, Flannery announced plans to sell many of GE's businesses, including its century-old railroad division, Thomas Edison's light-bulb unit, Baker Hughes and the health-care unit that makes MRI machines.

Power nightmare

GE's shares fell nearly one-third this year as investors worried about the company's mounting debt and shrinking profit.

"Investors grew impatient with the lack of improvement and with the sheer scale of the problems uncovered," CRA Research analyst Jim Corridore wrote to clients.

The sell-off accelerated last month after GE said that two of its gas turbines failed, forcing the closure of power plants. The turbine trouble could tarnish GE Power's reputation and hurt sales at a time it's strapped for cash.

Under Immelt, GE made a big M&A splash by acquiring Alstom's power business for $9.5 billion. The 2015 deal, GE's biggest-ever industrial purchase, pushed the company further into fossil fuels just as renewable energy began stealing market share.

GE, an original member of the Dow since 1896, was booted from the exclusive index over the summer. Last week GE's market value fell below $100 billion for the first time since March 2009. As recently as 2004, GE was the most valuable company in America, worth nearly $400 billion.

Culp faces serious challenges as he tries to restore GE to greatness.

Beyond its power disaster, GE is grappling with a dual-pronged SEC investigation into its accounting practices and insurance business. And GE still owns a huge financial arm that it is trying to shrink. Part of that business, the subprime mortgage unit, is under investigation by the Justice Department. GE could put it into bankruptcy.

GE, like many multinational companies, is also navigating the US-China trade war. Analysts warn that GE's financial problems could force the company to cut its dividend again. GE halved the dividend late last year for just the second time since the Great Depression.

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