GE was once the most valuable company in the US. And not in like 1875, but in 2001. Now, it’s worth about 15% of its peak value. What happened?
Lights Out is an interesting look into GE’s decline, written by two WSJ reporters. It’s a relatively quick read and enjoyable, though probably best for people interested in business books1.
Why did GE fail?
Over time, GE became less of a manufacturing company and more of a bank: its division GE Capital, which originally helped its customers finance their purchases, expanded into all sorts of investing / lending, including small business loans, venture capital, and holding real estate.
GE Capital was not just profitable, but strategically important for the company. GE was obsessed with reporting quarterly profits that steadily increased each quarterly. This is because investors generally want steady and predictable earnings from customers. But getting your profits to increase each quarter for years is really tough!
Fortunately, GE Capital (and GE more broadly) were experts at finessing financials to make quarters. A very basic example (from GE’s traditional business) would be calling a customer and getting them to buy a machine the day before the quarter ended as a favor.
Under the leadership of Jeffrey Immelt, the company expanded into lots of new markets, including software and oil & gas equipment. It often overpaid for acquisitions or got nowhere with new products. At the same time, some of its core markets, like machinery used in gas power plants, grew slower than anticipated
And then, in what feels like a Succession episode, there were the sins of the past: At one point, GE had gotten into the insurance industry, but ultimately sold that business. But there were some contracts so bad and toxic that nobody would take them, so they stayed on GE’s books (unknown to investors or even many in the company). In 2018, GE announced that they would allocate $15B to cover insurance claims from these contracts, which shocked investors and hurt the stock
Investors also questioned the logic of a conglomerate. At this point, the business effectively been dismantled and sold for parts (and by 2024, “GE” will just focus on aerospace, having spun off its remaining healthcare and energy units).
If I had to sum it up, it was poor management decisions and some markets growing a bit slower than expected. A lot of it was capital allocation (a fancy way to say “what do we spend money on?”), with the company probably overpaying for some companies and spending too much on its dividend and stock buybacks2.
There wasn’t any massive fraud like Enron3, there weren’t any huge product issues like Boeing (whose new 737s kept crashing), and there weren’t any huge disruptive forces like those which sunk Blockbuster or Kodak (If anything, the company was overly focused on the next big thing). Throughout this whole period, GE kept making good power plant equipment, jet engines, and MRI machines. There’s nothing in the book about losing market share or the underlying businesses doing poorly. GE’s equipment still generates one-third of the world’s electric power
I enjoyed this overall - it’s a fairly quick read for a business book and almost all of this was new information to me.
Key takeaways:
In “why they failed” books, there are a few consistent themes:
It’s usually not one mistake that sinks a company, but mistakes that compound over time and keep getting worse as people try to cover it up (in GE’s case, trying to smooth earnings got harder over time, as each quarter required even more manipulation as earnings targets continued to grow)
There is often a culture that makes it hard to acknowledge mistakes or talk honestly about shortcomings (Immelt was a relentless optimist and demanded the same from his team)
The company becomes overly focused on 1 metric to the detriment of the entire business (e.g., near-term earnings growth in GEs case)
Sometimes our biggest weaknesses some come from our biggest strengths. Immelt was a fantastic salesman: charismatic and relentless. But he also used this mentality for buying companies, where he was determined to close a deal, even if it meant overpaying for a company
You can’t buy your way out of a problem: GE really wanted to get into software (who wouldn’t, given it’s an amazing business model) but just threw money at it without carefully articulating any kind of strategy or vision. It reminded me of some of the commentary from The Afghanistan Papers, where the US spent massively on things like brand-new schools when there weren’t any teachers to put in them).
GE didn’t just pour money into Predix—it smothered the project with cash. But without a coherent strategy and well-thought-out processes, the product development path was a wasteful one. GE’s plan to move fast, produce a viable product, and then perfect it in the field got bogged down partly because of the size of the effort. GE hired armies of new employees and gave them all the resources they wanted to build its vision. It was like an auto company building an assembly plant, hiring workers, and leaving them standing on the production line, waiting for the vehicle to be designed. Instead of charging a small team with developing the best product and then letting the operation grow with the product’s evolution, GE set up a huge organization that wasn’t quite needed yet. Development was often paused or delayed in order to start the process over entirely or just to stabilize the systems.
It’s important to be around people who will challenge you. GE’s board was comprised of some of the most accomplished executives in the world, but never pushed back on Immelt. One board member, new to the board, asked a more senior one what the board’s role was. “Applause,” he was told
Note that an even newer GE biography - with similar-ish name (Power Failure) - just came out that is supposed to be good, too.
In a stock buyback, a company uses its cash to purchase some of its own shares, which theoretically should make its investors shares more valuable as there are now less total shares so each remaining share receives a higher percent of profits. (E.g., there’s a company with 100 shares and $100 of (earnings) profits. Its earnings per share is $1. If the company buys 50 shares back, the earnings per share are now $2 ($100 of earnings divided by 50 shares = $2 / share), so each share should hypothetically be more valuable.
Though the company did play very fast and loose with accounting and was ultimately fined by the government.