TURNING THINGS AROUND – GENERAL ELECTRIC

We talked yesterday about the WeWork acquisitions that appear extraneous to its core product.

General Electric, a company whose progress in disentangling itself from previous acquisitions, is the current poster child for acquisitions made without thought given to core product.  CEO Larry Culp, has the difficult job of managing the “disentangling.”  Acquisition/merger deals can be made in just a few months; disengaging from those arrangements takes much longer, particularly if the intent is to have a healthy and successful company as a result.  Culp has recently made this fact crystal clear by saying that expectations for a near-term turnaround for GE were likely a little far-fetched.  He indicated that the company wouldn’t generate any cash from its operations in 2019 because its power business continues to lose money.  He added that, “This is a multi-year turnaround in the power business. . . I don’t want to sugarcoat the process . . .There’s a lot of work;  It’s a game of inches.”  Yes, indeed – that’s what’s involved when a company is trying to turn itself around during the laborious task of installing better management practices as well as divesting itself of much of its ill-conceived acquisitions.  Culp indicates that he expects free cash flow performance to improve in 2020 and 2021 and that 2019 will be the year in which they ramp up restructuring in power and elsewhere to “wring out” as much cost as possible before year-end.  During the past week, GE executives held a session with investors to provide additional information on the company’s insurance holdings, which forced GE to plug a $15 billion shortfall after several years.  Most investors see the company as moving in the right direction, following some trying previous years.  GE lost $200 billion in stock market value in 2017 and 2018, the result of needing to face continued problems in the power business and GE Capital.  Culp has been embracing the need for change head-on and hasn’t been reluctant to walk back the rosy picture painted by former CEO Jeffry Immelt, as well as the costly acquisitions made during his tenure.  Culp explains his approach in this way: “You try to make a market for reality inside the company, by asking tough questions, encouraging honest, tough answers, flipping over stones that maybe haven’t been flipped over.”  As we’ve discussed previously, Culp has spent a large amount of his time, since taking the helm, in working on turning around the power business.  The division makes and services turbines converting fuel into electricity and has been hurt by mis-management, bad deals and a market shift away from fossil fuels in favor of renewable energy sources.  The power division lost $2.7 billion in free cash flow in 2018; Culp expects that loss to widen in 2019.  “We think this is a transformation in the making,” he says, “But we need to pay the piper in 2019 and we’re going to do that because that’s the right long-term decision for GE.”  It’s definitely about time to think about GE; it’s always good to hear Culp as he makes the case for the company, not for some frivolous notions of acquisitions and mergers.

ALL THE MOVING PARTS:  A COMPANY IS ONLY AS GOOD AS ALL OF ITS PARTS, WORKING TOGETHER, CAN PRODUCE SIGNIFICANT PROGRESS TOWARD AN AGREED-UPON GOAL.

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