On Tuesday, January 16, 2018, GE surprised the market by disclosing it would book a $6.2 billion charge in its fourth quarter and would have to set aside $15 billion over seven years to bolster insurance reserves at its GE Capital unit.
The announcement surprised investors because GE shares have lost value in recent years and its problems have been much discussed and presumably disclosed and understood. Last year, in fact, the shares nose-dived, losing more than $100 billion in market value, when the company revealed that cash flow problems would result in reduced dividend payments.
These problems, and pressure from activist investor Nelson Peltz’s Trian Group, caused new GE’s new CEO John Flannery to announce last year that management, in addition to cutting the dividend, was exploring streamlining the company to focus on three core businesses: aviation, power and health care.
In light of Tuesday’s newly disclosed financial problems, GE announced that they are considering a more fundamental break-up of the company. “We are looking aggressively at the best structure or structures for our portfolio to maximize the potential of our businesses,” Flannery stated.
Flannery took the helm at GE from Jeffrey Imelt who ran GE for sixteen years. For much of these 16 years, Imelt enjoyed celebrity status. However, it appears now that he will be best remembered as the CEO that led GE to destruction.
Under Imelt, GE’s stock was dead last in performance among the thirty stocks that comprise the Dow Jones Industrial Average. Now it is increasingly likely that GE will be dropped from the DJIA altogether and that the company will be split apart, with the remainder being a very much smaller remnant of the former colossus.
A pat explanation of GE’s problems is that industrial conglomerates are outdated. However, GE’s problems are more a function of simple dishonesty. Jack Welsh, who amassed nearly a billion dollars running the company until 2001, was infamous among Wall St. analysts for never missing an earnings projection, no matter how preposterous the explanations for the company’s apparent clairvoyance in an unpredictable world. In 2005, a few years after Welsh left, GE was forced by the SEC to restate it’s earnings for several years and pay a fine.
During the financial crisis, GE was the beneficiary of approximately $140 billion in federal bailout funding. Shortly thereafter in 2009, GE settled a charge of accounting fraud brought by the SEC in 2009 and agreed to pay another fine of $50 million.
Almost immediately after Imelt vacated the top job at GE midway through 2017, disturbing tales of Imelt’s personal extravagance at the company’s expense came to light. Most notoriously it was revealed that Imelt habitually traveled via two corporate jets, one of which was vacant and brought along as a spare, just in case the first corporate jet had mechanical issues.
The precipitous drop in GE’s shares last year was accompanied by continued complex accounting posturing that the market suspected to be simple disingenuousness.
- “Everyone’s Fed Up With GE’s Confusing Accounting”, Bloomberg, October 16, 2017;
- “Murky GE Accounting Clouds Cash Flow”, Fox Business, November 10, 2017.
Tuesday’s announcement by the Company confirms that the GE’s ‘smartest guy in the room’ accounting explanations were indeed attempts to cover-up unpleasant truths at the company.
With respect to observations that GE was doomed because industrial conglomerates are outdated, the actions of Berkshire Hathaway with respect to GE are instructive. Berkshire Hathaway, as everyone knows, owns scores of companies outright and significant stakes in dozens more, and has handsomely rewarded its own shareholders in doing so. Last year, when GE divested its store credit card operation called Synchrony Financial, Berkshire Hathaway bought a significant stake, valued at over $500 million. In the same time frame, it sold all of its shares in GE.