I like to read books about business failures. Most books praise successful companies, but it seems to me that you can learn a lot more by reading what went wrong and the mistakes leaders made. As Charlie Munger has said often, “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.”
So, in my opinion, it’s hard to find a better source of learning than General Electric over the past two decades! Remember, at the turn of the 21st century, GE was arguably the most admired company on the planet. Its president from 1981 to 2001, Jack Welch, was universally recognized as one of the best business leaders. For decades, many university graduates sought to carve out a niche for themselves at GE, which was recognized as a breeding ground for talented managers in high demand among other companies.
In 2000, GE was the largest US company with a market capitalization of nearly US$600 billion. Founded in 1892 in Schenectady, New York, in 2000 GE was present in many industries that affected most facets of the economy of developed countries around the world: turbines, household appliances, light bulbs, aircraft engines, locomotives, medical devices, not to mention GE Capital, a bank-like division that financed the company’s customers as well as many other borrowers. The company’s stock had been part of the select club of 30 companies that make up the Dow Jones Industrial Average since 1907.
21 years later, GE’s market capitalization is only $117 billion. Over the past many years, GE has sold many businesses, including its home appliance division, light bulb manufacturing business, oil and gas production equipment, and most of GE Capital’s businesses. There are only three main sectors of activity left today: Power, which produces mainly gas turbines and wind turbines; Aviation, which produces engines for major aircraft manufacturers; and Health, a manufacturer of medical devices, as well as various financing and insurance businesses. In the past few days, GE management has announced that it will distribute its health division in early 2023 and energy division in 2024 to shareholders.
Considering a recent reverse 8-for-1 stock split, the stock’s price fell from over $400 a share in November 2000, 20 years ago, to its recent price of just over $100 a share. Sure, dividends have been generous over the period, but the company is now paying only US$0.32 per share in annual dividends compared to over $9.50 per share before the 2009 financial crisis.
Here are the 10 lessons I take from the GE debacle:
1. A company’s dominance does not last indefinitely.
2. Watch out for leaders who seem to be walking on water.
3. Watch out for companies whose profits continually meet analysts’ expectations. Better to monitor free cash flow to avoid companies doing “accounting gymnastics”.
4. Watch out for companies whose CEO is also the chairman of the board. As the authors wrote, “When the board chair and CEO are the same person, the top executive is essentially his own boss.”
5. Watch out for strong growth in the finance sector (financing and insurance). At its peak, GE Capital provided more than half of GE’s profits.
6. Beware of complexity. The company’s former VP of finance during Welch’s reign, Dennis Dammerman, said “Only GE could understand how its businesses made money, and investors should simply be happy with the results.”
7. It is easy to make acquisitions with an expensive stock. “A steady stream of acquisitions fed the earnings momentum. GE could use its unusually high price-to-earnings ratio for an industrial company as high-value currency to pay for deals. By acquiring companies with a lower price-to-earnings ratio, GE was getting an automatic earnings boost.”
8. Watch out for great stories from the marketing department. As Elizabeth Comstock, named VP marketing in 2003 said, “Pick a simple story … and tell it again, and again, and again.” But the long-term financial success of a business cannot only be built on a great story.
9. The size and prestige of a stock exchange company does not mean that its stock is risk-free.
The GE debacle is unfortunately not unlike that of Bombardier, which reached its peak around the same time as GE (2001). Like GE, Bombardier had relied heavily on its financial division (Bombardier Capital). Like GE, Bombardier used to publish earnings per share consistently slightly better than analysts expected quarter after quarter and throughout the 1990s. Like GE, I believe Bombardier executives had acquired the certainty that they could succeed in almost any field and successfully rub shoulders with the biggest players in their industry.
But, at the end of the day, and this is the 10th lesson on my list, GE’s biggest mistake was the arrogance and sense of invincibility that emanated from its leaders.
