G.E. Rolls Back the Breadth of Its Ambitions

This post was originally published on this site

https://static01.nyt.com/images/2017/11/14/business/14GE1/14GE1-moth.jpg

John Flannery, the new chief of General Electric, is backing away from the ambitious designs of his two predecessors, who steered the corporate giant and its conglomerate-style empire building for more than three decades.

Mr. Flannery, who became chief executive in August, left no doubt on Monday that the conglomerate era is long gone. The new G.E., he declared repeatedly in his first detailed presentation on its future, will be a smaller company with fewer businesses.

The operations up for sale include businesses that reach back to the days of G.E.’s founder Thomas Edison, like light bulbs and railroad locomotives. More than $20 billion in assets are earmarked for sale in the next couple of years.

In addition, to help pay for the remaking of the company, G.E. announced on Monday that it would cut its dividend, only the second time it has done so since the Great Depression. The quarterly payout will be sliced in half, to 12 cents a share.

The goal is to make G.E. “simpler and easier to operate,” Mr. Flannery said. “Complexity has hurt us.”

That complexity was long a part of the company’s pitch to investors. Past executives like Jack Welch argued that they could efficiently manage businesses that had little in common, like television, with NBC, and financial services. Other companies followed that thinking as well, leading to a wave of deal-making.

The streamlining began under Jeffrey R. Immelt, who led G.E. for 16 years after Mr. Welch retired in 2001. Mr. Immelt’s goal for G.E. was to create an industrial company for the internet age, adding software and sensors to industrial equipment to make “smart” machines. It was a bold plan, and Mr. Immelt once predicted that G.E. would become “a Top 10 software company” by 2020.

No more. While the digital strategy is still vital to G.E., Mr. Flannery said he was cutting that unit’s spending by $400 million in 2018, and focusing on a few products.

Even the G.E. board of directors is being reduced, to 12 members from 18. Three of the dozen will be new directors.

Mr. Flannery, 56, sought to portray the path ahead not as a retreat but as an inspiring challenge.

“This is the opportunity of a lifetime to reinvent an iconic company,” he said.

Still, the hoped-for reinvention, even if successful, is going to take time. G.E. lowered its earnings target for next year and reiterated that 2018 would be a “reset year.” And the outlook for 2019, while improving, is expected to be challenging as well for its big power-turbine business, which fell off sharply this year.

It will also change the complexion of the company. G.E., the country’s largest manufacturing company, had nearly 300,000 employees worldwide at the end of last year. The impending sales of several businesses and other cost-cutting initiatives will undoubtedly leave it with far fewer in the coming years, in more focused areas.

“John Flannery is generally saying and doing the right things,” said Scott Davis, chief executive of Melius Research, an independent financial analysis firm. “But I was looking for more — faster and more aggressive moves, both on cost-cutting and thinning the portfolio of businesses.”

Concerns about the pace of change and the dividend cut sent G.E. shares, which had already dropped by 35 percent this year through Friday, down more than 7 percent on Monday.

Graphic | GE’s Stock Price

Mr. Flannery had previously given broad outlines of his strategy, including that the company would shed at least $20 billion in assets over the next two years. What came on Monday were details that confirmed a shortlist of businesses that are up for sale, like lighting, which has quietly been on sale for months.

He also emphasized his belief in the vitality of a smaller G.E., and nodded to products like electric generators, jet engines and medical-imaging equipment. Because of those products, Mr. Flannery said, the company will continue to “power the world,” “transport people safely” and “save lives.”

He also described other parts of the businesses as “fundamentally strong,” including wind turbines for renewable energy, and the company’s railroad-equipment unit, which is expected to be sold off.

Mr. Flannery’s strategy will accelerate the streamlining job begun by his immediate predecessor. Mr. Immelt described the company he inherited as a “classic conglomerate.” During his tenure, G.E. sold off its media business, NBC Universal, to Comcast and its consumer appliance business, among others.

But the biggest move was to shed nearly all of the company’s finance arm, GE Capital. At its peak, the finance unit accounted for more than half of the company’s profits, and its lending ranged from home mortgages in Japan to reinsurance for long-term care for the aged.

Mr. Flannery has attacked expenses, and he spoke repeatedly on Monday about injecting more “rigor and accountability” into the G.E. culture. Mr. Immelt departed earlier than expected as chief executive after Trian Fund Management, an activist hedge fund, persistently pressured G.E. to improve its financial performance. Edward Garden of Trian joined the G.E. board last month.

To link management behavior more tightly to financial performance, Mr. Flannery is changing the compensation program for G.E.’s top 5,000 managers. The current plan, he explained, is about 70 percent in cash and the remainder in stock. The new plan, he added, will flip that ratio, with 70 percent of compensation in stock.

His own pay package, Mr. Flannery said, will be 100 percent in stock, with the amount of shares determined by the performance of the company.

Since becoming chief executive, Mr. Flannery has grounded the corporate jet fleet, stretched out the construction schedule for G.E.’s new headquarters in Boston, closed down several international research-and-development labs and trimmed the work force in units like GE Digital.

GE Digital, Mr. Flannery said, “continues to be vital to the company.” But its spending will be trimmed sharply as it concentrates on a narrower set of products that improve the efficiency and performance of G.E.’s industrial equipment.

G.E. last cut its dividend in 2009 in the throes of the financial crisis, when it was the nation’s largest non-bank financial institution.

The move announced on Monday reflects the company’s declining cash flow, but it is also a byproduct of the streamlining strategy. In the future, there will be fewer businesses to put cash in the corporate till.

The total dividend payout had been $8.4 billion a year, among the most costly for American corporations. But the cash flow to cover that bill has faltered.

When G.E. reported its third-quarter earnings last month, it said cash flow for the year would be about $7 billion, down from an initial target of $12 billion to $14 billion.

The 12-cent quarterly dividend will consume only $4.2 billion. Mr. Flannery acknowledged “the gravity of this decision,” especially for individual shareholders who rely on dividend income. But it is necessary, he said, to “restore the oxygen of cash to the company.”

Correction: November 13, 2017

An earlier version of this article misstated the age of John Flannery, General Electric’s new chief executive. He is 56, not 55.