GE’s First Outsider CEO Makes the Hard Decision No Others Would
(Bloomberg) -- It took an outsider to do what no one else would.
Larry Culp, the first General Electric Co. leader who didn’t come up through the ranks, announced the breakup of one of the most storied companies in U.S. history.
It’s a dramatic step that GE investors say was long overdue and marks a career-defining move for an executive who had earlier earned industry plaudits for turning little-known Danaher Corp. into a juggernaut.
The buttoned-up chief executive officer, speaking Tuesday in an interview, insists separating wasn’t always the plan. When he took the helm in late 2018, there were too many other fires to put out, from a sinking share price to heavy debt to an investigation by U.S. securities regulators.
“It was a challenging time,” said Culp, who is 58. “Some people were suggesting we might not make payroll.”
Instead, Culp says the decision to split into three independent companies came into view only this spring amid signs that efforts to reduce leverage and fix GE’s operations were gaining traction, while pandemic restrictions began to ease.
The move followed several years of big changes, including cutting the dividend and selling some health-care and jet-leasing businesses.
“It took Larry to operationally fix it,” said longtime GE analyst Nick Heymann of William Blair & Co. “Then he could cleave it.”
GE investors and analysts have long questioned the company’s structure -- in particular, many have called for a spinoff of the health-care unit. Deane Dray, an analyst with RBC Capital Markets, called this “the longest anticipated breakup in the multi-industry sector.”
Former CEO Jeffrey Immelt has said he thought the company was unwieldy when he took over in 2001, and his decisions to sell some finance divisions and offload the oil operations were touted as moves to simplify GE’s structure. Similarly, his successor, John Flannery, said he would consider a breakup after taking over in 2017.
Yet the executives, who each spent the bulk of their careers at GE, declined to take the plunge. Immelt was said to resist attempts to divest the health unit, which he had previously run. Flannery was faulted by the board for not being aggressive enough in his changes.
Culp said Tuesday in an interview Bloomberg Television’s “Balance of Power With David Westin” that the decision was “not one I made alone.” The company also noted that the board unanimously supported the move. The plan will dismantle a company that was one of the original members of the Dow Jones Industrial Average and was a key part of the index for more than 100 years before being kicked out in 2018 just prior to Culp’s arrival.
Since Culp took the helm, GE’s shares are up about 28%, about half the increase of the S&P 500 stock index.
After the breakup is completed, Culp will lead the remaining GE, which will be comprised primarily of aviation along with some insurance and inherited debt. John Slattery, who currently runs GE’s jet-engine business, will remain in that same role.
Culp came to GE with a reputation for making the right moves. Armed with a Harvard MBA, he was just 38 when he took over Danaher in 2001, when it was making products like gasoline pumps and Sears Craftsman tools. But over the next 14 years, he remade the company through more than $20 billion worth of acquisitions, focusing on the health-care and life science industries.
The executive is known for pushing “continuous improvement” of workplace techniques -- borrowed from Toyota Motor Corp.’s vaunted practices -- that became known as the Danaher Business System.
Danaher, which underwent its own breakup after Culp left, today has a market value of about $214 billion -- 2,500% higher than when Culp was named CEO.
If he can achieve even a fraction of that kind of gain at GE, he’s in line for a big payout. His massive stock grant, which was roundly criticized by investors and so far has yielded him at least $124 million, remains in place after the spinoffs and will take into account the stock performance of all entities, according to the award’s terms.
In an example of how such a split can create value for stockholders, Abbott Laboratories spun off its pharmaceutical unit in 2013 as AbbVie Inc. while retaining its medical devices and diagnostics divisions. The two publicly traded businesses quickly became worth more in total market capitalization as separate companies than together.
The effects of a breakup on the stock price could help GE’s CEO achieve the thresholds needed to get more money. Dray, the RBC analyst, estimates that the split could generate 20% upside to GE’s current price. That could push Culp’s total payout to more than $200 million, according to calculations by Bloomberg News.
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