The giant cannot stop

General Electric’s board extended CEO Larry Culp’s contract by two years amid the pandemic.

Despite the pandemic has upended his plan to turn around the ailing industrial giant, there is still future for Larry Culp at General Electric (GE), as he will lead the company through at least August 2024 with the option for a one-year extension after that, the company said in a regulatory filing. The board also revised how Culp would be compensated, making it easier for him to take home as much as $230 million at the end of his contract.

Long before the pandemic, when H. Lawrence, aka “Larry,” Culp took over as CEO of General Electric (GE) in October—the first ever company outsider to take on the role—he faced no small challenge: turn around one of the historic giants of US industry, which had seen its stock price fall by two thirds between 2016 and 2018 amid a corporate meltdown like few in recent memory. Yet Culp has performed this kind of heroic feat before. Over the course of fourteen years as CEO of Danaher Corporation, he quintupled revenue at the global science and technology conglomerate and won praise for his business philosophy and shrewd eye for acquisitions. In 2014, Culp was named one of the Top 50 CEOs in the world by Harvard Business Review.

“He’s an outsider, and maybe it’s going to take an outsider to come in and fix this thing,” Scott Davis, an analyst with Melius Research, told Bloomberg upon Culp’s appointment at GE.

Operating in the healthcare, energy, and finance sectors, among others, GE is the eighteenth largest company in the US with global revenue of $121.6 billion in 2018. Incorporated in Boston 127 years ago, it is also an American icon. Yet amid accusations of poor capital allocation, culture, and management, the once-profitable conglomerate has gained a reputation as a wounded giant—albeit one with enormous potential for recovery.

Culp’s appointment certainly sparked renewed optimism. Shares in the company rose by an impressive 7.1% upon news he had accepted the offer to take the helm— their most impressive rally in nine years— while GE recently announced that profit from continuing operations more than tripled in 2018.

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A MAN WITH A PLAN

Born in Washington, DC, in 1964, Larry Culp graduated from Washington College and the Harvard Business School before joining Danaher in 1990. “It is hard to refute Larry Culp’s track record and accomplishments at Danaher,” Steve Winoker, an analyst at UBS Group AG, said in a note to clients upon the former’s appointment at GE. “High performance culture and strategy were hallmarks of the company.”

Culp turned things around at Danaher Corporation in large part by employing the legendary Toyota Production System (TPS), founded on the principles of long-term philosophy, respect for staff and partners, and minimizing waste. Applying the process at almost every level from HR to R&D, Culp would rechristen TPS “The Danaher Business System”; more recently, it has become known more widely as Lean Production. Yet always modest, Culp himself has termed the philosophy “common sense, vigorously applied.”

Danaher’s market capitalization grew from $9.7 billion to $50 billion under thirteen years of Culp’s leadership, which saw the deployment of some $25 billion in capital as he steadily expanded the company into healthcare and environmental businesses. He also grew revenues, with 2009 representing the only negative year of sales growth while he was in charge. Shares rose by 400% during his tenure.

Upon taking over at GE, Culp reportedly told staff that “everything is on the table” with a view to reviving the fallen industrial giant. Yet the problems facing the company in 2019 are considerable. Put simply, GE is in a very different starting position than Danaher was in terms of balance sheet and cash challenges.

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A WOUNDED GIANT

Interestingly, Culp was promoted to CEO at Danaher the same year that Jeff Immelt started his 16-year tenure at GE. A look at the price charts of their stocks during those years tells a story about the careers of both men.

In fairness, Immelt’s tenure got off to an unimaginably tough start; it began just four days before 9/11. Airplanes, one of them powered by GE engines, crashed into the World Trade Center towers, which were insured by GE Capital. Air travel demand contracted violently, hobbling GE’s business as the world’s largest lessor of planes.

In the coming years, Immelt did hundreds of deals, once claiming to be the only CEO to have ever bought and sold over $100 billion of companies. Among those deals were some big winners (Enron’s wind turbine manufacturing assets, for example), but also significant losers (GE Capital and GE Homeland Security.) Indeed, when asked to explain how GE landed itself in crisis, the most common answer given by analysts, customers, vendors, competitors, and former executives and directors has generally been “capital allocation.”

Management of human capital and culture have also been cited as contributors to GE’s woes. After he took over as CEO in August 2017, John Flannery clearly wasn’t happy with the team he inherited. Between Immelt’s exit and the first six months of Flannery’s year in charge, the CFO (who was also a vice chair), two of the three other vice chairs, the head of the largest business, various other executives, and half the board of directors exited the scene.

Flannery took charge vowing to trim GE down to three core businesses, but he lasted in the role little over a year. A year ago, the company announced it would spin off its healthcare division, separate out its interest in its Baker Hughes energy business, and take additional steps to shrink GE Capital in a landmark breakup.

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REVIVING FORTUNES

Larry Culp was thus brought into the CEO role at GE to carry out a rescue mission, and the initial signs have been positive. In a conference call with analysts to promote GE’s annual report in April, he announced that along with increased profits in its aviation, energy, and healthcare units, negative cash flow from industrial business was $1.2 billion, much less than the $2.16 billion outflow that analysts, on average, were expecting. Shares rose by 5% at the news.

“We saw progress in the first quarter as we continued to execute on our priorities to improve our financial position,” Culp told analysts, while cautioning that the company faced a “multiyear transformation”. “One quarter is a data point, not a trend,” he warned.

Profit margins contracted at GE’s aviation, power and renewable energy businesses, the three core units that GE plans to retain as it proceeds with the aforementioned breakup. For example, while the Boston-based conglomerate stuck to its full-year financial forecast, Culp noted “new risk” from Boeing Co’s 737 MAX jet, for which GE manufactures engines with partner Safran SA of France.

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The model was grounded worldwide last month after a second fatal accident in less than five months.

Yet GE has also made several important moves during the first quarter of this year, announcing the sale of its BioPharma business to Culp’s old firm Danaher for $20 billion, completing the merger of GE Transportation and passenger rail company Wabtec, and seeing its HA gas turbine technology selected for the 485-MW Long Ridge Energy Generation LLC Project in Hannibal, Ohio, which is set to begin construction later this year.

“I am encouraged by the improvements we are making inside GE,” Culp said in the conference call. “We continue to focus on reducing leverage and improving the underlying performance of our businesses to create long-term value for our customers, employees, and shareholders.”

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