"Lights Out"

[fiefoe]

Thomas Gryta and Ted Mann chronicle the descline of GE in gory details. Business disaster porn can be depressingly enjoyable. Funny that the two-corporate-jets scandal doesn't ring a bell even though that happened when I still listened to Marketplace.

• The gas turbines that made up the core of GE’s business were essentially cousins of their aircraft engines: enormous spinning rotors moving equally titanic generators not that different from those first installed in the early days of Edison in Lower Manhattan. And no one made more turbines—the massive machines at the center of power plants—than General Electric, whose equipment still generates about one-third of the world’s electrical power.
• The company also taught its peers about the power of public relations, influence-peddling, and mythmaking. The archly rendered city of Ilium in the novels and stories of Kurt Vonnegut was a stand-in for real-life Schenectady, New York, the incorporated home of GE, which Vonnegut knew, perhaps too well, from his days spent writing copy for internal corporate communications. Vonnegut’s brother was a GE scientist in Schenectady who successfully worked on developing methods to induce clouds to begin raining.
• It hired celebrity pitchmen—in particular, a film actor whose career was on the wane named Ronald Reagan—to entice consumers to buy its home goods and fire up workers with enthusiasm
• The company’s first offer was its offer, take it or leave it. Such intransigence was so associated with GE that it became known as “Boulwarism.” And Boulware’s tutelage is widely credited, among those who knew him, with engineering the transformation of the company pitchman, Reagan, from a run-of-the-mill Hollywood back-lot Democrat into the first nationally electable politician of the American right.
• Under Welch, GE was changing rapidly. He famously gave a speech in his first year as CEO titled “Growing Fast in a Slow-Growth Economy.” With the power of the GE brand providing credibility to his strategy, the new CEO oversaw almost one thousand acquisitions, or about four deals a month over his two decades, with a value topping $130 billion.
• a vast portfolio of business units and properties all designed to use GE’s immense, solid balance sheet not just to finance goods so its customers could buy them but to pursue financial profits for their own sake. Welch’s greatest innovation, as great as his much-advertised embrace of management training and efficiency, was this embrace of finance.
• At its height, GE Capital produced more than half of GE’s total profits. The most famous industrial company in America had essentially become one of its largest and most inscrutable banks.
• He slashed more than 100,000 jobs in the 1980s, one-fourth of the entire workforce of General Electric, and he moved tens of thousands of other jobs overseas, where there were no unions and labor was cheap.
• For its new boss with a jock style, GE held a pep rally, an unlikely spectacle of a throng of corporate workers cheering for upper management. No detail was left up to chance. Just before Immelt went on, two young women hurried into the arena in Milwaukee to stir up the crowd. Like stage crew members at a TV talk-show taping, they held up signs to the crowd of GE workers that read: NOISE.
• Not making payroll was a totally foreign concept to this executive. He’d had no idea that his job included keeping an eye on the daily management of money moving in and out and around the company. At GE, managing a balance sheet had been essentially risk-free because the company—or more accurately, Welch—took care of that. Now it was Immelt’s problem to solve for those below him.
• Gross’s comments were a shot at the heart of GE Capital, which generated its outsized returns by borrowing huge sums via short-term debt and commercial paper, then lending it out at higher rates for longer terms. At the time of Gross’s attack, Moody’s reported that GE Capital’s short-term debt, covering commercial paper and debt due within twelve months, totaled a stunning $127 billion and that only 24 percent of this amount, or $31 billion, was backed by bank lines.
• If too much profit came out of the finance side, GE could face pressure from credit rating agencies to address the risk in its structure. The secret sauce of Capital—receiving a stellar credit rating that let it borrow cheaply because it was viewed as an industrial company, not as a bank—could have been at serious risk.
• GE even commissioned its own typeface, to be used in everything from advertising copy to press releases. The company said that the font was “conceived from” the rounded letters of the GE Monogram. GE named its new typeface “Inspira.” ... (Never prone to underselling, the company described the font this way: “When introduced, the rounded and flowing forms of Inspira caused some to question its open nature. Others felt a breath of freshness and inspiration.”)
• GE Capital saw itself as an elite finance operation—better than the hidebound bankers of Wall Street—and the sturdy scaffolding that was holding up the results of the lumbering conglomerate. As they saw it, there was no imagination in their work. Nor was any needed.
• Seizing on a Welch-era concept, Immelt called on GE workers to pursue “boundaryless sales”: selling not just particular products from their own GE business unit but the entire catalog. Taken even further, you were now selling the entire product portfolio. An executive selling a locomotive in Delhi was in perfect position to nose around for leads about prospective buyers of X-ray machines or electrical switchgear or asset-backed commercial loans.
• By contrast, GE’s corporate structure not only could prevent managers from developing the skills they needed to run an independent business, but also made it impossible to get an accurate picture of a division’s performance or health. Measuring profit without including all the underlying costs distorted the performance of the businesses and their management. It was great for painting a picture of success to investors. Less clear was whether the thickening of the corporate layer was a solid strategy for the long term. Immelt was effectively undoing the aggressive cuts that Jack Welch had inflicted on the GE bureaucracy.
• In Norwalk, where GE Capital was based, they weren’t dealing in dreams, counting on imagination breakthroughs, or taking big swings at transforming the company. The way Capital and its people saw it, they just made money.
• If KPMG rarely questioned GE’s findings, the corporate audit staff was even less prone to uncomfortable demonstrations of independence. In fact, they were incentivized to juice GE’s accounting wherever possible. CAS teams descended on businesses to make sure they were performing, but also to search for ways to adjust practices to increase profits. In other words, the crack internal squad with the word “audit” in its name was also being paid to search for ways to boost GE’s quarterly earnings.
• Immelt’s optimism was a fortress. “Our financial services businesses should do well in a year like 2008,” he wrote. “There could be $300 billion of assets available at high returns. We plan to seize opportunities in the current turmoil and position our financial services businesses for years of profitable growth.”
• Comstock had struggled in the last assignment, where her signature move had been the $600 million acquisition of ivillage.com, a women-oriented content site. That purchase had been a kind of land grab in the digital world, but the price tag was openly mocked, partly because NBC spent more buying ivillage.com than News Corp paid in its infamous purchase of the trendy social media site Myspace.
• Commercial paper was GE’s lifeblood. It used its stellar triple-A credit rating to get cheap access to tens of billions of dollars in commercial paper to keep GE Capital running smoothly. If GE couldn’t access that market, it couldn’t meet its massive obligations. It would be technically insolvent. Paulson was alarmed by the call,
• But in the financial crisis, when nervous investors feared any sign of the next domino to fall, these bank lines weren’t always a lifeline. When Countrywide Financial tapped its credit lines for $11.5 billion in the summer of 2007, it was a clear sign of desperation. With the questions swirling around the market, GE’s bank lines were now effectively useless. Drawing on them would be the equivalent of shooting a flare into the sky and would almost certainly send investors, customers, and counterparties running away for fear that GE was in trouble.
• there was simply no appetite among investors for risk backed by faith in any corporation. The FDIC program offset that fear as it tried to jump-start the market, but it also effectively blocked GE from the market because no investor would voluntarily buy GE’s nonguaranteed paper.
• And what GE needed to do this, in the eyes of Immelt and some of his closest deputies, was a story. The narrative of success begat success, and the imagination of excellence and innovation was the first step to achieving both. One of those Immelt allies would later put it succinctly: “Strategy is a story well told.”
• even as lawmakers hundreds of miles downriver from GE’s PCB pollution sites tried to pressure the company to go along with a cleanup. “Why are they afraid of what it’s going to do? They are afraid because General Electric’s public relations people have been telling them to be afraid. They’re afraid because General Electric has been spending millions of dollars to avoid culpability.”
• in the spring of 2005. On screens in the hall, a tranquil rainforest image appeared, along with the strains of a familiar tune as the action began: a CGI-animated elephant calf dancing through the jungle to “Singin’ in the Rain.”
• The leaders of the company were quietly considering a kind of disarmament. They wanted to see if they could finally shed their tremendous, but troublesome, financial weapon by laying it down entirely. They considered the question with the characteristic self-assurance of GE men.
• That is, GE was planning to shed the Systemically Important Financial Institution categorization that had brought it under the scrutiny of the Fed by selling off most of its finance operation. SIFI status was the regulatory scarlet letter that followed the financial crisis: the designation was applied to the largest banks and financial institutions, those whose failure could trigger another meltdown.
• Sherin shrugged. “It’s just work,” he said, repeating a phrase that would become a refrain in the following months filled with single-minded focus on pursuing negotiations, finding buyers, closing deals, and shutting down the bulk of Capital. There was no plan B for replacing the cash that GE would need to keep operating as it had.
• With its backward logic, the deals team was working to put together a value for the entire Alstom power enterprise from which they could back out a price per share that would get Bouygues to the table.
• That effort led to some strange arithmetic. In the final GE bid for Alstom, more than half of the enterprise value—the price GE would actually pay for the struggling French assets—came from “cost synergies.” In other words, more than half the value of what GE was buying would come from slashing employees and factories and other costs
• Once the company leaders, from Immelt and Steve Bolze on down, had decided that they needed to make the French investor whole in order to get the deal done, the secret work being done by bankers and lawyers was an exercise not in calculation but in justification: they were coming up with an explanation for the amount the company had decided they needed to pay.
• And Montebourg, a hardened skeptic of American corporate giants like GE, feared that one of the most important national institutions was rushing itself into a fire sale to a cold-hearted company best known for its facility with layoffs and transactional churning.
• Not to worry, Way said. GE’s “base case” assumption for all of the rosy pictures it was painting about its oil unit was $100 for a barrel of oil. <> A year later, a barrel of Brent crude cost less than $50—less than half the price at which GE had just assured its investors that all its plans for the oil business made financial sense.
• Still, the smaller company had been by some measures a victim of its own success. Afloat on fracking profits during an oil boom, Lufkin had caught GE’s eye and been swallowed up at an expensive price, only to become a casualty when the conglomerate couldn’t abide the hit to earnings that a prolonged dip in the price of oil represented.
• Between two Mondays—the day GE announced it was coming to Lufkin and the day the company said it would move on, leaving a shuttered foundry at the center of town—just 868 days had passed.
• MEANWHILE, IN CALIFORNIA, the pledge to turn General Electric into a major software company was turning out to be slightly more challenging than Immelt had made it sound. The corporate vision of connecting the world’s heavy machinery, harvesting data, and streamlining the use of energy relied on a software ecosystem that didn’t really exist yet—operating systems and apps, data protocols and standards, trouble-shooting tools for the inevitable early hiccups, and clouds and server farms to hold the massive volume of data that GE hoped to analyze.
• GE Digital was on track to spend $5 billion by 2016—a massive sum even by GE standards, equivalent to about half the R&D budget for a new, clean-sheet jet engine.
• There was a lot of talk about Predix and everything digital. There were annual investor conferences on the San Francisco waterfront and demonstrations by major GE industrial customers, including Union Pacific and Exelon, pointing to the potential for big data in the future. The problem was that, $5 billion in, it wasn’t clear whether GE would be getting what it paid for.
• Once again, the marketing was getting ahead of the product. In fact, the sales teams weren’t even entirely confident about what their product could do. Instead of knowledgably hawking GE’s lineup of products and services for a given division, they were now pitching customers on a deep analytic software platform that was hard to understand and harder to explain.
• The small team gathered that night was paradoxically delighted when they finished crunching the numbers. By their count, the deal concessions GE was being asked to make had now grown so large that GE’s original logic for the transaction no longer made sense. The cost to close the deal seemed to exceed the overall benefit to the company. And that, they realized, would trigger a breakup provision in the sale agreement, allowing GE to back out of what they increasingly viewed as an albatross of a deal. They weren’t the only ones. The company had even gone so far as to hire litigation counsel, anticipating that they would be in for a massive court fight, whether battling over the regulators’ demands or finally backing out of the deal altogether. Adam Smith grabbed his cell phone and called a superior, one of the company officers at corporate who was overseeing the deal. This could be it, Smith told him. We might be able to pull the plug on this thing. The other executive was firm: “This is Jeff’s deal. We’re not backing away.”
• by the time the companies finally managed to get the deal through Brussels in the fall of 2015, the shell of a company they had tried to buy in the spring of 2014 had dried up into a carcass.
• But the absence of robust opposition also pointed to the broader problem, long cultivated and growing into a quiet crisis within the company, of real candor and self-awareness. For all its vaunted levels of management and procedures of accountability, when it had come time for lower levels of management to stand up to the ultimate boss, Immelt, and tell him that his legacy play wasn’t going to work—and in fact, had been a clumsy mistake all along—no one was willing to do so.
• The company’s swagger about its Power unit was hard-earned and long-standing. GE had built the first natural gas turbine to run a power plant in the United States in 1949. The first unit, which pumped out even more electricity than the planners had hoped for, wouldn’t be decommissioned until 1980.
• Industrial growth wasn’t coming fast enough, and the company had blown billions on share repurchases that now seemed worthless. During Immelt’s tenure, GE spent well over $100 billion buying up its own stock, much of it at a price far above where it traded now. Without adjusting its sacred and expensive dividend, the company had gutted its ability to generate cash. In the first six months of 2017, GE had earned hardly any of the $12 billion in cash it had previously said it would take in that year. It would need at least $8 billion just to cover the dividends it had promised stockholders, before getting to the myriad other areas, like research and development, where regular infusions of capital were essential to its success.
• Jamie Miller, who inherited the troubling insurance problem, mentioned the insurance risk deep inside the disappointing three-hour presentation in November, adding a little-noticed warning: the ghost of an insurance business that investors thought the company had rid itself of years before would prevent GE Capital from paying its dividend to headquarters. The insurance hit, she noted, was likely to exceed the $3 billion dividend payment. Two months after Miller flagged the $3 billion, it was clear that the problem was a great deal larger. GE was preparing for it to be more than $6 billion and needed to come up with $15 billion in reserves required by regulators to cover possible costs in the future. The figure was gigantic—almost four times the yearly cost of GE’s new slimmer dividend.
• When it came, GE’s once unimaginable decline happened quickly. In the year after Immelt left, more than $140 billion in stock market value evaporated from the company. More than twice the amount that vanished when Enron collapsed in 2001, that loss dwarfed the market losses on Lehman Brothers.