The General Electric story, of a long-proud initial member of the Dow Jones Industrial Average falling out of that index — and appearing to be in competitive free fall — provides a powerful illustration of two effects we see throughout today’s corporate world: clueless, but deep-pocketed, activist investors and mergers and acquisitions folks masquerading as strategists.
GE’s fall accelerated on October 25, 2015, with activist hedge fund Trian announcing a $2.5 billion equity investment in GE stock, one that made it a top 10 shareholder. GE stock was trading at $25.47 at the time of announcement, with a dividend of $0.92 per share. Trian announced that with its help, GE could look forward to a stock price in the $40–$50 range by 2017, and threatened a proxy battle unless GE put Trian cofounder Ed Garten on the board. In June 2017 longtime CEO Jeff Immelt resigned under unrelenting Trian and shareholder pressure, and John Flannery took over as CEO. Four months later Garten joined the board.
During the Immelt era, the dominant mode had been of strategy by way of mergers, acquisitions, and divestitures (MA&D), including most recently the disastrous merger of the GE oil and gas business with Baker Hughes in 2016. In the fall of 2017 under Flannery, MA&D unsurprisingly became GE’s turnaround strategy tool. Along with a surprise halving of the dividend, Flannery announced a review of the portfolio that would see the divestitures of numerous historic GE businesses, which ended up including light bulbs, appliances, and locomotive engines.
The approach of seeing strategy as the act of rejuggling one’s corporate portfolio of businesses is common in the large modern corporation. Many have strategy heads, who are ex-dealmakers at investment banks, whose default assumption is that if the company has a performance problem, the natural fix is to buy and/or sell something. The idea does not naturally come to mind that perhaps the problem is an uncompetitive value equation with customers. The result is a boon for the private equity business, which gets to buy underperforming corporate divisions for a song and turn them around at a huge profit, and for the sellers of growth businesses, who get paid crazy multiples of earnings and sales for businesses that are purchased to generate growth for big companies that are, on their own, incapable of organic growth.
It is not as though MA&D can’t help strategy. It can when the moves are designed to help improve the value equation delivered for the customer — like Google buying Android, or Facebook buying Instagram, or P&G buying Tambrands. But for a business that is struggling with growth and/or profitability, MA&D is not going to be of assistance if it distracts management’s time from fixing the core customer value equation problem — and it almost inevitably distracts. That is one reason why so many acquisitions are abysmal failures: They are distracting Hail Mary attempts. Take, for example, News Corporation getting into the exciting internet space by buying MySpace, or Microsoft into smartphones with Nokia, or HP into software and services with Autonomy — all written off virtually in their entirety.
In the case of GE, unsurprisingly, all the acquisitions and divestitures (plus the massive cost-cutting) of the past several years haven’t improved performance. So on June 26, 2018, Flannery announced that GE was going to be fixed by doing more, and bigger, divestitures, this time spinning out the giant GE Healthcare and Baker Hughes businesses — and cutting costs some more.
Good luck with that, GE and Trian! Remember, the definition of insanity is to do the same thing and expect a different result. Maybe a slimmed-down GE with only aviation, power, and renewable energy businesses will be able to focus on the strategy task of improving the customer competitiveness of that portfolio. But equally likely, I suspect, this will just be the starting point for another spate of MA&D masquerading as strategy.
The happiest folks out there are probably GE Healthcare’s two big global competitors, Philips and Siemens Healthineers. While GE Healthcare’s executives spend the next two years on carve-out audits, creating services and systems to replace the GE shared services, negotiating new stock-based compensation, and doing road shows for investors, Philips and Siemens (which completed its 18-month health care spinoff/IPO exercise in March) executives will be focused on building their businesses at GE’s expense — an awesome window of opportunity for them.
What does Trian get as a reward for all of its clever help in driving executive change, cost-cutting, and divestitures at GE? Well, Ed Garten isn’t a board member of a Dow Jones 30 company anymore. And with the stock closing at $13.96 the day after Flannery’s latest announcement, Trian’s TSR on its investment in “helping” GE is approximately minus 36% (giving credit for $2.47 per share in cumulative dividends). It is no wonder that other CEOs tend not to welcome activist investor “help” with open arms.
Sadly, that is the core story of the toxic combination of activist investors and mergers, acquisitions, and divestitures masquerading as strategy in the modern economy. Executives can’t wish away the plague of activist investors — they will be here to stay until their true track records become clearer — but by pursuing strategies that continually improve their value equations with customers, they can at least keep the activists looking elsewhere.