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Tags: Financial Markets | Health Topics | Infrastructure | Money | GE | Larry Culp | Jack Welch

How GE's Larry Culp Split the Empire Jack Welch Built

Jack Welch
The late Jack Welch, who was chairman and chief executive officer of General Electric from 1981 through 2001, and who The New York Times called "the most influential business manager of his generation." Welch passed away in 2020. (AP)

Wednesday, 10 November 2021 08:06 AM

It was the break-up that eluded a generation of General Electric Co. insiders.

When Larry Culp, the first GE chief executive not to rise from within its ranks, convened a board meeting earlier this month to greenlight the split of the industrial conglomerate into three companies, he secured its backing.

It was a far cry from board meetings held in the 1980s and 1990s by one of Culp's predecessors, Jack Welch. The iconic entrepreneur got the GE board to back his moves in the opposite direction, getting GE into businesses as diverse as mortgages, credit cards and television entertainment and prompting the Federal Reserve to characterize the company as too big to fail.

Selloffs Date Back to the 2000's

Welch's successors, Jeff Immelt and John Flannery, gradually sold of many of GE's businesses to boost the company's ailing share price in the two decades that followed.

But it was Culp who managed to push through the ultimate untangling of GE, with a plan to break it up into three companies to house its healthcare, aviation and power businesses separately.

Culp, 58, became GE's CEO in October 2018 after joining it as a board director six months earlier. Culp started informally discussing the idea of a break-up with advisors earlier this year, according to a person familiar with the matter, but discussions with GE's board started to formally intensify in the spring as the plan he put together took shape.

"With the progress on the deleveraging, the progress with our operational transformation, the pandemic lifting ... there's no reason to wait a day," Culp told Reuters in an interview. "It's the right thing to do."

The idea to spin off health care was not new - Flannery had floated it publicly in 2018, but never got to see it through. Financial woes at GE's power business escalated into a crisis that caused the company to miss many profit targets and cost Flannery his job.

Culp's Top-to-Bottom Review

In the weeks that followed his appointment, Culp, a former CEO of industrial conglomerate Danaher Corp, undertook a top-to-bottom review of GE's sprawling businesses and numerous profit-and-loss lines, people familiar with the matter said. Analysts and investors lauded him for improving GE's profitability.

Culp decided at the time that the health care business, a pre-eminent supplier of medical equipment and instrumentation, was too important of a cash cow, while GE's other two businesses were still not self-sufficient for the break-up to happen, one of the sources said.

A GE spokeswoman declined to comment on the discussions between Culp and GE's board.

Still, Culp wanted to pursue the idea, and pruned GE through other deals in the meantime. These included a $30 billion merger of GE's jet-leasing unit with Ireland's AerCap, and the $21-billion sale of the biopharma business to Danaher.

Now, GE's troubled power business is finally turning a profit. The company's renewable energy business has also been able to improve its cost structure and be in a position to capitalize on the transition to a low-carbon economy.

"We can spin health care, we can do that first," Culp told Reuters. "That business is clearly performing well. We have some preparations on the shelf from the [abandoned] IPO a few years ago. We've talked about some of the work we still need to do in renewables ... but we'll really be ready for this next step in early 2024."

Trian Fund's Role

Hedge fund Trian Fund Management, an ally of Culp on GE's board, lauded the latest moves, stating it "enthusiastically supports this important step in the transformation of GE."

To be sure, Culp's tenure at GE has not been without criticism. Earlier this year, GE shareholders rejected a payout for Culp of as much as $230 million in a non-binding vote.

Proxy advisory firms Institutional Shareholder Services Inc. (ISS) and Glass Lewis, which opposed the pay packages, argued that GE had lowered the bar on Culp's performance targets during the COVID-19 pandemic and that his stock award was too generous.

GE countered that the payout was necessary to incentivise Culp. 

© 2021 Thomson/Reuters. All rights reserved.


StreetTalk
It was the break-up that eluded a generation of General Electric Co. insiders. When Larry Culp, the first GE chief executive not to rise from within its ranks, convened a board meeting earlier this month to greenlight the split of the industrial conglomerate into three...
GE, Larry Culp, Jack Welch
677
2021-06-10
Wednesday, 10 November 2021 08:06 AM
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