General Electric replaces CEO with outsider Culp, shares soar

(Reuters) – General Electric Co (GE.N) ousted Chief Executive Officer John Flannery in a surprise move on Monday, replacing him with outsider and board member Larry Culp, and said it would take a roughly $23-billion charge to write off goodwill in its power division, primarily from a large 2015 acquisition.

The struggling energy, health and transportation conglomerate said it would fall short of its forecast for free cash flow and earnings per share for 2018 due to weakness in its power business, something analysts had expected.

GE shares jumped 14 percent to $12.88 in early trading as investors bet Culp could re-energize the GE brand and more quickly transform its portfolio. The shares had dropped more than half since Flannery became CEO in August 2017, replacing Jeff Immelt, who had led GE since 2001.

With a market capitalization below $100 billion as of Friday, GE was worth less than a fifth of its peak value a generation ago.

GE Power’s falling profits last year forced GE to slash its overall profit outlook and cut its dividend for only the second time since the Great Depression.

GE’s board, meeting in the last few days, unanimously picked H. Lawrence Culp Jr as its new CEO. Culp, 55, who was named to GE’s board in February, was CEO of Danaher Corp (DHR.N) from 2000 to 2014, helping grow an industrial company into a broader conglomerate through a series of acquisitions.

(Graphic: GE stock performance – reut.rs/2Isclc1)

SHADOW OF ITS FORMER SELF

Flannery’s departure underscores the slow pace of his efforts to turn around GE. Despite cutting jobs and shedding businesses, GE’s results continued to deteriorate, mainly due to problems at its power plant division, which makes electric generating equipment.

GE doubled down on fossil fuels in 2015 under Immelt with the $10.3-billion purchase of French group Alstom SA’s (ALSO.PA) power business. The deal expanded GE’s exposure to gas, coal and nuclear power. It added employees, dozens of factories and service centers at a time when GE was trying to cut costs.

The power division’s outlook appeared to worsen last month when GE said several power plants equipped with its newest turbines had to be shut down because of a part failure. That comes after the power business posted a $10-billion loss last year.

Changing CEOs “won’t fix short-term problems at power but Larry, as an outsider, will be able to make the difficult decisions on cost,” said Scott Davis, an analyst at Melius Research in New York. “GE is bloated and its culture is destroyed.” 

Davis said GE’s power business is fixable but suffered from “a lot of excess capacity and bad execution decisions” and the stock price has probably already adjusted to expectations of no contribution from power.

General Electric said in June it will spin off its healthcare business and divest its stake in oil-services firm Baker Hughes (BHGE.N), effectively breaking up the 126-year-old conglomerate – once the most valuable U.S. corporation and a global symbol of American business power. Slimmed-down GE will focus on jet engines, power plants and renewable energy.

Also in June, GE lost its spot in the blue-chip Dow Jones Industrial Average .DJI after over a century.

Analysts said the sinking stock price showed the transformation of GE’s portfolio was moving too slowly under Flannery.

“They can’t afford to wait any longer for Flannery to try and regain the confidence of the investor community,” said Gabelli & Co analyst Justin Bergner.

“I think what (Culp) will bring is sort of external mindset into the organization and particularly the ability to run a decentralized company very effectively, given that was sort of the way in which things were done at Danaher.”

Culp said in a statement, “We will move with urgency … We have a lot of work ahead of us to unlock the value of GE.”

GE said the power division’s goodwill balance is about $23 billion and the impairment charge would eliminate most of it. The non-cash charge primarily relates to GE’s acquisition of power assets from Alstom in 2015, GE said.