What's up guys and welcome to wall street millennial on this channel, we cover everything related to stocks and investing today we're talking about the fall of ge, which is one of the most epic declines in corporate history. This video topic was chosen by our channel members who get access to our non-time sensitive videos one day in advance and get to vote on our video topics. In 2000, ge's stock peaked at 60 dollars per share, but has, since decreased more than 75 percent to 13 per share. This is a compounded annual return of negative seven percent per year.

During the same time, the s p increased 188 for a compounded annual return of positive five percent. Ge was a behemoth in its prime in 2001, it was the most valuable company in the world with a market cap in excess of 400 billion dollars by 2017. Ge had fallen all the way down to 11th place with a market cap of just 259 billion, as of 2021 ge has shrunk to become the 90th most valuable company with a market cap of just 118 billion dollars. In this video we'll look into how ge rose to be the most valuable company in the world and what factors led to its epic demise ge has a very long history and can trace its roots to some of the most legendary american investors and industrialists of the 19Th century, in 1889, thomas edison turned his invention of the electric light bulb into a number of business interests.

These businesses included the edison lamp company, which produced electric lamps, edison machine works which created electric motors and a few others drexel morgan inco, an investment bank co-founded by jp morgan, approached edison and offered to help merge all of his companies. Under one corporation, this merger created the edison general electric company in 1896, general electric ipo'd on the new york stock exchange. It was one of the 12 original companies, including the newly created dow jones industrial average throughout the 1900s ge, expanded aggressively through dozens of acquisitions and quickly became the leading industrial powerhouse, not only in the us, but the entire world. In the early 1900s ge entered the aviation business and quickly became the industry leader in the second world war.

They supplied the us military with over 300 000 supercharger engines used to power fighter and bomber planes, and in 1941 the us chose ge to develop the nation's. First, jet engine throughout the 20th century ge stayed on the cutting edge of technology even getting into the computing business to compete with ibm ge's business really started to take off in 1981, when jack welch, a former chemical engineer, was appointed as the youngest ever chairman and Ceo of the company welch meticulously looked at every single business unit within the company and completely transformed the company's structure. Ge was a conglomerate built by hundreds of mergers and acquisitions. This led to an extremely complex corporate structure with dozens of unnecessary layers of bureaucracy.

This made the company inflexible and inefficient welch immediately started restructuring the business laying off redundant administrative employees and selling off the company's underperforming business units he laid off more than one hundred thousand employees in which amounted to roughly one quarter of the company's workforce. This earned him the nickname neutron jack after the neutron bomb that vaporizes people but leaves buildings standing while welch, valued simplicity and divested underperforming business units. He was also not scared of expanding the business into new growth opportunities during his 20-year tenure as ceo he oversaw over 600 acquisitions, which amounts to more than one acquisitions. Every month, some of his most significant acquisitions were nbc universal.

In many acquisitions of financial companies that were integrated into ge capital ge capital was originally formed to finance ge's customers. For example, if an airplane manufacturer wanted to buy a ge jet engine, they could borrow money from ge capital to fund the purchase. The unit was not supposed to be a profit center and was only intended to subsidize ge's industrial customers to stimulate demand, but jack welch realized ge capital could actually be very lucrative in its own right and aggressively increase the scope of its operations, expanding to personal loans, Automotive loans and other financial services, this became one of the company's most profitable businesses by restructuring the business and focusing on ge capital. Welch transformed the company from a slow, growing bloated conglomerate to the most valuable company in the world.

From the time he took charge as ceo in 1981 till the time he retired in 2001, the stock price increased 40 fold taking its market cap from 12 billion dollars to 410 billion dollars during the same period, revenues increased from 27 billion dollars to 130 billion dollars. In 1982, a young man named jeffrey immelt, joined ge, jeffrey immelt was born in cincinnati ohio, where general electric had significant operations. His father was employed at ge in the aircraft engines division after attending dartmouth college for his undergraduate degree in harvard business school for his mba. He joined ge in its plastics appliances and healthcare businesses.

He was able to quickly rise. The ranks to become an officer in 1989. by 1997 he'd become a part of the board of ge capital, and only four years later was named to the ceo position in 2001.. Jeffrey immelt's tenure as ceo of ge was mired in disaster from the very beginning, just four days after he took over as ceo, the 911 bombings happened, which disproportionately affected ge capital.

The disaster cost ge's insurance business, a total of at least 600 million dollars and negatively affected ge's aircraft engine business. The 2008 recession also hit ge hard, as its industrial businesses suffered dramatic reductions in revenue. As a result, ge saw its corporate earnings fall by more than half from more than 22 billion dollars in 2007 to less than 11 billion in 2009. This was a blow that g has never fully recovered from when jeffrey immelt became ceo.

He ushered in a new era of huge mergers and acquisitions, as well as divestitures of large parts of ge's business in 2004. Emel bought amersham plc for nearly 10 billion dollars. Amersham was a radio pharmaceuticals company engaged in making products for nuclear medicine procedures. Immelt wanted to acquire it to strengthen ge's healthcare business in 2002, emel oversaw the formation of ge, wind energy.

The fall of enron allowed immel to buy assets from enron's wind turbine business after its candles were revealed. This marked the beginning of another one of ge's business areas, renewable energy. These acquisitions were very expensive, costing ge tens of billions of dollars and contributing to ge's bloated businesses. It wasn't long before inel also began selling off parts of ge's businesses, ge spun off.

Most of its insurance and mortgage insurance business in 2004, as its own company called glenworth financial in 2009, ge sold parts of universal to the cable company comcast in 2011, ge capital sold its mexico assets to santander bank and exited the mexico market, but immelt kept investing Ge's reserves into new acquisitions, including the purchase of john wood plc's world support division in 2011 for almost 3 billion dollars, immelt's habit of buying and selling largely unrelated businesses for billions of dollars on an almost annual basis. Continued investors increasingly saw ge as a bloated behemoth of a company engaged in unrelated businesses with little connection or synergies. As a result, ge's stock suffered the conglomerate discount, a phenomenon whereby companies that are overly diversified are valued at less than the sum of the values of its parts. There is some disagreement as to why the conglomerate discount exists, but some economists believe that is the result of investors, preferring to invest in pure play stocks.

Another reason is that conglomerates provide less disclosure about their constituent businesses than if they were split into multiple companies. Whatever the causes it contributed to ge's lagging stock price from the peak under jack welch ge's stock price never recovered at its highest point remaining under roughly half its high value from before jeffrey immelt's tenure. In 2008, the investment bank lehman brothers, as well as insurance giant aig, collapsed, causing global markets to tank and freezing up access to capital. Ge capital had been the crown jewel of the company over the past decade and by 2008, almost half of the company's profits came from the financial services.

The company turned into a bank that sold a few engines on the side. Ge capital's operations were extremely diversified and leading up to the financial crisis. They were even in the business of originating subprime mortgages. They were also in the credit card business and provided credit lines for walmart and lowe's branded credit cards.

Unlike traditional banks which fund their loans through consumer deposits, ge capital relied heavily on commercial paper. Funding commercial paper refers to very short-term loans, usually maturing in a matter of days and typically have very low interest rates in 2008, the majority of commercial paper matured in less than four days. Usually, this is not a problem because the borrower can just roll over their borrowing every four days and in this way borrow money indefinitely. However, with the fall of lehman brothers, commercial paper lenders started to become less willing to land and commercial paper.

Volume fell by more than two-thirds ge. Capital was especially a hard hit because, just like lehman brothers, they were also involved in subprime mortgages. Lenders feared that ge could go bankrupt at any time so refused to roll over the loans when this happened. Ge had just a few days to raise billions of dollars of capital to avoid a default.

The fears around ge's financial situation heavily weighed on the share price, with the stock falling by more than 80 from peak to trough. The company was truly on the brink of insolvency. In the fall of 2008, they made a desperate phone call to warren buffett, one of the few investors who had the financial wherewithal to save them. He agreed to invest three billion dollars into the company in exchange for preferred shares that yielded a 10 dividend and an option to buy an additional 3 billion at the low price of 22.25 per share.

This capital rates gave them ample liquidity to weather the storm and importantly, gave them a huge vote of confidence from america's most respected investor, the stock price, more than doubled in the next year, and it looked like the company was on its way to a full recovery. After watching his company teeter on the brink of bankruptcy in 2008, ceo jeff immelt decided financial services were too risky. He made the decision to spin off ge capital and refocus the company on its core competencies of industrial production. In 2015, he reached agreements to sell most of ge capital's business units to various financial institutions, including blackstone wells fargo and goldman sachs for a total purchase.

Price of 26.5 billion ml was too eager to sell off ge capital and sold most of its units for a lower price than they originally purchased, for it leading ge to recognize a 16 billion write-down on the closing of the transactions in 2014 email also, rebranded ge, Capital's credit card business as security, financial and spun it off in an ipo in 2014.. This turned out to be a mistake as synchrony's business, far outperformed ge after the spinoff, with a stock increasing more than 80 percent. The only parts of ge capital that remain to this day are their aviation, finance and energy finance units. These divisions provide financing for ge's aviation and energy customers today.

Ge capital is very small and is not a meaningful contributor to the company's bottom line. Ge capital once represented half of the company's total profits with the unit now gone, imelt had to find other growth areas to bring the company back to its former glory at the time, oil was booming and he made the fateful decision to go all in on the Oil industry ge's oil business was a multi-decade disaster for the conglomerate. Ge first entered the oil industry in 1994 when it acquired nuovo pignone throughout the 2000 and early 2010s ge oil and gas continued to add to its portfolio through acquisitions, including the massive acquisition of the well support division of john wood group for 2.8 billion dollars. Jeff immelt shifted ge's attention that used to be focused on ge capital.

Instead on ge oil and gas, by the early 2010s ge, oil and gas had become an energy behemoth. In 2013 alone, ge oil and gas acquired three major oil companies, including lufkin industries, a texas oil and gas equipment company for 3.3 billion dollars. In 2016, ge oil and gas began its negotiations to combine with baker hughes. The deal was so big that it required clearance by multiple national agencies, both in the u.s and the eu, including the u.s department of justice.

The final deal was worth something in the neighborhood of 30 billion dollars and resulted in baker hughes becoming one of ge's companies. Ge remained the controlling stakeholder in baker, hughes, which was, and still is publicly traded under the ticker symbol bkr by september of 2019 baker, hughes stock had lost more than half of its value since the ge takeover. At this time, ge reduced his ownership in the company to a non-controlling stake in mid-2020. Ge announces plans to sell the remainder of its stake over the course of several years.

This would help ge pay off some of its massive 80 plus billion debt burden, but incur significant losses due to baker hughes's poor performance over the period since ge's acquisition of the company in the quarters and years leading up to the sale ge was already taking huge Corporate losses, in particular a 22.8 billion net loss in 2018.. However, their long-term debt position of almost 90 billion dollars at the end of 2018 was even more dire and forced ge to liquidate assets such as the bakery hughes stake for billions of dollars of losses. Besides the divestiture of ge capital in the disastrous pivot to oil, there was another factor weighing on ge stock price. That was not jeff, immelt's fault long before jeff immelt took over as ceo ge accumulated tens of billions of dollars in pension liabilities.

That is obligated to pay to its retired employees. Every time an employee is paid, a portion of the paycheck is withheld and put into a pension fund that invests the money over time. Once the employee retires, the company is obligated to pay him or her a fixed monthly payment to get them through their retirement back in the 80s and 90s, when jack welch was ceo, ge undercontributed to the pension fund, which helped boost reported profits at the time. This was not necessarily intentional, as the pension's future returns are highly uncertain, but regardless during immel's time, as ceo ge had massive unfunded pension liabilities that totaled 44 billion dollars in 2016., this forced the company to add additional capital to the pension fund, which caused a major Drag on earnings, as of 2020, the company still has 30 billion dollars of unfunded pension liabilities.

This amounts to more than 25 of the current market cap and is still a drag on the stock price. Finally, in late 2017, jeff immelt stepped down as chairman of the board of directors at ge two months earlier than expected, he was replaced as ceo by john flannery in june of the same year, john flannery was a career ge, employee and the board of directors wanted To give ge a fresh start to try to return to profitability by replacing immelt the discontent with ml came to a head after ge reported third quarter earnings in 2017., sometimes in life you have to be harsh and it's terrible, sometimes in life you can't play for Dinner, you have to say things you wouldn't like to say on tv. This is a disgrace. What happened here? It was a great american company and mr flannery is going to return it to be a great american company, as he did with health care.

But i think if you don't speak out formally about what happened to this company, then you really are a sham and i refuse to be a champ and i'm proud that mr haynes told me that i don't give free passes to people. There's no free pass. Mr rimmel did some bad things here. In august of 2017, the long-time ge executive, john flannery, was appointed as the new ceo and given the herculean task of turning the company's declining revenue and profitability around at the time, ge was saddled with over 100 billion dollars of long-term debt.

The high interest expense, along with the declines in the energy business, weighed heavily on the company's profitability shortly after flannery took over the company also reported a 6.2 billion dollar write down relating to liabilities from its old insurance business, even though they sold the insurance business. A long time ago, as part of the sale, they still had to keep some of the long-term care liabilities on their own balance sheet. Long-Term care liabilities are notoriously difficult to calculate the fact that ge announced a 6 billion write-down relating to these liabilities made investors lose confidence in ge's, reported balance sheet figures and caused fear that they may be far greater than the company was reporting flannery reasoned, that the Main issue weighing on ge's stock price was fears about their excessive debt load and legacy insurance liabilities. His plan to remedy the situation was to spin off ge's healthcare and transportation divisions as well as at stake in oil field company baker.

Hughes. The newly spun off companies would take some of ge's debt burden with them, thus alleviating ge's balance sheet. However, it proved to be very difficult to find anyone willing to purchase ge's individual business units when they were loaded with so much debt. So his plans to break up the company didn't go anywhere in the first year after he announced it with the breakup not going as quickly as planned.

The only thing flannery could do to shore up the balance sheet was cut the dividend by 50 to 12 cents per share from 24 cents in the year after flannery took the job as ceo ge shares fell more than 50, as he failed to implement a meaningful Turnaround on october, 1st 2018 ge's board of directors unanimously voted to remove flannery, as ceo in 2018 ge moved on from john flannery and appointed lawrence kolp to chairman and ceo of ge. He was the first non-internal ceo of ge and, in fact, came from serving as ceo of danaher corporation for more than a decade a graduate of harvard business school. He had immense success in his previous role at danaher and grew their revenues by five times, while their stock price increased commensurately bringing in his outside perspective. Larry kolp over the past two to three years has steered ge back to a trajectory towards its former glory, since he took the helm of ge in 2018, ge cut its losses from -23 billion dollars in 2018 to only five and a half billion dollars in 2019, And in 2020 reported a profit of 5 billion, its stock price has risen commensurately, nearly doubling over the course of 2020, despite the worst global pandemic of the past hundred years.

However, ge is still a long way from achieving its former glory. A 2020 profit of 5 billion is still less than half of what ge made more than 20 years ago. In 2000, ge made nearly 13 billion dollars, which is the equivalent of 20 billion today after adjusting for inflation. It finally seems like ge is turning the page on its last decades, but it still has a lot of work to do before it can achieve the same level of success and admiration.

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