General Electric misread the energy transition: A cautionary tale
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Key Findings
GE’s largest segment was its thermal Power division which represented 20% of its total revenues in 2014. Revenues from the division had increased 11% over the prior year, and as recently as 2016, the Power division equated to 50% of GE’s pretax profit.
GE paid a huge premium for Alstom’s Thermal, Renewables and Grid power businesses, well above the book value of Alstom’s power assets. The acquisition was a costly bet that global utilities would choose gas and coal-fired power far into the future.
By the end of 2016, GE’s then-CFO Jeff Bornstein noted in an earnings call that the Alstom integration had “performed well this year with total orders of $10bn, building a backlog that is up 18%.” In 2017, global demand for gas turbines unexpectedly collapsed.
Executive Summary
General Electric Company (GE) is a case study in how rapidly and unexpectedly the global energy transition away from fossil fuels travels up the economic chain and destroys value in the power generation sector.
The recent collapse of the company’s Power division comes alongside a string of other management missteps over the past several years, leading to a cash flow and earnings crunch, financial distress, ongoing corporate restructuring and dividend cuts.
GE destroyed an almost unprecedented US$193 billion (bn) or 74% of its market capitalization over 2016-2018.
This value destruction was driven in large measure by the collapse of the new thermal power construction market globally—a collapse which caught GE entirely by surprise. GE’s largest shareholders—Vanguard, BlackRock, State Street and Fidelity— were also caught by surprise.
Its investors lost billions.
GE badly misjudged the energy transition.
With its 5.7% stake, BlackRock investors suffered a $16bn loss between 2016-2018 related to its holding in GE, much of which was passively held on behalf of investors who buy BlackRock Exchange Traded Funds (ETFs), for example.
Was this epic failure of corporate governance preventable by investors?
NOT TOO LONG AGO, GE WAS THE MOST VALUABLE COMPANY IN THE WORLD. Today, GE has a current market capitalization of $87bn.
GE has lost more than a half-trillion dollars in market value since its all-time high of $600bn, back in 2000.
Much of GE’s precipitous drop came in 2016-2018, when it badly misjudged the acceleration of the energy transition post Paris.
GE assumed wrongly that demand for natural gas and coal would continue to track global economic growth.
The misstep forced CEO Jeff Immelt into early retirement and cost his successor, John Flannery, his job after less than a year. (The average tenure of a GE CEO, prior to Flannery, had been over 12 years.) And for the first time in its history, the company did not hire from within, selecting Larry Culp, former CEO of Danaher, to right the ship.
Press release: Surging energy prices accelerating pace of wind, solar and battery adoption
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