Financial Crisis Immelt and the Collapse of Housing Marketing Paper Here are the three topics that needs to be written as body paragraphs. In other words,
Financial Crisis Immelt and the Collapse of Housing Marketing Paper Here are the three topics that needs to be written as body paragraphs. In other words, the paper needs to only talk about topics mentioned below. Also, introduction and conclusion is not needed for this paper. 16 pages need to only compose of the 3 topics mentioned below, excluding introduction and conclusion. 1. Financial Crisis (collapse of housing marketing, Immelt’s lack of ability to foresee potential dangers and so forth)2. Acquisition of Alstom (Immelt’s bad sense of capital allocation and so forth)3. Oil Company (Bought at higher price, sold at lower price and so forth) Ex) Baker HughesYou are definitely more than welcome to use more sources than ones provided by me. Please let me know if there is any questions. How GE Built Up and Wrote Down $22 Billion in Assets – WSJ
THE MIDDLE SEAT
3/13/19, 5:21 PM
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https://www.wsj.com/articles/how-ge-built-up-and-wrote-down-22-billion-in-assets-11552469401
BUSINESS
How GE Built Up and Wrote Down $22
Billion in Assets
GEs goodwill move enabled conglomerate to avoid costs that would have reduced its earnings
From left: former Alstom CEO Patrick Kron, former GE chief Je!rey Immelt and Steve Bolze, ex-head of GEs power business, at
an Alstom shop in Belfort, France, in June 2014. As GE raised goodwill, it e!ectively reduced the value it placed on the acquired
Alstom assets. PHOTO: SEBASTIEN BOZON/AFP/GETTY IMAGES
By Michael Rapoport
March 13, 2019 5:30 a.m. ET
?
When General Electric Co. GE 2.66% ? bought Alstom SAs ALO -0.08%
power business in 2015,
it cost it a little more than $10 billion.
But when GE put the acquisition on its books, something odd happened: The company recorded
$13.5 billion in goodwill.
Goodwill is the excess amount that a buyer spends on a target above the accounting value of the
things it paid for. In e?ect, it is the $4 that squares up the balance sheet when a company
spends $10 for something that will only add $6 to its net worth. In recording goodwill that
exceeded the cost of the acquired power business, GE was essentially telling investors that the
Alstom assets it bought had a net worth less than zero.
GEs unusual move didnt violate accounting rules, but it is one of a number of puzzling
decisions the company made in recent years regarding goodwill. The conglomerate stunned
investors last fall when it erased $22 billion in goodwill from its books, and the Securities and
Exchange Commission is investigating the write-down.
Following the 2015 Alstom purchase, GE boosted the deals goodwill further, to $17.3 billion in
2016. GE later held o? on reducing the value of the goodwill as the deal soured and the unit that
houses the assets struggled.
https://www.wsj.com/articles/how-ge-built-up-and-wrote-down-22-billion-in-assets-11552469401?mod=article_inline&mod=hp_lead_pos4
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How GE Built Up and Wrote Down $22 Billion in Assets – WSJ
3/13/19, 5:21 PM
A GE spokeswoman said the companys goodwill accounting has followed accounting rules and
been properly disclosed. We will continue to be transparent in our accounting, she said.
The company plans to update its financial outlook Thursday.
Increasing goodwill had the e?ect of enabling GE to avoid costs that would have reduced its
earnings. Not writing it down delayed investors realization of how deep the conglomerates
problems ran.
There should have been a write-down long before, said Lynn Turner, a former SEC chief
accountant.
Part of the reason for so much goodwill from the Alstom deal, GE said in a securities filing for
2016, was estimated GE-specific synergies, such as additional revenue from GE and Alstom
product lines complementing each other.
J. Edward Ketz, a Penn State University associate professor of accounting, said that while GEs
accounting follows the rules, he couldnt recall another case in which the goodwill a company
recognized from a deal exceeded its cost. The justification is on the aggressive side, he said.
As GE raised goodwill, it e?ectively reduced the value it placed on the Alstom hard assets it
acquired. Just before the sale, Alstom placed a net value of about $600 million on the tangible
assets and liabilities it was selling to GE, excluding goodwill and other intangibles. But when GE
added those items to its own balance sheet, net tangible value was about negative $6.2 billion.
Among the reasons for the changes, GE said, were revisions of some of its assumptions and
valuations, additions of $990 million to legal reserves and the change from international to U.S.
accounting standards.
By increasing goodwill and reducing tangible assets, GE avoided costs that could have weighed
on its earnings each quarter for years.
An employee measures a turbine at Alstoms facility in Rugby, U.K, in April 2014. GE used an independent third-party valuation
firm to review its decisions on Alstom goodwill. PHOTO: BLOOMBERG
Many types of assets gradually lose value as they age, leading to regular depreciation or
amortization costs that count against a companys earnings. But goodwill su?ers no automatic
loss of value, so there arent any amortization costs. Companies must examine their goodwill
yearly to determine if it has lost value, but if it hasnt, it can stay on the balance sheet forever.
GE conducted regular goodwill tests as required; companies cant write down their goodwill
until and unless they fail a goodwill test. It also engaged an independent third-party valuation
firm to review its decisions on Alstom goodwill.
But the company took only relatively modest charges before the 2018 write-down. It did
suggest a bigger bath was possible: In July 2018, more than two months before the $22 billion
charge, GE said in its quarterly SEC filing that the two power-business units holding most of the
Alstom goodwill were worth only slightly more than the value at which GE carried them. That
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How GE Built Up and Wrote Down $22 Billion in Assets – WSJ
3/13/19, 5:21 PM
meant write-downs couldnt be ruled out if the power business eroded any further, GE said.
Still, there are indications GEs leadership knew much earlier that the power segment had
problems.
In April 2017, GEs industrial businesses posted sharply negative quarterly cash flow, $1 billion
below internal expectations, raising concerns about its accounting and the health of the power
business. Je?rey Immelt, then GEs chief executive, told the companys board in 2017 that
management had identified risks in the power division, but he played them down, The Wall
Street Journal has reported.
The board learned of the depth of the problems in September 2017, according to the Journal,
and GE acknowledged them publicly shortly after. In December, the company said it would cut
nearly 18% of the power divisions workforce. Still, GE didnt take the $22 billion charge for
nearly another year.
While the numbers always have some level of professional judgment, the SEC thinks they
should be in good faith, Mr. Ketz said. If the SEC looks at that and thinks theyre not making a
good-faith estimate, there could be problems.
Write to Michael Rapoport at Michael.Rapoport@wsj.com
Copyright © 2019 Dow Jones & Company, Inc. All Rights Reserved
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Page 3 of 3
How Je?rey Immelts Success Theater Masked the Rot at GE – WSJ
2/21/18, 1:41 PM
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https://www.wsj.com/articles/how-jeffrey-immelts-success-theater-masked-the-rot-at-ge-1519231067
How Je?rey Immelts
Success Theater
Masked the Rot at GE
A culture that disdained bad news contributed to overoptimistic forecasts
and botched strategies
By Thomas Gryta, Joann S. Lublin and David Benoit
Feb. 21, 2018 11:37 a.m. ET
Je?rey Immelt, the longtime boss at General Electric Co. , was a polished presenter who held
court each year at a waterfront resort o? Sarasota, Fla., where industrial executives and Wall
Street listened for his outlook on the conglomerate.
This is a strong, very strong company, Mr. Immelt said at the event last May.
On that Wednesday morning, though, he looked shaky to some people in attendance, running
quickly through highlights of 27 slides in the ballroom of the Resort at Longboat Key Club. He
defended his long-held 2018 profit goal, an optimistic benchmark Wall Street had long
abandoned.
Its not crap. Its pretty good really, he told the room, referring to GEs recent financial
performance. Today, when I think about where the stock is compared to what the company is,
its a mismatch.
It was a mismatch. On that day, GE shares were trading near $28. They would go on to collapse
over the next six months while the stock market set fresh records. Today, they trade below $15.
GEs precipitous fall, following years of treading water while the overall economy grew,
was exacerbated, some insiders say, by what they call success theater. Mr. Immelt and his
top deputies projected an optimism about GEs business and its future that didnt always match
the reality of its operations or its markets, according to more than a dozen current and former
executives, investors and people close to the company.
This culture of confidence trickled down the ranks and even a?ected how those gunning to
succeed Mr. Immelt ran their business units, some of these people said, with consequences that
included unreachable financial targets, mistimed bets on markets and sometimes poor
decisions on how to deploy cash.
The history of GE is to selectively only provide positive information, said Deutsche Bank
analyst John Inch, who has a sell rating on the stock. There is a credibility gap between what
they say and the reality of what is to come.
Said Sandra Davis, who knows several GE executives as the founder of MDA Leadership
Consulting: GE itself has never been a culture where people can say, I cant.
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How Je?rey Immelts Success Theater Masked the Rot at GE – WSJ
2/21/18, 1:41 PM
Within weeks of the May meeting, Mr. Immelt announced his retirement. By year-end, GE under
a new leader had cut its dividend in half and triggered a restructuring that is expected to
eliminate thousands of jobs and cast o? more than $20 billion worth of assets. Today, federal
regulators are examining GEs accounting for certain transactions, and new CEO John Flannery
is considering breaking up the 125-year-old company.
The tumble is all the more stark for a company that embodied the managerial success of
American business and its industrial power. GE once had the highest market value of any
U.S. corporation. Its alumni have gone on to run companies such as Boeing and Chrysler.
Few knew just how badly ailing the American icon was. Even GEs board didnt realize the depth
of problems in the biggest division, GE Power, until months after directors had replaced Mr.
Immelt, according to people familiar with the matter. For the 2017 fourth quarter, GE reported
lower revenue and, after a charge related to a review of its insurance business, a loss of nearly
$10 billion.
Many of us are in some level of shock, said a former director.
Investigations are under way inside GE, including at the board level, seeking to determine how
it all happened, some of the people said.
Several GE executives were aware the 2018 profit goal of $2 a share wasnt realistic, they said,
and some were surprised Mr. Immelt stuck to it at the May event.
I led GE through multiple industry cycles, 9/11, recessions, and the global financial crisis.
My leadership team always focused on the task at hand, Mr. Immelt, 62 years old, said in a
written statement. Because we had a culture of debate and external competitiveness, GE built
a set of industrial businesses that lead in their markets.
At a conference hosted by Axios in November, the month after he stepped down as chairman
ahead of schedule, Mr. Immelt noted that GE is 125 years old; we go through cycles, and said
he was fully confident that this company is going to thrive in the future.
A spokesman for the former CEO pointed to his decision to purchase $8 million worth of GE
shares in 2016 and 2017. That included 100,000 shares in mid-May at a price roughly twice
todays.
Former GE Chief Financial O?cer Keith Sherin, who worked alongside Mr. Immelt during
challenges such as the financial crisis, said the CEO would methodically approach a problem
with his team, consider multiple viewpoints and communicate regularly with the board,
making sure executives stayed focused on the most important issues. I never found him to be
overly optimistic, said Mr. Sherin, who retired in 2016.
Gas turbines, seen under assembly in Greenville, S.C., are a big business sector for GE but one that has struggled. PHOTO: LUKE
SHARRETT/BLOOMBERG NEWS
But Mr. Immelt didnt like hearing bad news, said several executives who worked with him, and
didnt like delivering bad news, either. He wanted people to make their sales and financial
targets and thought he could make the numbers, too, they said.
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How Je?rey Immelts Success Theater Masked the Rot at GE – WSJ
2/21/18, 1:41 PM
The optimism was evident in how Mr. Immelt and the board used the companys cash. Over the
past three years, GE spent more than $29 billion on share repurchases, at an average price of
almost $30, twice the current level. That included billions of dollars spent less than a year
before GE suddenly found itself strapped for cash last fall.
Mr. Immelt won applause from those who believed in him. Trian Fund Management LP,
which invested $2.5 billion in GE in 2015, wanted it to buy back even more stock. The
activist investor urged the company to borrow $20 billion for repurchases (which it didnt do),
based on a belief that the profits Mr. Immelt was promising would send the stock soaring when
they arrived.
Instead, at Mr. Immelts retirement in August the stock was below its level when he took over 16
years earlier. Including dividends, GE gained 8% with Mr. Immelt at the helm, while the S&P 500
rose 214%. Since he stepped down, the stock has lost about 43%, erasing almost $94 billion in
market value. The relationship with Trian deteriorated last year and the investor successfully
pushed for a board seat to assert influence.
Mr. Immelts successor, Mr. Flannery, was one of his lieutenants, a 30-year GE veteran. In
November, Mr. Flannery slashed the 2018 financial targets his former boss had stuck with a
few months earlier. Instead of $2 a share GE now projects $1 to $1.07. Gone now are most of Mr.
Immelts team, including his finance chief and head of the power division.
GEs customers, investors and employees want us to focus on the future. We are building a
stronger, simpler GE, Mr. Flannery said in a written statement. In the last decade, the GE
team built a number of excellent businesses.
Several directors discussed in November whether the entire board should be fired, according to
people familiar with the meeting. Instead, what had been an 18-person board will lose half its
members but soon add three new directors in coming months.
Mr. Immelts predecessor, Jack Welch, delivered steady profit growth and sent shares soaring
in the 1980s and 90s by striking deals and aggressively slashing costs and jobs. Mr. Welch also
built up a huge lending business called GE Capital that for years generated outsize profitsbut
nearly sank the company during the financial crisis on Mr. Immelts watch.
When GE later sold most of GE Capital, Mr. Immelt laid out a strategy in which the
industrial businesses would grow enough to o?set the lost cash flow from the financial
unit, so that GEs long-term financial projections and dividend were sustainable. It didnt work
out that way. Free cash flow wasnt su?cient to cover the dividend for years.
During his tenure, Mr. Immelt ramped up research spending and hired thousands of
programmers to develop software for the machinery GE makes. Results were strong at two of
GEs big units, aviation and health care (medical equipment). But sales and profits slumped at
the enlarged oil and power units, creating serious problems.
Starting early in his tenure, Mr. Immelt bet heavily on the energy boom. Acquiring companies
that help drillers pump and transport fuel, he had GE spend more than $14 billion over 10 years,
most of it based on higher oil prices than todays.
He also spent more than $10 billion to scoop up assets from a turbine rival, a transaction that
closed just as that market was cooling. The deal was a 2014 agreement to acquire Alstom SAs
power business, one of GEs biggest industrial acquisitions and a key part of Mr. Immelts
strategy.
Mr. Flannery, then in charge of business development, favored the deal. The power sector is
core to GEs future and it has excellent long-term growth prospects, he said after the 2014
announcement. Now the new CEO says the price was too high.
The acquisition su?ered in part because of an 18-month regulatory review in Europe. To get the
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How Je?rey Immelts Success Theater Masked the Rot at GE – WSJ
2/21/18, 1:41 PM
deal done, GE had to make sure French jobs were secure and shed certain assets and technology.
Some GE executives were concerned the compromises changed the calculation too much.
Alstoms power business su?ered while the sale was in limbo, and some in the leadership at GE
wondered if it should walk away. Mr. Immelt and power division leaders were determined to
close the transaction, people familiar with the decision said.
MORE
GE to Maintain Baker Hughes Stake
Defenders of the deal say it gave GE a much larger base of
customers for its services and provided technology to
produce a more e?cient gas turbine. While the timing
wasnt ideal, said one person close to the transaction, the
company couldnt control when such assets became
available.
When the EU delayed the deal, GE should have walked away, said Scott Davis, an analyst at
Melius Research. The fatal move, however, was how GE acted after the deal closed.
Rather than using his units greater size to raise prices, GE Powers then- CEO Steve Bolze
moved to gain market share, undercutting rivals such as Siemens AG to win sales for GEs
biggest gas turbines, analysts say.
Former CEO Je# Immelt, left, former power division chief Steve Bolze and John Flannery, now CEO, left a 2014 Paris meeting
about buying competitor Alstom. PHOTO: ETIENNE LAURENT/EPA/SHUTTERSTOCK
At the time, Mr. Bolze was among those competing to be the next head of GE. He was bullish on
the power units prospects in March 2017 but warned of possible volatility. I am not naive on
the market, Mr. Bolze said at an investor meeting that month, predicting a flat market for the
biggest turbines. In June, days after losing out for GEs top job, Mr. Bolze said he would leave.
It wasnt until a meeting in September that the board learned the depths of the problems at the
division, which accounts for 30% of GEs approximately $122 billion in annual revenue. GE
Power was sitting on too much unsold inventory and was discounting deals to hit sales
projections.
Mr. Immelts optimism was part of the proble…
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