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Larry Culp’s long to-do list to fix GE

General Electric Co., Schenectady Works, circa 1907 (Library of Congress)

General Electric’s inexorable downward spiral has been marked by massive, unforeseen write-downs, a cut in its dividend and a boot off its prestigious perch on the Dow Jones industrial average after more than a century.

A reckoning came to a head Monday with the abrupt firing of chief executive John Flannery after a year running the giant conglomerate, which includes businesses such as manufacturing jet engines, drilling for oil and gas, and building ultrasound medical devices.

The mess has been years in the making. The company, once venerated for its reliable returns to shareholders, has long since lost its golden touch. For comparison, the Standard & Poor’s 500-stock index delivered total returns (including dividends) of 185 percent from 2000 through the end of September. Over the same period, GE returned a loss of 61 percent.

What will it take to fix GE? New chief executive H. Lawrence Culp Jr. faces a daunting turnaround, according to Wall Street analysts, management experts and investors.

“I ‘heart’ Larry Culp, but a large amount of wood to chop,” is how JPMorgan Chase analyst Stephen Tusa put it in a dire note on Monday. “We struggle with how even Larry Culp, after only a few months, can understand the inner workings of these businesses.”

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That reverence for Culp, 55, who was named to GE’s board in February amid a governance shake-up, follows his 14-year run as CEO of Danaher Corp., the Washington industrial conglomerate. While there, Culp had the sort of run that makes investors’ hearts race: He grew revenue and market capitalization fivefold, leading a much smaller yet focused conglomerate where he was known for well-timed acquisitions and overseeing a 465 percent return to shareholders.

Culp’s pay package could reach $21 million annually for four years. Additionally, if he can push up GE’s share price, he stands to earn hundreds of millions more.

“Culp is the perfect guy to run this business,” said financier Ken Langone, who served on the GE board from 1999 to 2005 under both Jack Welch and his successor, Jeffrey R. Immelt. “He has the mind-set, the experience and the demeanor to give the people of GE a sense of hope.”

Global investment bank RBC Capital Markets upgraded its rating on GE to outperform on the news that Culp was taking over.

“There is still much to fix at GE, but the market can now have full confidence in the senior leader at the helm,” said analyst Deane Dray in a note to clients Monday.

Unlike most CEOs who run corporations with primarily one business, Culp has experience leading a group of executives who themselves run disparate businesses, a very different leadership skill, said Steve Mader, a retired vice chairman of the executive search firm Korn Ferry.

As GE director, Culp was known to the board, an advantage Mader said may have contributed to Flannery getting yanked more quickly.

“The board had a chance to get to know him,” Mader said. “There’s so much additional confidence.”

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Yet what Culp faces in reviving the onetime paragon of U.S. industry is a steep climb with problems that go back nearly two decades. Complex finances. Poorly timed and expensive acquisitions that have dragged down earnings. Massive write-downs. A finance arm that posed a towering liability during the financial crisis. A bloated workforce.

Analysts see several fast, brutally unsentimental changes needed to restore the company’s credibility with Wall Street and to stanch the decline in the stock price, which was halved in Flannery’s 14 months as CEO.

The company has lost $175 billion in market value over the past 20 months, a drop that’s roughly equal to the value of the Walt Disney Co.

Flannery had succeeded Jeffrey R. Immelt, whose reign has come under sharper scrutiny as the company’s deeply entrenched problems have surfaced.

“The most prevalent question for these multi-industrial companies is whether you break them up or not,” Morningstar analyst Josh Aguilar said. “Culp has to decide what he wants to keep and what he wants to get rid of.”

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Culp’s to-do list is long, analysts said.

Fix the company’s turbine business and figure out what to do with health care — all while keeping GE’s crown jewel, the jet engine business, humming as the envy of the aerospace world. Raise cash and fix the ailing finances. Shake up management, a process Flannery started last year after taking over. Improve transparency. Cut costs and slash bureaucracy.

Some investors are cheering the management change — GE’s stock was up 8.8 percent this past week on Monday’s news.

“These management changes are substantial,” said Stephanie Link, head of global equities research at Nuveen, the investment management business at TIAA, in an appearance on CNBC.

Link, who also manages a U.S. equities portfolio, said she had begun buying GE, expecting to see a restructured power division, smaller corporate overhead and an equity offering.

She called the appointment of Thomas W. Horton as lead GE director “phenomenal.” Horton has experience in turnarounds from his time as American Airlines chief executive.

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Others have lost trust. GE’s reputation for complexity, which once earned it a certain mystique, has boomeranged on the industrial giant. Simplifying the beleaguered icon will now be among Culp’s top assignments.

“They’re not minor problems, otherwise Flannery would have solved them,” said Michael Useem, a professor at the University of Pennsylvania’s Wharton School who directs its Center for Leadership and Change Management. “We’re talking about turning around an aircraft carrier in high seas.”

Fix the power business

Once among the company’s star performers, GE Power — about 30 percent of its $122 billion in annual sales — is the source of an embarrassing $23 billion write-down that accompanied Monday’s announcement that Flannery was exiting.

Much of that was a result of its $10 billion purchase of energy assets from Alstom, the French industrial giant for which many believe GE overpaid in 2015. The acquisition also amped up production as global demand for traditional power generation and transmission came under increased competition from renewable energy such as solar and wind.

Culp will need to decide whether to fix GE’s power division or scrap it. David Kass, a finance professor at the University of Maryland, thinks he should sell it because of its “substantial” underperformance.

“The remainder of GE can then be turned around,” Kass said. “GE should become a smaller company.”

Others think the power business could be salvaged. Scott Davis of Melius Research said the power unit is troubled enough that Culp might need to step in himself.

If he keeps GE Power, “Larry may need to effectively become the CEO,” Davis said, leaving the other businesses to be run by deputies he trusts.

GE Power would still have to deal with waning demand for the turbines it sells and the services it provides to coal and gas plants. GE has been left with more turbines than it has buyers. That business has also been hit by highly publicized malfunctions in a small number of weakened blades.

“Capacity has to come out and fast,” Davis said. Former CEO Welch “fixed [GE’s] nuclear power business by forcing managers to assume that they would never sell another power plant again. In gas, perhaps the same extreme is necessary.”

Fix the finances

Unpacking GE’s financial statements has long been a challenge, analysts say.

“Basic questions on debt, cash, margins go unanswered,” Davis wrote in a note Monday, summing up what Culp will need to do now. “Insiders give different answers to the same questions. Retired GE corporate folks will tell you that they didn’t understand the accounting.”

In past earnings calls, GE executives said they are simplifying reporting metrics.

Analysts say a big challenge will be improving its cash flow and repairing the balance sheet.

Jeff Windau of Edward Jones has zeroed in on whether GE is generating the cash it needs to cover its spending, which he noted has included about $4 billion a year in capital expenditures and $4 billion in dividends.

“We will be expecting a discussion by management during the upcoming earnings call addressing the cash flow issues,” he said.

At the end of the second quarter, GE reported $115 billion in total borrowing. It has about $64 billion in cash and securities. Its pension is underfunded by nearly $29 billion, with $100 billion in obligations.

The company has billions in debt on long-term insurance liabilities on its GE Capital businesses, and GE Power is diverting valuable resources. It needs to clean those up, so it can put its cash to better use, such as investing and expanding its profitable businesses.

“There are several high hurdles,” Windau said.

GE was once one of the few companies that enjoyed a prestigious AAA rating on its debt, but lost it in 2009 after the financial crisis. This past week, S&P Global Ratings lowered its rating on GE debt two notches, from “A” to BBB-plus.

“It’s going to raise their cost of borrowing,” Windau said.

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Regarding the downgrade, spokeswoman Jennifer Erickson wrote in an email that “GE has a sound liquidity position, including cash and operating credit lines. We remain committed to strengthening the balance sheet including deleveraging.”

Culp will need to consider the rest of GE’s portfolio, too. Some analysts said GE should accelerate the sale of its Baker Hughes oil production company. Meanwhile, GE Healthcare, which Flannery said in June the company would spin off, is nicely profitable and could fetch a high price, but Culp knows business well from his Danaher days and it’s a stable moneymaker.

“They might sell Healthcare,” Davis said. But “if Larry thinks that’s a good business and that he needs to keep it to help pay the bills, then he will keep it.”

Culp could also sell more stock to raise money, but that could hurt the already wheezing stock price. Cutting spending on everything from big capital projects to advertising could also free up cash and help boost its bond rating, analysts said.

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Boston-based GE has more than 300,000 employees across 180 countries, and analysts have said Culp could bring a knife to head count, particularly at headquarters.

“Danaher was able to run a pretty large and complex company on less than 100 people in corporate headquarters,” Davis said. “If you think about all the corporate people in GE, there are thousands.”

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Culp, the first outsider to lead GE in its 126-year history, could help reinvigorate GE’s culture, which Langone said suffered as its iconic status lost luster and the stock price fell.

“The first thing Culp needs to do is address the morale issues” that arose during Immelt’s tenure, Langone said. “The biggest job is to restore the esprit de corps.”

During Immelt’s tenure, the former CEO’s spokesman said, “GE was consistently rated by experts as one of the best companies in the world for leaders. Voluntary turnover was less than 5 percent. These are both signs of a strong culture and energized workforce.”

Flannery admitted to investors that the culture needed to sharpen its “accountability” and “rigor.”

“Effort’s good, outcomes matter,” Flannery said in an investor presentation in November. “Transparency, more candor, more debate, more pushback.”

While outsiders may be unencumbered by emotional ties to the past, there are risks in bringing in too many, or cutting too many legacy heads. One is losing too much internal knowledge, particularly for a CEO who’s new to such a sprawling, diversified business.

The other is that a company with a management history as storied as GE’s might not take well to outsiders.

“The antibody levels are really high,” Mader said of “broad and deep” cultures like GE’s. “You could put in good leaders who don’t assimilate very well.”

If Culp doesn’t quickly make it clear who he is and what he stands for with employees, Mader said, “it’s over. He’ll lose them.”

He and Useem both thought Culp might consider reaching a few levels down within GE’s ranks, looking for “suppressed, annoyed, frustrated players under the top level,” Mader said.

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Useem points to Carlos Ghosn, who was known for doing just that at Nissan.

“When he came in, his predecessors had a turnaround plan, but they couldn’t execute it,” he said. “Some people in the middle ranks said, ‘I think it’s great. We just haven’t been pressed to do it.’”

Culp might elevate such younger managers, especially given that he was given a shot at a huge job at a very young age.

“Remember how old he was” when he took over at Danaher, Useem said. “He was only 38.”

Turnarounds of this size are rare — names like Louis V. Gerstner Jr., who made the “elephants dance” at IBM, are famous for a reason. Useem said he used to teach General Electric as an example in his classes at Wharton, before dropping it in recent years. The case study he introduced more recently? Culp’s tenure at Danaher.

Correction: An earlier version of this report contained incorrect total returns for GE from 2000 through the end of September.