What GE CEO Culp Is Getting Right

And why investors are feeling optimistic

Jan 24, 2020
Finance
Management

SMITH BRAIN TRUST – Analysts may disagree on General Electric stock prospects, but there’s one thing they do seem to agree on: the effectiveness of CEO Larry Culp.

Culp took over as chief executive in October 2018, following a long and bumpy ride for the multinational conglomerate.

GE’s stock has been on a bit of an uptick of late, recently hitting a 52-week high above $12 a share. It’s a relatively new sensation for shareholders – GE shares had been under pressure for much of the past five years. In 2016, the price dropped by roughly half.

Now, it appears that Culp’s promised turnaround is beginning to take hold, Maryland Smith’s David Kass said recently, speaking to InvestorPlace.

“There is optimism among investors that GE’s fourth quarter report – to be issued on Jan. 29 – will show evidence of an improvement in corporate performance with revenues and earnings exceeding most analysts’ expectations,” says Kass, a clinical professor of finance at the University of Maryland’s Robert H. Smith School of Business. Culp was lead director of GE before being promoted to CEO. Prior to that, Kass notes, he had “a stellar record of building and managing Danaher Corp.,” a Washington, D.C., based conglomerate.

Paulo Prochno, clinical professor of management and assistant dean of Maryland Smith’s Part-Time and Online MBA programs, also spoke with InvestorPlace, offering up a broader view of GE and its history as a “very diversified” conglomerate. “The strategy literature suggests that unrelated diversification results in lower-than-average performance – unless the company has unique capabilities that it can transfer to each unit,” he said.

“The ‘old’ GE was very successful due to its managerial capabilities. For a long time those capabilities were rare, and although there was not much synergy across units, every unit benefited from those managerial capabilities developed at the headquarters level.”

Not surprisingly in competitive landscapes, competitors over time developed managerial capabilities as effective as that of GE, which subsequently rethought its diversification. “Some business units were sold, and GE started to look for operational synergies across units,” Prochno said. “What was once a conglomerate became a more focused company, with businesses around a core of industrial engineering.”

But GE “appeared to lose its soul” in this transition, Prochno added. “It was hard to find a new core for the company, and some businesses suffered. It became difficult to answer the usual question one should ask all diversified companies: what is keeping the different units together?”

Enter Culp.

“Coming from Danaher, a highly diversified company that resembled the old GE, he is bringing back a core for GE,” Prochno said. “Not exactly the same core as GE in the past, but one that is general enough to be applied to all business areas within the group: operational efficiency. Danaher was able to develop and keep a system based on operational efficiency that has added a lot of value to their areas; GE seems to be heading in that direction.”

Culp is acting on multiple fronts, “including adjustments in the portfolio of businesses – but his major contribution so far is to bring back a glue to keep the units together,” Prochno added. “This is still under development, but investors have been optimistic with the future potential of this logic.”

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About the Expert(s)

David Kass
<p>Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Sophomore Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on&nbsp;<em>Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), FOX TV, Bloomberg Radio, Wharton Business Radio, KCBS Radio, American Public Media's Marketplace Radio,&nbsp;</em>and<em>&nbsp;WYPR Radio (Baltimore)</em>, and has been quoted on numerous occasions by&nbsp;<em>The Wall Street Journal, Bloomberg News, The New York Times&nbsp;</em>and&nbsp;<em>The Washington Post</em>, where he has primarily discussed Warren Buffett, Berkshire Hathaway, the economy, and the stock market.&nbsp;</p>
Paulo Prochno
<p>Paulo Prochno is a Clinical Professor at the University of Maryland's Robert H. Smith School of Business, and the Faculty Director for the DC evening MBA program. From 2010 to 2014, Paulo was the associate chair of the department. Prior to joining the Smith School faculty in the Fall of 2007, he had appointments at Fundação Dom Cabral, a top-ranked school from Brazil focused on executive education, and Ibmec Business School, where he coordinated open enrollment executive programs.</p>
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