What I Need to See from General Electric's New CEO

On my desk in my office here at Money Map Press is a yellowed newspaper clipping from mid-November 1997 - a Page 1A story featuring my byline.

I've kept this clipping for all these years because it was the last big "scoop" that I got for Gannett Newspapers in Rochester - right before I left for a job here in Baltimore.

I'd been covering the corporate flailing of the once-great Eastman Kodak Co. (NYSE: KODK) for nearly five years - a journalistic vision quest that took me from Upstate New York to Silicon Valley, Hollywood, Japan, and even China.

General ElectricThe story that I broke that November was about a soon-to-be-announced corporate "restructuring" - a $1 billion, 10,000-layoff cost-cutting plan that Kodak was planning to share with Wall Streeters at a New York "event" the following Tuesday.

I didn't realize it at the time, but what I'd really written... was Kodak's epitaph.

The company's prospects had seemed much better four years earlier, after a huge shake-up at the top.

I still remember that brighter moment, when I was seated in the executive offices on the top floor of Kodak Tower in Rochester, N.Y.

Across the conference table from me was George M.C. Fisher, Kodak's just-appointed CEO and a vaunted "fix it" guy who was the first-ever outsider to lead the company.

I was there to interview Fisher. The topic on the table: the film giant's possible turnaround.

I was sitting in the room with a very shrewd executive, brought in from "outside" to right the ship...

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Pushing Hard to Change a Huge Company

After years of lousy financial results and a stubbornly eroding market share in the company's hugely profitable film business - and with the cannibalizing threat of digital photography beating like the jungle drums in one of those cheesy 1940s "B" adventure flicks - Wall Street was pushing for change at Kodak.

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Analysts, institutional investors, and a pioneering activist investment firm called The LENS Fund were thumping on Kodak to cut costs, cut employees, and sell businesses - and to use the savings to reward long-suffering shareholders by buying back lots of stock and boosting the dividend.

One extremist sell-sider even wanted Kodak to consider the "Harvest Strategy" - and just liquidate the company.

Kodak's board finally caved: It fired CEO Kay R. Whitmore, an engineer and career Kodak man, and in October 1993 recruited the well-thought-of Fisher from Motorola.

Fisher liked the Kodak brand, liked the "we make stuff" nature of the company, liked the people, and (I'm sure) loved the tens of millions he stood to make if he was even partially successful.

And the Kodak folks seemed to like him: His Midwestern values and "Just call me George" demeanor won over employees who feared for their futures. And his wife, who I met and talked to several times (including on an airplane flight - she was in first class ... I was in coach) and who knew me on sight, was a sweetheart.

In his heart, Fisher knew he'd inherited a bloated cost structure. But he refused to accept that Wall Street's slash-and-burn strategies were the answer.

Instead, he wanted to invest in new products, services, and technologies - and to restore Kodak's corporate luster.

And one line from that first meeting has always stayed with me.

"Bill, you can't cost-cut your way to greatness," Fisher told me. "You've got to have growth."

And yet - in November 1997, just three years after that - there I was ... writing the news-story-turned-obituary that I still think about today.

As it turned out, Kodak was unable or unwilling to do what was needed to "grow" its way out of its predicament - and ended up in a downward cycle that involved round after round of cost-cutting, bankruptcy, and a recent ridiculous gambit to cash in on the Bitcoin revolution.

Kodak waited too long to make its move, to bring in fresh blood - and even once it did, the company failed to act quickly enough and decisively enough to overcome the market shifts and competitive incursions that were killing it one cut at a time.

It's a story I've told time and again...

I've Written a Lot of Corporate Obituaries

This was an experience I drew upon as I repeatedly predicted the failure of Yahoo Inc. (NASDAQ: YHOO) CEO Marissa Mayer, who'd been drafted to engineer a makeover at the onetime leader in Internet search.

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I drew upon those Kodak lessons again here last year when I said that new General Electric Co. (NYSE: GE) CEO John Flannery had chosen a similarly fatal path.

On Monday, the GE board came to the same conclusion: It abruptly ousted Flannery and installed GE director and former Danaher Corp. (NYSE: DHR) CEO Lawrence Culp as the wheezing industrial giant's new leader.

And that begs the question: Will Culp choose cost-cutting or growth? And three years from now, will we be writing a GE success story - or a Kodak-style eulogy?

Flannery's ouster was a shrewd strategic move: It buys time for Culp and the company and gives it more maneuvering room.

But I'll need to see evidence of the creative game plan that Flannery seemed unable to devise.

GE Was Once Poised for Success

For a long time coming out of the Great Recession, I liked GE's prospects.

And I wasn't alone.

Three years ago, with GE trading at more than $25 a share, investor Nelson Peltz and his Trian Fund Management activist hedge fund announced that they'd amassed a $2.5 billion stake in GE since May, making it one of the company's top 10 shareholders.

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Trian is one of the most successful activist funds around. And it saw a big upside for GE.

"Trian believes GE has significant long-term potential and that its implied target value per share - including dividends - could be $40 to $45 by the end of 2017 based on our view that GE can deliver EPS of at least $2.20 in 2018," Trian Chief Investment Officer Ed Garden said.

Obviously, that forecast didn't come to pass: Even after the run-up that followed Culp's appointment, GE is trading at only $12 a share.

I liked GE's vision of becoming a "digital-industrial" company. With the focus on the high-growth, big-opportunity Internet of Everything (IOE), I believed General Electric had staked a claim to a growth market with a big upside.

I became a bit chagrined when GE's development of this opportunity began taking too long.

And Flannery's total reversal - to a slash-and-burn strategy that provided no clear shareholder benefits and no clear long-term upside for GE itself - lost me. In fact, in this interview with Money Morning's Casey Wilson last year, I said I was no longer a GE bull and predicted that Flannery's gambit would fail.

And I was right.

While acknowledging - as TheStreet's Jim Cramer says - that Flannery was "dealt a bad hand," the fact is that he did little to maximize the cards he did have to play: His plan for GE was uninspiring, too conservative, and seemed to take too long to develop.

Ultimately, it was that latter reality - the too-long-to-develop factor - that cost Flannery his job, most experts are saying.

Here's What CEO Culp Has to Do

The ouster buys GE more time and more "goodwill" with institutional investors. It's allowing the company to take a $23 billion write-down - in essence, half its stockholder's equity - on its power business.

It gives Culp the chance to potentially reconfigure Flannery's downsizing plan (I'm not sold on the plan to dump the healthcare business, and there's talk that Culp may reconsider that decision). And it gives Culp the badly needed time to do so.

Oppenheimer analyst Christopher Glynn and some of his sell-side brethren currently believe that we've seen the bottom with GE's stock - and all the bad news. That theory holds that there's upside from here - however long it may be in coming.

"The GE story remains one of heavy lifting," Glynn wrote. "Rather than an emphatic endorsement that GE can rapidly pivot to a stabilized baseline - that enough shoes have dropped - we concede that Culp accepting the appointment endorses the view that the frameworks confronting GE, while real and onerous, are not fundamentally unstable past a point."

My takeaway: I want to carefully watch what Culp says - and what he does. I want to see if he, perhaps, brings Don Comas, his longtime CFO at Danaher, over to GE. Comas is already planning to retire at year-end and could add credibility to the GE turnaround.

My hope is that Culp's game plan - when it is unveiled - will be growth-focused. You truly can't cost-cut your way to greatness. But you also can't make the Kodak mistake - and wait too long to jump-start growth.

It would be a shame if GE's push for renewed "greatness" will have to go unrealized.

I'll be watching this one carefully - and with great interest.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning at Money Map Press.

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