On October 1st the board of directors replaced John Flannery as Chairman and CEO with Larry Culp. Culp had a great 25-year career at Danaher from 1990 -2014, including ~15 years as President and CEO from 2000 – 2014. During his tenure as CEO, he helped build, acquire, and manage a diverse collection of industrial businesses.
As the CEO of GE, his most critical job will be allocating capital and managing the portfolio of businesses. In order to help better understand the types of future decisions he could make, we take a deep dive into how Larry Culp historically allocated capital (M&A, capex, buybacks, etc) and managed Danaher’s portfolio (spin-offs, divestitures, etc).
After researching his track record at Danaher, we believe that the skillset required to turnaround GE is much different than the strategy Culp executed at Danaher. Nonetheless, investors are rightfully excited to have a skilled, outsider executive lead GE because the trend of industrial conglomerates breaking up could provide a roadmap for additional portfolio moves at General Electric beyond the already announced spin-offs.
While Culp was the CEO of Danaher, they were in a rapid growth phase. Revenues increased from under $4 billion to nearly $20 billion and free cash flow increased from just over $400 million to well over $3 billion. They accomplished this growth mainly through mergers and acquisitions.
During Culp’s tenure, Danaher spent a total of roughly $32 billion of capital. The chart below shows the breakout of what they spent the capital on during Culp’s tenure as CEO.
They didn’t spend a whole lot on buybacks, dividends, or internal growth opportunities (capex). By far the largest area of capital deployment was on acquisitions where they spent nearly $27 billion dollars. This represents over 80% of the total capital the company deployed from 2000 – 2014.
Furthermore, the capital deployment was lumpy. In some years, they deployed capital that was over twice their free cash flow for the year, while in other years they let cash build or delevered the balance sheet. Making large investments when they see opportunity is a characteristic seen in a lot of good CEOs.
The largest acquisition under Culp was in 2011 when they acquired Beckman Coulter for $6.8 billion. Interestingly, he was not around in 2015 for Danaher’s acquisition of Pall Corporation, their largest in company history, for $13.8 billion.
Culp’s focus was on building up Danaher through M&A. He made shockingly very few divestitures during his time leading the company. In fact, we estimate that he only executed around $1.6 billion of divestitures during his tenure, of which roughly half came from selling the Apex Tools Group to Bain Capital in 2013 (Apex was part of a JV of which DHR owned ~50%).
The major portfolio moves that shrank Danaher’s portfolio came from spin-offs in 2015 and 2016, after Culp had left. In 2015, they executed a split-off and merger of their Communications Business with NetScout through an exchange offer. Then in 2016, they spun-off Fortive.
The portfolio management strategy at General Electric going forward will have to be much different. GE already has already announced two spin-offs (Transportation and Healthcare) which are set to be completed in 2019. However, with the continued struggles, additional portfolio moves could be necessary to refocus the company.
At its core, evaluating an asset, whether the intention is to acquire it, spin it off, or sell it, is the same. However, the process around each of these transactions is different. While Culp only has experience building up companies, the CEO role at GE is more akin to Ed Breen’s role as CEO of DowDuPont where he is separating businesses off on their own so that they can each be compelling stand-alone companies.
A skilled executive like Culp should recognize where GE is in their corporate lifecycle and execute a capital allocation and portfolio management strategy that is consistent with creating value on a go forward basis. We will be keeping an eye on how he proceeds, but in order to regain investor confidence, they need to consistently generate free cash flow and simplify the business.