Yesterday, General Electric unexpectedly terminated their CEO of 14 months, John Flannery, and replaced him with Larry Culp, the first “outside” chief in the company’s 126-year history.
At first blush, it seems like yet another hitch in a terrible year for the beleaguered energy giant — but the news actually sent GE stock soaring by as much as 16%.
Turns out, fired CEOs are good for stock
Wall Street isn’t typically a big fan of being blindsided by corporate shake-ups… with some exceptions.
Historically, studies have shown that when a business isn’t performing so hot, an ousting like Flannery’s gives risk-tolerant investors a renewed sense of hope. As a result, stock goes up.
This “pop” usually doesn’t last long, though: Investors soon realize that a new CEO is often just a Band-Aid solution for much deeper issues.
When the scandal-ridden pharma company, Valeant, replaced its CEO in 2016, stock shot up 14%, but quickly flatlined. Likewise, when Dick Costolo quit as Twitter’s CEO in ’15, an 8% temporary increase was followed by a multi-year stagnation.
GE has bigger problems than an ineffective CEO
The company has been in a long, slow decline since its heyday in the ’90s, when stock hit $51 per share under CEO Jack Welch.
Jeff Immelt, who succeeded Welch, led GE through years of “poorly timed deals and needless complexity” — all of which were inherited by Flannery when he took over the reigns in August 2017.
In 2018 alone, GE stock has fallen by 33%, and the company announced it will “fall short” of its 2018 profit projections due to a “weaker performance” than expected in its power division.
Ladies and gents, Larry Culp to the plate
If there’s any silver lining to this, it’s that the new guy, Larry Culp, isn’t like the others.
GE has always hired its CEOs from the inside; Culp comes from the technology giant, Danaher, which he grew from $9.7B to $50B in market cap in his 14-year helm as CEO.
Let’s hope he rights the ship — otherwise, he’ll end up just as Culp-able as the others in GE’s fall from grace.