General Electric Co. (GE) has added a top executive from Trian Partners to its board as new CEO John Flannery remaps the manufacturing conglomerate's strategy amid pressure from the activist investor to boost returns.

Ed Garden, the Trian chief investment officer who worked with DowDupont (DWDP) CEO Ed Breen to combine two chemical giants and break them up, joined Boston-based GE's board on Monday, Oct. 9. He has previously described Flannery, who succeeded longtime CEO Jeffrey Immelt on Aug. 1, as "part of the solution" at GE.

"I am excited to work with John and the rest of the board in the same way that I've worked at other companies," said Garden, whose appointment was announced only a day before Procter & Gamble Co. (PG) investors conclude a vote on his firm's proxy fight to install CEO Nelson Peltz at the consumer-products giant. "I am disappointed by the recent performance of GE's stock, but I continue to believe that GE represents an attractive long-term investment opportunity with significant upside."

Garden replaces Robert Lane, the former Deere & Co. (DE) CEO who is leaving GE's board for health reasons. The change was announced just days after GE disclosed that Immelt would step down as chairman nearly three months early and that three vice chairs, including CFO Jeff Bornstein, would retire at year's end.

While the management changes have been "described by GE and its board as a planned succession, the progression makes us think there is indeed more to it," Stephen Tusa, an analyst with JPMorgan Chase & Co., said in a note on Monday. Bornstein had been awarded a retention bonus of $6.7 million in stock as recently as June, he noted, though it wouldn't have vested until 2022.

"The negative signs of significant house cleaning" combined with weaker markets for some of GE's businesses "opens the door to many outcomes that would have perhaps not been possible prior," including a reduction in the company's popular dividend, Tusa wrote.

GE says the dividend, valued at about $8 billion, remains a top priority, though it has conceded it might re-examine planned stock buybacks.

Investors expect Flannery to address those matters on Nov. 13, when he details his plan to boost profitability and cash flow after months of meetings with shareholders. The new CEO has promised a thorough evaluation of GE's portfolio, which ranges from medical equipment to jet engines and locomotives, following Immelt's wind-down of most of the lending business and exit from NBC.

While the new CEO hasn't offered any hints about which businesses he might sell, he has said he's fully committed to digital manufacturing, the initiative championed by Immelt that led to the creation of Predix, a software platform that does for factories what Apple Inc.'s (AAPL) iOS and Google's Android did for smartphones.

Trian's Ed Garden said he's excited about working collaboratively with GE's board to produce 'long-term value.'
Trian's Ed Garden said he's excited about working collaboratively with GE's board to produce 'long-term value.'

in the meantime, Flannery has moved to cut costs, starting with the sale of a fleet of corporate aircraft used by senior executives, according to a person familiar with the matter. GE had long required its CEO to use company aircraft for both business and personal trips, and Immelt's 2016 compensation included $257,000 worth of travel on GE planes.

Additionally the company is scrapping a practice of leasing cars for higher-level managers, which cost GE $112,000 for five top executives in 2016, and shrinking corporate expenses overall, including for its new Boston headquarters, the person said.

The conglomerate has been under pressure from Trian since 2015, when the firm acquired a stake that's valued at about $1.7 billion today and drafted a white paper outlining how the conglomerate might expand its already large stock-buyback program. 

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The firm suggested at the time that GE might be worth as much as $45 a share by the end of 2017. Instead, a rally that began as Immelt was winding down the GE Capital lending business peaked at about $32 in mid-2016, then faded to the mid-$20 range as the company struggled with falling oil prices and its manufacturing businesses generated less cash than expected.

The shares fell 3.9% to $23.43 in New York trading on Monday.

While GE's portfolio is strong, it consists of very cyclical businesses, Trian's Garden noted at a September conference in New York.

Current weakness in the power business as well as a less-than-expected bounce in the oil, gas and locomotive markets are hindering the company's efforts to meet a $12 billion target for cash-generation from manufacturing businesses this year, JPMorgan's Tusa said in a September report.

When GE disclosed that it was $200 million in the red on cash from industrial operations for the first six months of the year, then-CEO Immelt assured investors that cash flow would improve.

Still, executives warned that cash from manufacturing would come in "at the lower end" of GE's original forecast of $12 billion to $14 billion -- and that meeting the goal would depend in part on natural resource markets.

Such challenges also make the company's early profit target of $2 a share in 2018 considerably more difficult. Wall Street analysts are projecting just $1.67, the average from a FactSet survey, and Flannery may set the bar even lower.

On that point, the departure of Bornstein, whom the company described as recently as June as Flannery's partner in GE's turnaround, is suggestive, wrote Jeff Sprague, an analyst at Vertical Research Partners.

"We thought it would be untenable for Mr. Bornstein to explain the bridge from the prior $2-plus 2018 construct to something much lower, and this now clearly seems the case," he wrote in a note to clients.

He and Tusa concur that the moves make a dividend cut appear more likely, too. That could crush the stock, since it is widely held by retail investors, but keeping it gives the company little excess cash for expansion, Sprague said.

Updated from 8:15 a.m. ET on Monday, Oct. 9, 2017.

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