How Jack Welch’s Success Wrecked the Idea of the American Company

The recently deceased business icon pioneered mergers and acquisitions, stock buybacks, and offshoring

In early February of 1981, President Ronald Reagan picked his antitrust chief, William Baxter, whose arrival signified the reconstitution of monopoly power in America. Baxter restructured antitrust and merger law to prioritize economic efficiency and supercharged a merger trend already underway.

Low stock prices and high inflation meant that the new rule in corporate America was not to build products or services — it was to buy or be bought. Business goliaths restructured in the 1980s to take advantage of this new merger wave. The leader was a young and aggressive new CEO at one of the oldest and biggest conglomerates in America, General Electric.

Under Welch, the company began a policy of firing 10% of its employees every year, as well as spending billions of dollars to buy back stock.

Jack Welch — who died at age 84 — was trained as an engineer and had made it to the top at GE by selling a new type of plastic. Citibank chief executive Walter Wriston was on the board of GE and had helped Welch become CEO. Welch made his mark as CEO not by engineering products, but by financial engineering. Welch understood earlier than almost any other business leader what the new pro-merger legal environment meant and announced at his first meeting with security analysts in 1981 that under his leadership, GE’s strategy would be to stop competing in markets where the company wasn’t number one or two. In any business in which GE wasn’t or couldn’t become the market leader, he would either have the manager find a way to get to number one, sell the division, or shut it down.

Within four years, Welch shut down a dozen of the company’s 217 factories and cut 18% of total employment at the company. Welch sold all mass market manufacturing lines, except big appliances and light bulbs. GE ditched its consumer electronics business. Under Welch, the company began a policy of firing 10% of its employees every year, as well as spending billions of dollars to buy back stock.

In the press, Welch became known as “Neutron Jack,” with his strategy of mass layoffs reminding reporters of the neutron bomb, which was reputed to kill people while leaving buildings intact. Journalists sometimes called him “Trader Jack” for his strategy of buying and selling companies, treating GE less as an industrial giant and more as a portfolio of financial assets. In six years, he bought and sold nearly 600 business and product lines. But he also, as author Barry Lynn noted, set the pattern for mergers and acquisitions in old-line industrial America.

In 1985, at the height of fears about the Japanese “invasion” of corporate America, Welch took over television maker RCA, assuring Congress he would combine GE and RCA to compete more effectively with Japanese television manufacturers. Instead, Welch traded the entire GE-RCA TV division to France’s Thomson Electronics in return for Thomson’s medical device business. He kept NBC, which was not subject to international competition. As Lynn put it, “in two strokes, Welch remade multiple world-spanning industries. The rationale behind his moves was simple: concentrate power, avoid direct competition with firms backed by mercantilist states (as Japan’s electronics companies were), and focus on industrial activities that could be protected through interaction with regulators (Thomson’s medical device business) or the Pentagon (RCA’s defense business, which Welch kept).”

By the 2000s, the company founded by Thomas Edison didn’t even manufacture light bulbs, sourcing them from Chinese contractors and branding them as GE products.

Welch also began to outsource much of GE’s work to other companies, often those abroad with lower labor and environmental costs. “If I had my way, I’d put every GE plant on a barge,” he famously said. Eventually, GE would do even better. By the 2000s, the company founded by Thomas Edison didn’t even manufacture light bulbs, sourcing them from Chinese contractors and branding them as GE products.

Other leading companies, such as General Motors, followed Welch’s path. In the mid-1980s, GM bought both Electronic Data Systems and Hughes Aircraft, attempting to diversify away from the auto industry in which it was up against foreign competitors backed by governments into regulated industries with government contracts. What it couldn’t do by diversifying it did by offshoring, moving production to low-wage areas like northern Mexico starting in the early 1980s.

The steel industry did the same thing. U.S. Steel bought not only Marathon Oil for $6.3 billion but paid $3.6 billion for Texas Gas and Oil; National Steel bought United Financial Corporation of California, and another steel company, Armco, went into insurance. Meanwhile, in 1986, the Reagan administration’s Commerce Department invited 38,000 American companies to a trade fair in Acapulco, encouraging them to explore moving factories to Mexico.

American business was getting bigger, hollower, and more concentrated. Corporations were consolidating power over individual markets. Welch saw the change in antitrust law in the Reagan era and pushed it along aggressively. He structured the world of business for decades to come.

© 2019 Matt Stoller. Author of Goliath: The 100-Year War Between Monopoly Power and Democracy