| |
Is G.E. Too Big for Its Own Good?
Jeffrey R. Immelt, chief executive of General Electric, hopes to re-energize his company.By NELSON D. SCHWARTZ
EVEN by the standards of a company that builds everything from light bulbs to power plants and straddles markets as varied as prime-time TV and commercial finance, General Electric’s mammoth project along the Hudson River north of Albany is staggering. The company plans to lay down more than 28,000 feet of rail and 267,000 square yards of plastic beside the river’s edge — all to haul nearly 400,000 tons of sediment from the bottom of the Hudson beginning in 2009, seven years and $500 million after G.E. agreed to undertake the job.
Except this isn’t one of the huge infrastructure projects that’s driving G.E.’s bottom line these days; it’s a government-mandated cleanup of pollutants the company dumped in the river long ago. It’s also a task that G.E. routinely resisted for decades until Jeffrey R. Immelt, then the rookie chief executive, succumbed to federal pressure and abandoned the combative stance of his predecessor, John F. Welch Jr., and pledged to dredge the Hudson.
Toxic mud wasn’t the only mess Mr. Immelt had to clean up when he took the reins from the legendary Mr. Welch in 2001. Along with dealing with a struggling reinsurance unit that forced G.E. to take billions in write-offs, a power turbine business poised to collapse and an overvalued stock, Mr. Immelt had the misfortune to move into the corner office just four days before the Sept. 11 terrorist attacks altered the political landscape and the outlook for core G.E. franchises like jet engines and aircraft leasing.
A cooler, humbler and more reserved chief executive than Mr. Welch, Mr. Immelt readily acknowledges that the last several years have not been easy.
“We’ve had to re-earn the respect of investors,” he said in an interview in G.E.’s Manhattan offices atop 30 Rockefeller Center, home of the company’s troubled NBC Universal franchise. But that’s what happens “when you write off $3 billion on reinsurance, sell stuff, buy things, and the earnings growth rate is 11 percent and it should be 15 percent.”
Even so, the clock is ticking. There is growing pressure on Mr. Immelt to do something — anything — to get G.E.’s stock moving after six years of stagnation. Despite a 15 percent rally over the last two months, G.E. shares are still down 30 percent from their Welch-era peak. And in April, the analyst Jeffrey T. Sprague of Citigroup Investment Research stunned Wall Street by calling for a breakup of the company, urging Mr. Immelt to sell off NBC Universal, as well as the consumer finance and real estate units.
Mr. Sprague’s call was the equivalent of breaking china in G.E.’s executive dining room, and the company’s top brass took it as a sign that Wall Street was running out of patience. Although NBC looks safe until after the broadcast of the Summer Olympics next year, Mr. Immelt is vowing to be “tough-minded and investor-friendly” in evaluating G.E.’s myriad holdings, while swearing off big acquisitions for the rest of this year.
No one expects Mr. Immelt, 51, to be forced out of the top job, but the longer the stock stays underwater the greater the likelihood that he will have to take the kind of drastic action that analysts like Mr. Sprague are urging.
All of which is reasonable: corporations hire C.E.O.s to make both prescient and hard choices. But Mr. Immelt faces a more complex challenge than his predecessors. Whereas Mr. Welch took over a company vulnerable to foreign competition and hamstrung by a bloated work force (and cut so many jobs that he earned the unwelcome sobriquet Neutron Jack), Mr. Immelt took over a giant that had been successful but wasn’t growing as fast as smaller, more agile companies — and which had a number of financial and operational time bombs in its portfolio.
“Five years ago, we had troubled franchises and no liquidity,” Mr. Immelt says. “Think about being in the aircraft leasing and aircraft engine business on September 12.”
To reinvigorate the corporate behemoth that is G.E., Mr. Immelt has made more than $75 billion worth of acquisitions in sectors like energy, aviation, water treatment and health care while selling off the division where he and Mr. Welch both began their careers, GE Plastics, for $11.6 billion in May. The result, says Mr. Immelt, “is that the company in every way is different than it was in 2001.”
Maybe so, but investors don’t seem especially grateful. Even worse, shares of its archrival and Connecticut neighbor United Technologies have nearly doubled over the same period. So while the environmentalists who panned his predecessor — not to mention the employees who feared Mr. Welch — might vastly prefer Mr. Immelt, there is one group that still longs for the days of Neutron Jack: Wall Street analysts and institutional investors whose respect Mr. Immelt is desperately seeking before the calls for a breakup become too loud to ignore.
“There’s no drop-dead date, but he’s going to hit his six-year anniversary,” says Mr. Sprague, the Citigroup analyst. “If the stock doesn’t move, people will get more agitated.”
For his part, Mr. Immelt is either too smart or too loyal to blame Mr. Welch for his troubles. “It is what it is,” he says. “He couldn’t have seen 9/11 coming.” Mr. Immelt has spent almost his entire 25-year career at G.E. and Mr. Welch’s legacy has clearly left an impression.
“Jack Welch’s track record was phenomenal,” says Mr. Immelt, his voice slowing and growing deeper with emotion. “I’ve had the opportunity to know hundreds of C.E.O.’s, and there’s still not one I admire more than him.”
Although Mr. Welch proclaims himself “totally satisfied” with Mr. Immelt’s performance, he doesn’t hide his feelings about G.E.’s slumbering stock. “It’s disappointing to all of us — ‘frustrated’ is the word I’d use,” he says in his trademark Boston rasp. “It’s below where it was when I left, but I haven’t sold.”
Mr. Welch vehemently disputes the notion that Mr. Immelt has been forced to clean up a financial mess, and he is equally adamant in his critique of calls to break up the company.
“It would be a tragedy of enormous proportions,” he says. “When you start talking like that, it’s surrender.”
OFFICIALLY, the Welch era at G.E. lasted 20 years, from the April day in 1981 when Mr. Welch took over from his predecessor, Reginald H. Jones, until he retired on Sept. 6, 2001. In reality, however, General Electric and Jeffrey Immelt are only now emerging from both Mr. Welch’s shadow as well as what some people call the perfect storm that enveloped the 129-year-old company during the first half of this decade.
Last week, after a solid second-quarter earnings report, G.E. shares hit a five-year high of $40.95, though still a far cry from the $60 level reached in 2000. Revenues came in at $42 billion, $1 billion higher than some analysts expected, enough to deliver the mid-teens percentage earnings growth Mr. Immelt has been promising Wall Street but failed to deliver last year. And environment-focused investors who wouldn’t dream of buying G.E. stock under Mr. Welch are full of praise for Mr. Immelt’s new “Ecomagination” initiative and are now eyeing it as a suitable investment.
“I feel like we now have control over our own destiny for the first time in the last few years,” Mr. Immelt says. “There’s no headwind.”
Whether Mr. Immelt can keep his company’s rebound on course has consequences that will extend far beyond 30 Rock or G.E.’s headquarters in Fairfield, Conn. That’s because G.E. has always been more than just another company in the Fortune 500, where it ranked sixth last year after earning $20.8 billion on revenue of $168 billion. With six main divisions — commercial finance, infrastructure, industrial, consumer finance, health care, and entertainment and media — G.E. has long been a proxy for the overall health of corporate America.
And anything that hurts the nation’s economy usually takes its toll on G.E. as well. The current crisis in subprime mortgages, for example, is underscored by a $500 million hit to earnings G.E. absorbed in the first half of the year.
The company has long served as a C.E.O. boot camp and fertile territory for executive recruiters. Among headhunters, snaring a top G.E. name is akin to winning an Oscar; the runner-up to succeed Mr. Welch, W. James McNerney Jr., left G.E. to take over 3M and is now the chief executive of Boeing. (Robert L. Nardelli, another former G.E. star, went on to run Home Depot, but that’s another story.)
G.E.’s raw scale and visibility, and the regal status accorded to past holders of the top job, put Mr. Immelt into a very exclusive club. He’s only the 12th man to hold the position since Thomas Edison founded G.E. Indeed, it can be lonely at the top, but Mr. Immelt has sought advice from Warren Buffett, the renowned investor and chief executive of Berkshire Hathaway. He says he also regularly dines with fellow C.E.O.’s like Kenneth Chenault of American Express, Samuel Palmisano of I.B.M. and William Weldon of Johnson & Johnson.
Unlike Mr. Buffett, though, Mr. Immelt isn’t a hero to investors these days. And while Mr. Welch says “my anticipation when I recommended Jeff for the job is that it would be 20 years and I see nothing that would change it,” the reality is that things have changed.
The rise of hedge funds as well as activist investors and private-equity buyers all mean that even the likes of Jeffrey Immelt have to worry more about the next quarter rather than the next quarter-century. “If it weren’t for its size, you’d have to consider G.E. a premier go-private candidate,” says one top banker who requested anonymity because he works closely with G.E.
Unlike Mr. Welch, Mr. Immelt acknowledges that time isn’t unlimited. “Nobody is guaranteed 20 years,” he says. “Not me. Not anyone else.”
So if the heat is on, why not break up the company? Or at least sell off noncore units like NBC Universal or the consumer finance unit, GE Money, which would not only raise billions but also make this colossus a heck of a lot easier for one man to manage? After all, Mr. Sprague says, “when you visualize G.E., you’re thinking about the meat and potatoes: power, aircraft engines, energy. You might get comfortable with GE Money, but hardly anyone is buying the stock because of GE Money.”
In defending their stance, Mr. Immelt and other current executives don’t fall back on Mr. Welch’s no-surrender, last-man-standing rhetoric. Instead, they make a more subtle argument against breaking up the company: Not only does being a conglomerate help G.E. ride out the inevitable ups and downs of the economic cycle, it also creates those elusive synergies that most other companies only talk about.
For example, G.E.’s sponsorship of the Summer Olympics in Beijing next year has given G.E.’s infrastructure unit a leg up in winning lucrative orders for locomotives and power turbines from Chinese buyers, according to G.E. executives. What’s more, says John G. Rice, the head of G.E.’s infrastructure division, managers are expected to reach across and work with colleagues in far-flung parts of the company. In fact, they don’t have much of a choice.
“If you’re reluctant to do it,” Mr. Rice says, “we’re going to have a sit-down.”
IN his understated way, Mr. Immelt is emphatic about G.E’s strength as a conglomerate, underscoring the long-term thinking that’s made G.E. the only original member of the Dow Jones industrials to retain its place in the index. But in the end, the only way for Mr. Immelt to win the argument and keep both his job and the company whole is for G.E.’s shares to move higher. As Steve Tusa, who covers G.E. for JPMorgan Chase, says: “The bottom line in this business is stock price performance.”
Short of a breakup, observers like Mr. Tusa say Mr. Immelt has to focus on the company’s huge infrastructure business, G.E.’s largest division in terms of revenue. “Infrastructure is carrying the company and that’s a good thing,” says Mr. Tusa, citing surging orders for locomotives, power turbines, jet engines and other big-iron products that boast fat margins and lucrative long-term service contracts. “That’s why you buy G.E., and he needs to keep that up.”
At the same time, G.E. must continue to cut costs at struggling divisions like NBC, which remains stuck in last place among the big four networks in prime time. And with consumer finance showing earnings growth of less than 10 percent, shedding it might not be such a bad idea. “It has limited synergies with the rest of the portfolio,” Mr. Tusa says.
Mr. Immelt must also demonstrate what analysts politely term “disciplined capital allocation” — that is, not overpaying for acquisitions. In the two months after G.E.’s announcement in January that it was spending $8.1 billion for Abbott Laboratories’ diagnostic unit, G.E. shares fell 10 percent, causing $40 billion worth of market capitalization to evaporate. In mid-July, Mr. Immelt abandoned the Abbott deal and appeased investors with an expanded $14 billion share buyback.
Analysts say that’s the kind of shareholder-friendly approach that enabled Mr. Welch to reign for 20 years at G.E., and they say it’s something Mr. Immelt needs to emulate if he is to repeat that run.
ONE of the perks of retirement for C.E.O.’s is not having to court — or bully — Wall Street analysts. So when the subject of Mr. Sprague’s report about breaking up G.E. is raised, Mr. Welch dismisses it outright. “That talk is short-term analyst talk,” he barks. “I heard it from 1981 on, when I first got in there.”
Not one to bark, the 6-foot-4 Mr. Immelt is preternaturally relaxed and affable. He has always been like that, acquaintances say. Mr. Immelt played intramural basketball with another future chief executive, Jamie Dimon of JPMorgan Chase, at Harvard Business School and he jokes that Mr. Dimon was the one who yelled during hoop games. Longtime associates can’t recall Mr. Immelt ever raising his voice, unlike the famously temperamental Mr. Welch.
Although no one disputes Mr. Welch’s success as a manager — G.E. shares rose a stunning 4,000 percent over the course of his 20-year tenure — working for him could be brutal. Jerome L. Dodson, president of Parnassus Investments, a money management firm that screens for socially responsible stocks, even cites Mr. Welch’s hard-nosed management style as one of the reasons his firm wouldn’t invest in G.E. “The company wasn’t a good place to work in our opinion,” Mr. Dodson says. (He is now eyeing the shares.)
While Mr. Welch was obsessed with internal productivity gains, Mr. Immelt is more focused on sales and marketing, says one former associate.
“He puts a bigger spotlight on a different crowd,” says David Calhoun, who ran G.E.’s infrastructure business before leaving last September to run Nielsen, the market research giant. “With Jeff, the worst possible thing is if you lose a sale and you don’t feel bad about it.”
Even so, it’s clear that the new regime is kinder and gentler. “Jeff probably lets the conversation go on longer then Jack did,” says Lorraine Bolsinger, a 26-year company veteran who heads G.E.’s new Ecomagination project, which seeks to develop more efficient products that will both help the environment and better serve customers. “You always feel it’s worth a shot to make your point. There’s no fear that if I suggest something or take a risk, I’ll be ridiculed.”
Given his stance on cleaning up the Hudson and on other environmental hot buttons, it’s hard to conceive of Ecomagination under Mr. Welch. It has its roots in a 2004 “growth playbook” session, the annual ritual in which G.E. managers outline a three- to five-year growth strategy. Customers were concerned about global warming and carbon dioxide emissions, and also eager to save money on energy costs, Ms. Bolsinger recalls.
“Jeff’s view was that we could use this to our advantage or be at the mercy of it,” she says. “And that’s a place we never want to be.”
The Ecomagination line now features 45 products with $12 billion in sales. Although skeptics might look upon Ecomagination as the latest version of corporate “greenwashing,” it has impressed socially conscious investors with memories of Mr. Welch.
“G.E. used to be stuck in the past,” says Bennett Freeman, senior vice president for social research and policy at the Calvert Group, an investment company. “But the effect of G.E. and Ecomagination is huge. When G.E. commits to renewable energy, the argument is over in corporate America.”
Mr. Immelt and Ms. Bolsinger say that the point of Ecomagination isn’t to save the planet but to make money. And the best evidence that G.E. can do both lies in a windowless Greenville, S.C., plant that is the largest gas turbine factory in the world.
Alongside huge gas-fired turbines destined for Saudi Arabia — half of G.E.’s overall revenue comes from overseas customers, and the Middle East in particular is booming — workers are busy assembling ultra-efficient wind turbines as quickly as they can get the components. Since G.E. acquired the wind unit from Enron after it went bankrupt in 2001, annual sales have grown to more than $4 billion from $500 million, and the $2 million machines are nearly sold out until late 2009. The wind turbines contain some 8,000 different parts, says Frank Ferraro, a manager at the plant, “but we can do the final assembly in less than a week.”
G.E.’s success in Greenville is an impressive example of its prowess when it comes to sophisticated manufacturing, as well as a sign that Ecomagination is more than just another slogan.
Ultimately, however, the kind of green initiative that Wall Street cares about most can’t be measured in carbon emissions or employee accolades, but in dollar signs. If Mr. Immelt has any doubt about that, all he has to do is consult the first of Mr. Welch’s six rules for successful leadership: “Control your destiny, or someone else will.”
Frank Ferraro, a manager, with a gas turbine at the General Electric plant in Greenville, S.C. The plant is part of the company’s Ecomagination initiative.
