Monday, June 11, 2007

The New York Times Gives Jeff Immelt A Pass

New York Times writer Joe Nocera penned a long, fawning piece about Jeff Immelt, GE's CEO, in the paper's Saturday edition. My partner had mentioned it to me on Sunday morning, and sent me the article, knowing of my prior posts on GE and Immelt (search on either term, and/or click on the two labels on the side of the main page).

I wrote most recently on this topic here, and here. For the record, let me state my unequivocal belief that Immelt has failed in his richly-compensated role as GE's CEO for nearly six years. I believe that Immelt should go, as the company is spun into its constituent parts as standalone businesses. The firm no longer has an economic reason for being.

That said, let me quote some of the more outrageous passages from Mr. Nocera's Times piece,

“When you put your foot on the gas in this company,” Jeffrey R. Immelt said a few weeks ago, with just the slightest trace of a satisfied smile, “the car goes forward.”

Oh, and one other thing: the entire time he’s been chief executive, the stock hasn’t budged. (It closed yesterday at $37.32.) In April, Jeffrey T. Sprague, the Citigroup analyst, called for “a partial breakup” of G.E., arguing that the company’s “size and complexity is working against investor interest in the stock.” During Mr. Welch’s 20 years at the helm, G.E.’s stock had a staggering 7,000 percent total return, including dividends. If the company’s share price doesn’t start to rise soon, Wall Street is going to be agitating for more than a breakup.

Mr. Immelt seems pretty much at ease about that, too.

Mr. Immelt also felt that G.E. needed to do a better job at what is called “organic growth,” that is, growth that is not a result of acquisitions. So he had G.E. study companies that excelled at internal growth, like Apple and Toyota, quantified the qualities that those companies had in common, and began teaching them at General Electric. Now, Mr. Immelt has told Wall Street that he wants the company’s organic growth rate to be 8 percent a year, twice what it used to be.

Most C.E.O.s whose stock hasn’t moved in five years would be in a world of trouble, of course. And Mr. Immelt is not going to get his 20-year run if he can’t get the stock to move. But he’s still got plenty of time to show that his repositioning is working; Wall Street may be antsy, but no investor is crazy enough to call for his ouster. And he’s adamant that the solution is to wait for the market to catch up with the company’s changing nature, rather than to execute a partial breakup just to please the Street.

“Investors go through cycles where they don’t like conglomerates,” Mr. Immelt said. “But if you want to be a lasting company, you have to know how to be a multibusiness structure. If Google is going to be a 100-year-old company someday, it is going to have to learn to do more than search.”

Let me make a few points, by way of rebuttal.

First, my proprietary research has concluded that, in order to have a significantly above-average probability of earning consistently superior total returns, companies need to post real rates of revenue growth in excess of Immelt's goal of 8% per annum. Less than the rate I discovered, and the company will not be considered a consistently high-revenue growth firm. Earnings growth, by the way, is statistically unrelated to consistently superior total return performance.

So much for Jeff's foot on the accelerator helping shareholders enjoy consistently superior returns by holding GE stock.

Second, as I wrote in one of the linked posts recently,

"Few today realize how Jones, of whom I have heard it said, "once a beanie (accountant), always a beanie,' stripped much of the strategic vision from GE that Borch had instilled through his business unit investments. Jones retooled the company to be a cash machine because, well, he was an accountant. He liked cash.

Welch, upon taking the helm from Jones, faced an unprecedented period of high inflation and a wide array of non-strategic businesses at GE. He rapidly cut and pruned the company's businesses, earning the now-forgotten moniker "neutron Jack."

What's ironic is how everyone seems to have forgotten GE's heritage of being subjected to wrenching change with each new CEO of the prior forty years, except for Immelt. He's the only one not to have actually made a big change in the firm, and it has stalled."

Thus, Immelt has actually broken the pattern of GE leadership through the ages by essentially changing virtually nothing. The firm has adapted to past eras, that is true. And this era is one of the continued de-conglomeration of American business. His sarcastic shots about Google to the contrary, Immelt's firm is too diversified to provide consistently superior returns to shareholders, because it's taxing them to feed an overgrown bureaucracy presided over by....none other than Chairman Jeff the First.

What Immelt fails to understand, in suggesting Google can't continue growing in its natural niches, is that every business undergoes a Schumpeterian life- and death- cycle. My guess is, Immelt is going to preside over GE's death.

Third, regarding Immelt's observation about investors "going through cycled where they don't like conglomerates" is a bit disingenuous. As I wrote in one of the linked posts above,

"Simply put, corporate diversification for cash flow smoothing has been a discredited management approach for creating consistently superior total returns for some time. My own proprietary research, which drives my equity portfolio selection of consistently superior large-cap companies, confirms this. Back some thirty or forty years ago, when trading equities was expensive and information and innovation were in shorter supply, it may have made sense for investors to hold shares of conglomerates. And, in the day, they existed- Gulf&Western, ITT, and Litton, to name just a few. But they are gone now. ITT still exists, but in nothing like the shape it had under Harold Geneen."

The era of growing, permanent corporate conglomerates is over, thanks to very efficient, large and deeply liquid capital markets. Markets so liquid that private equity firms can borrow to buy ailing business units of conglomerates, fix them, and spin them back out to the public. The only apparently consistently profitable "conglomerates" these days appear to be the large, multi-operating-unit private equity shops. But they don't seem to want to hold their businesses- just increase their value and flip them back to the public.

I question Nocera's trust that Immelt has 20 years to eventually re-ignite GE's total return performance. In Welch's day, the large private equity pools now common did not exist, and investors were far more patient.

Typically, it's been my experience that corporations, and their CEOs, cite 'soft' values and concepts when they simply can't earn consistently superior total returns for their shareholders. Even today, as Yahoo's Terry Semel came under assault for that company's abysmal performance under his tenure, Yahoo's corporate spokesperson recited a long list of non-quantitative 'accomplishments' under Semel's reign, carefully avoiding the clear record of financial failure.

Immelt is no different, nor are his supporters, such as Mr. Nocera.

1 comment:

Anonymous said...

Truer words were never spoken.
I just sent your post to Nocera at The NYTimes, just to show him how thoroughly your rebuttal reveals his thinking to be pure rubbish.