Wednesday, July 25, 2007

GE in the NY Times- Again

My business partner sent me last weekend's recent New York Times devotional to GE and Jeff Immelt, entitled, "Is GE Too Big for its Own Good?" penned, this time, by Nelson Schwartz. Last month, I wrote this piece about another Times writer's love paean to GE and its failed CEO.
For the record, nearby is a Yahoo-sourced, five-year price chart comparing the S&P500 and GE. Even with its modest recent price improvement, GE still badly trails the index for the last five years.

Far from the adulation his predecessor, Jack Welch, earned when he retired, Schwartz had this to say about Neutron Jack's legacy at GE,

"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."

So, now it's Saint Jeff who is trying to rehab the broken GE he apparently inherited.

At least Schwartz acknowledged Immelt's lackluster performance over the last six years as GE CEO, in this passage,

"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."

Ironically, Schwartz even hints at one of the explanations behind GE's mediocrity, when he writes,

"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."

The right answer is that GE is too big. A smaller firm that actually focused senior management on operational issues in its businesses would be far more nimble and quickly growing. GE is suffering the curse of diversified conglomerates- they are difficult to grow and nearly impossible to operate so as to generate consistently superior total returns.

It is Immelt's fault and responsibility for allowing this situation to continue far after global business and competitive conditions have rendered GE's size a detriment, rather than a benefit. For instance, by way of comparison, Schwartz notes,

"Even worse, shares of its archrival and Connecticut neighbor United Technologies have nearly doubled over the same period."

Not surprisingly, Welch has his own views on these topics, as Schwartz reports in his piece,

"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.”"

Yes, I rather think Jack would be up in arms when accused of leaving a mess to his successor. Regardless of what Welch may have or have not done, he certainly pulled the right levers to make investors and analysts believe he ran a consistently superior-performing company, even if he didn't. GE was, for most of Welch's tenure, inconsistently superior in its performance. In retrospect, revered, but difficult to have faith in before the fact.

On the matter of breaking up GE, Welch seems to just be misty-eyed and egotistical. It's way past time for GE to be split into its more economically-manageable pieces. Immelt, according to Schwartz, argues for keeping GE intact as follows,

"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."

The trouble is, riding out 'the inevitable ups an downs of the economic cycle' merely gets you mediocrity for shareholder returns. Which is what Immelt has delivered, in spades. Consistent superiority requires some guts, some intelligent foresight, planning and execution. Not just covering all your bets and saying you 'rode out the cycle.'

As my partner intimated, throughout the piece, Schwartz seems to treat Immelt as if he is some sort of business wise man. He writes,

"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."

Frankly, I don't think all that much of Buffett, Chenault or Palmisano. Neither has run a consistently superior company for any considerable period of time. Perhaps a few brief shining moments, but nothing stellar for the longer term. Immelt is, if anything, even worse.

Although Schwartz, paints Immelt as a more outwardly-focused CEO than Welch, via this passage,

"While Mr. Welch was obsessed with internal productivity gains, Mr. Immelt is more focused on sales and marketing, says one former associate."

GE's growth rate would make you wonder why. Once again, Immelt seems to be more about smoke, mirrors and image, than delivering consistently superior performances.

And, once again, the "People's Daily" gives Jeff a pass. At this point, I have to believe it's just to mollify the CEO of a major advertiser. And "green" CEO. It's hard to take these puff pieces seriously, when they lionize Immelt and GE for intentions and effort, but skip over simply evaluating GE under Immelt as a failure for shareholders. For six, long years.

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