Friday, April 18, 2008

The Delta-Northwestern Airline Merger

Color me excited! I can write about a topic that doesn't mention Jeff Immelt, GE, Iran or even Jack Welch.

Earlier this week, Delta and Northwest Airlines agreed to merge their two companies. Needless to say, this attracted quite a bit of attention. Airline profitability, fuel costs, economies of scale, union power, and consumer service and satisfaction all received lots of ink as pundits and analysts opined on this event.

However, in my opinion, industrial economics pretty much guarantees that, even with this merger, airlines are still not fated to consistently outperform the market.

Why might this be true?

Because of these industry characteristics: easy entry, complicated exits, little control over most costs, high percentage of long-lived, expensive fixed assets on the balance sheets, and too much competition to reliably set prices which provide sufficient profitability.

I have written on this theme in prior posts here and here. The second linked post references an additional three prior airline-oriented posts. Of those three, this post, from nearly two years ago, frames this whole issue rather nicely. It even includes a very lucid reader comment noting that airlines are still pretty much required to function as a utility, flying to and from destinations which will never really pay their way, just to provide 'service.'

As I wrote, in some cases, several times in those prior posts, at some point, today's airlines have to admit to limits to growth, market saturation, and the probably reality that there is a 'right size' for most airlines, in terms of areas served, plane types flown, size of flight crews, and number of flights, before too much uncertainty of demand and costs make the model unsustainably profitable.

All of that said, the best solution is probably regional and buyer-segment-based competition/organization. Which is what I've argued in prior posts.

But as I wrote this post, it occurred to me that the reference to the year-ago post, and the reader's comment about the 'utility' aspect of airlines, begs another question.

Do not airlines resemble, to some extent, power-generation utilities? For example, in today's world, airlines, like energy utilities, are necessary. We couldn't really think of our modern world without them.

Yet who ever thinks of electrical/power utilities as growth equities? Nobody. Instead, they are viewed more like bonds.

Airlines are somewhat like that, insofar as major components of their cost structure are out of their control, yet pricing is not in their power. However, unlike utilities, which are granted monopolies, or quasi-monopolies, airlines are not.

So airline equities lack the upside of non-utility-like companies, but also the downside, reliable fixed-income-like behavior of utility equities.

They are in a really bad, gray in-between world. And with easy entry, difficult exit, and large shared-resource components, such as airports and the FAA ATC system, no airline ever controls all that much of its profitability dynamics.

In fact, historically, about the only thing an airline can grab and hold, uniquely and competitively, is the lowly physical gate. Owning gates can translate into a non-duplicatable advantage in a local market.

But that's about it.

With that in mind, the various articles this week in the Wall Street Journal about this merger begin to make more sense. Holman Jenkins' excellent editorial on Wednesday reminded us of the parallel of the airline industry to legal shipping industry 'conference' price and volume collusion. Only our own Senators and Representatives have forgotten this little detail.

On the same day, the Journal's Travel column wrote of this merger,

'Two drunks holding each other up is not a good idea, says an aviation consultant.'

The only positive spin on the merger came from- you guessed it- Delta and Northwest.

I find myself in the same position on airline equities that I have always held. Someone has to fly the airplanes and operate the airlines. Like someone has to generate America's power.

But I don't think you'll see my equity portfolio selection process choosing an airline anytime soon. Aside from some very occasional growth spurts for the likes of a younger Southwest Airlines, these companies simply have little to no prospects for consistently superior total return performance.

Their industry dynamics mitigate against that, and probably always will. Mergers or no.

Thursday, April 17, 2008

Jack Welch On Immelt's GE- Redux: "Silly Talk?"

I didn't intend to continue writing about GE this week. But as long as Jack Welch keeps making dubious statements about the performance of his former company and the CEO he chose to replace him, I'll keep posting about it.

As I wrote in this post, yesterday, Welch guest-hosted for two hours on CNBC, and spoke about Immelt's big earnings miss with GE's first quarter results last Friday.

In that post, I discussed the difference between the 'Welch effect' on GE's stock early on in his tenure as CEO of the firm. And the way in which he ratcheted down GE's revenue growth, while putting a premium on reliable, steady, if modest, quarterly earnings growth. Thus, Welch kept GE moving in concert with the major averages- S&P500, Dow- over the latter years of his time at GE.

As a result of yesterday's comments, Welch sparked articles today in both the Wall Street Journal and the New York Times.

From the Journal article, we read,

"Five days after General Electric Co. disappointed investors with a surprise first-quarter earnings slump, Chief Executive Jeffrey R. Immelt defended his strategy and dismissed cries to split up and remake the conglomerate.

But even as he moves to address rising investor pressure, he came under criticism Wednesday from another important constituent: GE's high-profile former CEO, Jack Welch.

Mr. Immelt has a "credibility problem," Mr. Welch said on CNBC, a cable network owned by GE. Citing GE's missed earnings forecast, he said: "Here's the screw-up: You made a promise that you'd deliver this, and you missed three weeks later."

Mr. Welch defended his former protégé and GE's sprawling portfolio of businesses in a subsequent interview. "I truly believe this nonsense about breaking up GE and Immelt's in trouble is crazy," Mr. Welch said.

On his CNBC appearance, Mr. Welch said, "I'd be shocked beyond belief and I'd get a gun out and shoot him if he doesn't make what he promised now." But in an interview afterward, Mr. Welch defended the man he chose over two other candidates to replace him 6½ years ago. "He got his a- kicked because he said one thing and did another. That's the first time. This guy has a hell of a track record," he said.

"Jeff is moving in all the right directions to create growth for the future in what is a very difficult time and therefore will take time," said Warren Bennis, a business professor at the University of Southern California who has written about GE."

To be honest, I don't think Welch's comments begin to appropriately deal with the length and depth of Immelt's consistent underperformance for nearly 7 years as GE's CEO. And for Welch to ignore this, and claim that 'This guy has a hell of a track record' only marks Welch as now lacking in any realistic judgment of what constitutes superior corporate performance.

You have only to peruse my prior posts on GE, found under that label on this blog, to see factual evidence of Immelt's consistent inability to even match the S&P500 Index during his reign as CEO at the only major remaining American diversified industrial conglomerate.

Today, Welch appeared on CNBC from a remote location to try to 'clarify' his remarks about GE and Immelt. This time, he claimed to be fully supportive of Immelt, GE and the company's diversified model. The co-anchors on the program, Becky Quick, Joe Kernen and Carlos whathisname, discussed how Welch had indeed defended Immelt yesterday, but was simply quoted by soundbite and, thus, out of context.

Well, let me say that if what they said is true, it's a sad day for Welch and CNBC. As I have written numerous times about Immelt and, now, more recently about Welch, how can this dismal performance be excused?

It was Bill O'Reilly's first, and salient question to me during my Monday night appearance on his Fox News program, the O'Reilly Factor, about which I wrote here.

Jack Welch's final dismissal of the correct call to dismantle GE was to refer to it as "silly talk" in his interview on CNBC this morning.

What don't Jeff Immelt, Jack Welch and Warren Bennis get about GE's lack of performance? And, while I'm on this topic, Warren, if you ever read this post, please call me. I would love to be your investment manager. If you think GE is a good equity to own, and are willing to give people like Immelt 'time' to perform, boy, do I want to charge you 2/20 for managing your assets!

Well, as one friend from my fitness club, a longtime, retired Merrill technical analyst, Larry, put it,

'Here is what Immelt needs to say- I've increased earnings and revenues at GE during my tenure as CEO. It's not my fault if the market can't see the value I have added!'

Nice try, but not good enough. Why not? Simple. As I responded to Larry,

'For $20MM in compensation a year, on average, $5MM of it in cash, Immelt had damned well do better than just increasing earnings. You can't spend GE's earnings. All you get is the total return, and that has been less than the return of the S&P for the period of Immelt's tenure as CEO. For $20MM/year, a CEO had better simply know how to get his company's total return up above the S&P's!'

If a CEO wants to be excused for his company's fundamental, income-statement performance not generating consistently superior (to the S&P's) total returns, then I suggest he return all of the compensation he's been paid, over about $350,000/year. Anything over that is theft from the shareholders if he doesn't understand what performance patterns and levels, over time, will lead to a consistently superior total return for his shareholders.

Or, he could call me. Because I have proprietary research results on large-cap firms that explains what patterns and levels of fundamental performance do lead, with higher than average probabilities, to consistently superior total returns.

I use a more rigorous version of my performance research (thus, the name of my LLC- Performance Research Associates-) to select companies for inclusion in equity and/or options portfolios. Portfolios that, on average, have outperformed the S&P significantly over many years.

This week, the WSJ-minority-owned unit,, published a piece about GE, wherein they noted,

"But this just underscores the problem with GE's model. Yes, the stellar results at one division help offset crummier ones elsewhere. So GE may, overall, be a strong concern worthy of its triple-A credit rating. But as a consequence, it isn't a growth company. As first-quarter results make plain, its returns are middle-of-the-pack at best. They also show that GE's predictability -- another of its model's supposed benefits -- is questionable.

Of course, it might not be GE's model so much as its execution. Rival Connecticut conglomerate United Technologies has chalked up share-price performance seven times better than GE's over the past five years.

Since Mr. Immelt took over from Jack Welch in 2001, many shareholders have urged GE to significantly cut exposure to volatile financial services and real estate. Mr. Immelt and the board resisted those calls, preferring to whittle around the edges while times were good. The demands for change won't diminish now that times are bad. But GE's ability to fend them off will."

So I'm not the only one calling for GE's breakup. It is so stunningly simple. Here, in the clearest manner in which I can articulate the argument, is the logic:

1. Anyone can buy the S&P500 Index performance by owning a cheap, passive S&P500 Index fund from a vendor such as Vanguard, Schwab, or T Rowe Price. For something like .2 cents on the dollar, you can earn an average of 11% per year, the S&P long term historical average return.

2. Since taking the helm at GE, Immelt has presided over an average total return of something close to -2.3% per year.

3. Over the same timeframe, the S&P rose roughly 9.5% per year.

4. Owning a given amount of GE stock exposes the investor to substantial risks, due to concentration of assets in one equity, which are mitigated by owning 'the market,' when one puts the same amount of assets into an S&P500 fund. It will also be more expensive to buy GE, or own it through an actively-managed mutual fund.

I don't think I can make it any simpler. Nobody is well-served owning GE when they can realize a higher total return in a cheaper, better-performing S&P500 Index fund from any reputable fund complex.

Until GE is broken up into its constituent, unrelated business units, it is highly likely to continue to cost its shareholders significant performance penalties, relative to their ability to simply buy and hold an S&P index fund.

"Silly talk," Jack?

How about, "A sensible solution to GE's performance problems that has been a long time in coming?"

Wednesday, April 16, 2008

Jack Welch On Immelt's GE

This morning's CNBC Squawkbox program features two hours of retired GE Chairman and CEO Jack Welch as guest host.

Topic number one was GE's recent earnings miss for the first quarter.

It's not a surprise, really, that Welch and the CNBC on-air co-anchors carefully avoided the topic of yesterday's post, GE doing business in Iran. And that topic is still a popular one.

Yesterday, my blog registered 188 direct visitors, and 343 pages read, not counting those accessing it via Newstex distribution via Lexis/Nexis, That's more than twice the average of 70 visitors per day.

At 8:30 this morning, as I write this, 32 people have already visited, most for that post on Immelt, GE, Iran and Bill O'Reilly's segment Monday night on the topic, on which I appeared as a guest/commentator. There's a tremendous amount of interest in that subject.

But CNBC isn't about to lend credence or credibility to a Fox News investigation of its own corporate parent. Not even with its former CEO on the air this morning.

Instead, Welch chalked the entire drop in GE's stock price Friday, some 14%, to Immelt providing a bad earnings 'surprise.' That's it.

When asked about breaking up GE, for which I have argued for several years, on several bases, Welch sputtered that 'the model isn't broken.' He continues to insist that it's just one bad quarter, and Immelt is and will be paying for it. That Immelt has lost the trust of analysts and investors, but he'll 'get it back.'

I think Welch was a very capable and talented CEO for GE in his day. That day ended nearly seven years ago.

The nearby, Yahoo-sourced price chart for GE and the S&P500 Index from 1962 to the present clearly shows how GE has stalled in this decade.

In fact, the only time in the past 46 years that GE has really outperformed the index was under Welch. Taking the helm of GE from Reg Jones in 1981, a younger, energetic Welch transformed the sloppily-managed, sprawling, unfocused conglomerate into a much more responsive, better-managed, more tightly-focused company.

But as is evident from the chart, the index is where it was at the start of 2000, while GE is lower- much lower.

Welch kept, well, squawking this morning that the model has worked through the '80s and '90s. That's partly true.

Actually, he worked the model convincingly for twenty years. Somewhere around 1990, the model probably had ceased to work on its own. But by then, Welch's leadership of the last remaining diversified conglomerate was adding its own magical valuation effect to what otherwise would have been a lackluster stock.

In 1994, when I was at Accenture's predecessor, Andersen Consulting, my old boss from Chast Manhattan, the former senior strategy executive at GE, arranged a meeting for me with Welch. Back then, when my current work was in its infancy, information wasn't as easily and inexpensively available as it is today.

So, instead of comparing the total returns of GE and the S&P from Welch's start date as CEO to the date of the meeting, I used the price of GE stock vs. the Dow Jones.

That moment in the meeting is still fixed in my mind. The chart showed that nearly all of GE's performance advantage relative to the DJI occurred in just the first three years of Welch's tenure, when he aggressively shuffled his business portfolio, tightened performance criteria, and coped with management during inflationary times amidst inaccurate cost data.

Welch turned to me, scribbling madly on his copy of that page in my presentation, declaring,

"Nobody has ever shown me this. Nobody!"

With me at the meeting was my old Chase boss, Gerry Weiss, the GE veteran who knew Welch and had arranged the meeting. After we left the two-hour session, Gerry turned to me excitedly, saying,

"Did you see that? He wrote on that price chart of GE and the Dow. When they start writing on your charts, you know you 'have' them. You've shown them something new and interesting."

My point is that even as far back as 13 years ago, the exceptional period of GE's outperformance of the market had begun to ebb. The company rarely posted revenues growth in double digits for very long. Instead, Welch capably managed to boost productivity, in order to reliably deliver measured quarterly earnings growth.

Wall Street investors loved this, and the stock enjoyed a market multiple in excess of what it probably deserved just on revenue and earnings growth alone. It was Welch's reliability of delivering the steady performance increases that boosted the stock's value during his tenure.

Twenty-seven years later, capital markets are different. Private equity firms routinely buy troubled divisions of non-diversified conglomerates, or whole companies, fix them and spin them back out to the public. The diversified conglomerate model, as I have argued in prior posts related to GE, found by reading through the links on yesterday's (linked) post, is no longer necessary, nor viable. It simply isn't capable of delivering consistently superior total returns, relative to the S&P500, for more than a fortuitous year or two.

I respect Jack Welch for what he accomplished over a long and storied tenure as CEO of GE. It's understandable that he is loathe to declare the era of his old firm dead. And he's understandably reluctant to declare that he made the wrong choice of replacement for himself as CEO by tapping Jeff Immelt to succeed him at GE.

But that doesn't mean GE isn't an anachronism, or that Immelt is a capable CEO. I believe the opposite, on both counts. GE's ability to give investors a consistently better return than the S&P500 over any period beyond mere lucky timing is over. That being the case, Immelt is being paid far too much to underperform that index, as GE has since he took over as CEO.

Nothing can change those facts. Not even Jack Welch's hopeful declarations that the business world hasn't changed since he rose to lead GE 27 years ago.

Tuesday, April 15, 2008

GE, Immelt, Iran, Bill O'Reilly's Fox News Story- and Me!

I had an interesting evening yesterday. Thanks to this blog, and my dozen or so posts on the mediocrity of GE's total return performance under its overcompensated CEO Jeff Immelt's 'leadership,' Fox News' program The O'Reilly Factor invited me to be a guest/analyst on this topic on last night's episode of the show.

O'Reilly led with allegations of GE's continuing fulfillment of contracts to do work with various entities in Iran, at a time when the US military has identified IEDs and other support for Iraqi terrorists who are causing US casualties as coming from Iran.

If this were all O'Reilly could say, it would be newsworthy, but perhaps not compelling on its own.

However, from reading my blog, one of the program's producers, and O'Reilly, further realized that Immelt has continued GE's involvement in Iranian projects while shareholders have lost money, due to GE's dismal total return performance. Meanwhile, as I noted in yesterday's post, and prior, linked posts, Immelt has been wildly overpaid for destroying so many hundreds of millions of dollars of GE shareholder value since he took over the CEO spot from Jack Welch in September, 2001.

O'Reilly ended his prepared comments on the 'Talking Points' segment about GE with rather strident language, saying,

"There are more than a few villain CEO's in this country, but Jeffrey Immelt could be the worst."

Given the available time and context of a news show like Bill O'Reilly's, one cannot always make all the points one would like to have expressed.

For example, in answer to O'Reilly's questions concerning why Immelt is able to remain as CEO of GE, despite poor total return performance and the alleged Iranian business dealings, I posited that it is, in part, due to GE's brand's homey, wholesome image for most American consumers, as well as the fear that many media and financial institutions have of GE's enormous spending power for corporate services such as: advertising, investment banking, stock trading, pension fund management, to name a few.

What I didn't have the time, or context, to add, were these points.

-GE, as a diversified conglomerate, is an anachronism. In today's equity markets, positions can be bought and sold for negligible transactions costs, making corporate diversification irrelevant and unnecessary. Gone are the days of LTV, Litton, Textron and Gulf & Western, whose diversification obviated retail investors to pay a 14% round trip brokerage commission to trade equities.

-It's very hard, in America, for companies to die or be killed off. CEO's don't typically fire themselves, and boards are reluctant to terminate the life of the company on the board of which they serve. There are millions of shareholders, but only a few board members, and one CEO, so there is little in the way of countervailing shareholder power to that wielded by the board and CEO of GE.

-GE, if split up, would no longer taint all of its business units with the performance and possible terrorists-related business practices of just a few of its units.

In any case, with a segment like last night's on The O'Reilly Factor, I was certain that someone from GE would begin to investigate who I am and what is on my blog.

I didn't have long to wait.

Thanks to my sitemeter javascript, this visit was logged at around 9:30AM this morning:

Domain Name (Unknown)
IP Address (omitted to protect privacy).# (GENERAL ELECTRIC COMPANY)
ISP AT&T WorldNet Services
Location Continent : North America
Country :
United States (Facts)
State : Connecticut
City : Fairfield
Time of Visit Apr 15 2008 9:29:29 am
Last Page View Apr 15 2008 9:50:11 am
Visit Length 20 minutes 42 seconds
Page Views 8
Referring URL associates%22
Search Engine
Search Words "performance research associates"
Visit Entry Page

Yes, someone from GE's corporate headquarters, located in Fairfield, Connecticut, spent about twenty minutes reading my blog. Probably beginning with yesterday's second post, and continuing back through several of my GE-related posts.

I know they were motivated by viewing the O'Reilly program, because the Google search term, 'performance research associates,' is the name of my LLC, as provided onscreen during my appearance on last night's Fox program.

What's next? I don't know. But I discussed with various friends and family members last night if, and how, GE might respond.

Since nothing presented on O'Reilly's program was false, there is no basis for defamation, slander or libel charges by GE or Immelt against anyone. The question becomes one of what, if anything, Immelt can reasonably do to respond to a set of highly embarrassing facts about him and the company he heads, GE, which aired on the most-viewed cable news show in America.

My business partner, one of whose other businesses involved distribution of information to media companies, marveled at how the conventional, old world of journalism has been turned upside down.

By writing frequently and factually about business topics on this blog, I was discovered by Fox News personnel and invited to provide analytic commentary about a major US corporation's faltering performance and overcompensated CEO. In today's online world, my blog, devoid of a dependency on advertising, owing no large company anything, is free to be objective and candid in my characterization of the performance of various corporations and CEOs.

No simple phone call to the head of Disney, CBS, or even Rupert Murdoch would affect this, or any other blog reporting on GE's dismal performance under Immelt.

But, back to the question, what will GE, and Jeff Immelt, do about last night's O'Reilly program?

Well, I doubt Immelt will resign or give back any of his past compensation. I don't think the board will announce that it is splitting up GE by week's end. And Immelt can't change history and make the total return for GE shareholders magically become better ex poste.

But what Immelt can do, and, I think, his predecessor, Jack Welch, would have done immediately upon being made aware of the Iranian contracts, is to summarily and instantly have all Iranian-related GE commerce halted. Period. Pay whatever contract penalties are required, and sustain whatever lawsuits may come, but shed the ongoing perception and liability of having to admit that GE is doing anything in Iran.

GE would still be left with its performance and structural mess, and Immelt's inept management thereof. But at least they'd be out of the crossfire over a sensitive issue like selling products to Iran in a Presidential election year during which American troops are deployed in Iraq and taking casualties from Iranian-supported efforts.

Monday, April 14, 2008

Immelt's GE's Bad Earnings "Surprise"

Friday's GE earnings announcement before the equity market's opening bell is, by now, old news.

Perhaps the signature reaction to this dismal news by GE was Mike Holland's on CNBC Friday morning. Holland promptly cited Immelt's recent personal $4MM investment in the company, forgave Immelt as obviously not having known this was coming, and suggesting that this makes GE a much more attractive buy.

It reminds me of a saying introduced to me years ago by a Lehman broker whom I briefly dated. She recited the patter for a falling stock,

'If you liked it at $30, you'll love it at $25, and you'll marry it at $20!'

Pretty funny stuff, until you reflect on the analytical model it implies. Basically, it touts a stock and suggests that the market is wrong, so just keep on loading up as it falls. Dollar-average it, baby!

Unfortunately for its shareholders, I think GE is not going to change all that much, and will continue to disappoint investors. The nearby, Yahoo sourced price chart for GE and the S&P500 Index for the past five years indicates as much, and over a considerable time period. In other, prior posts, I've noted that GE has underperformed for all of Immelt's CEO tenure.

Consider the following factors specific to GE's recent and continuing mediocre performances.

Immelt was 'surprised' by the earnings slip. It sent the S&P500 down just over 2% on Friday, while the company's shares fell nearly 13%. As a management issue, you have to ask why Immelt and his corporate staff were so misinformed only a few weeks ago, when they confirmed their prior guidance for GE's first quarter performance.

Back in the 1980s, Sam Armacost, erstwhile CEO of Bank of America, lost his job largely due to an incredibly large, unexpected loan loss charge-off that he and his staff failed to identify more than a month prior to an earnings announcement.

This sort of 'surprise' doesn't speak well for a company's overhead-consuming corporate staff, does it?

For GE, it's especially galling, I would think, because it is a diversified conglomerate. The last of its type, really. The sort of corporation at which the corporate staff doesn't really manage any businesses, but functions more in a coordination and information management capacity. Immelt and his staff can't reasonably allege to have much effect on the performance of GE's mammoth-sized units. If they do, then something's seriously wrong. If they don't, why the need for the expensive, added layer of oversight, when shareholders could hold equities in each of its 4-6 major operating units as independent entities.

Then there is the issue, on which I touched in this post earlier today, concerning GE's diversified structure obscuring better-performing, faster-growing businesses by lumping their results in with much slower-growing, sometimes ailing units, like, currently, financial services.

As I noted in this post, back in August, 2006, and this one, in May of last year, there is no longer even a theoretical basis for a diversified conglomerate like GE to exist in today's capital markets.

Despite Immelt's recent public rejection of the notion that he should spin off NBC/Universal, Friday's earnings 'surprise' provides another reason why the entire company should be dismantled. If shareholders had the opportunity to own GE's entertainment unit separately, then this recent financial services unit debacle wouldn't have effected the former's performance.

A reader named Svaha left this comment on my recent post about Immelt's purchase of $4MM of GE stock,

"Well, smart-alec, looks like Jeff lost some money on his purchase of GE shares."

True enough, Jeff lost something in the range of $600-700K on Friday just on his recent market purchases of GE equity, as he disclosed in the company's annual report. But if you read the entire post, you'll see that I'm focused on the longer term, not just one day's losses, Mr. Svaha.

Jeff Immelt is crazy- like a fox. Losing a few hundred thousand in one day, much of which will likely be recouped in the months ahead, is a small price to pay for retaining his position earning tens of millions of dollars per year at GE.

Immelt's compensation means he's already won that game, as I noted way back in this March, 2006 post, as well as this more recent one. Now, I think he's just playing to stay in his job a few years longer.
It would be easy to call for Immelt's resignation, as might be implied by his words about taking 'accountability' for the earnings shortfall Friday. Typical CEO-speak calculated to make him look chastened, humbled and sorry. But still CEO.
However, the real culprit in this continuing saga of corporate mediocrity and excessive CEO compensation is the GE board. Rather than list all of the board members, I've linked GE's webpage listing them all here.
It's frankly unrealistic to expect Immelt to fire himself, give up his lush cash and deferred compensation packages, and the power and perks of being GE's CEO.
But is it asking too much for the board members, who putatively serve the shareholders' interests, to retain one or two outside consultants for the purpose of valuing the company's holdings as long term, independently-operating businesses? And, if this looks like a better value for shareholders, instruct Immelt to dismantle GE, with incentives for doing so in a manner that most richly benefits current shareholders?
I don't think so. It's their fiduciary duty. Sure, Immelt has been, and is being compensated far too richly for underperforming a simple, inexpensively-purchased S&P500 Index fund. But equally to blame is his board, for allowing him to do.
Looks to me like there is plenty of blame to go around to Immelt and his board for the continuing mess at GE.

Bad Timing on GE In The Wall Street Journal

Sometimes you just have bad timing. Wall Street Journal writer Scott Patterson must be shaking his head after writing this piece in the Friday (morning) print edition of the paper,

"Investors Are Missing GE's Energy Gusher

General Electric's stock has languished for years, mostly due to concerns about the company's huge financial arm. Investors should start to focus on another side of GE: energy.

GE's first-quarter earnings report Friday should show how the company's energy exposure is helping it weather the U.S. slowdown. Analysts surveyed by Thomson Financial expect GE to post earnings of 51 cents a share, up 16% from a year ago.

The lion's share of GE's growth in recent years has come from its energy-centric infrastructure unit, which does most of its business outside the U.S. GE's revenue outside the U.S. gained 22% in 2007 from the previous year, according to Morningstar, driven by a 23% gain in its infrastructure segment. That compares with a 6% increase in the U.S.

Its energy revenue, including financial services and oil and gas, totaled $31 billion last year. Sales of steam and gas turbines, nuclear power equipment and alternative energy products have boomed as oil prices shot to record highs.

GE's stock hasn't seen nearly the same strength that other energy firms have seen. As energy stocks have soared, GE is down nearly 30% since 1999.

It has been trimming its financial assets, shedding several consumer-finances businesses. It also hasn't seen the subprime turmoil that has plagued Wall Street's large banks.

"I don't think GE is nearly as exposed to the general credit problems that we've been seeing in other financial stocks," says Richard Tortoriello, Standard & Poor's stock analyst.

Perhaps it's time for Wall Street to shift its focus."

Of course, we all now know that later that morning, before the market open, GE announced a very surprising first quarter earnings of $4.3B, which was less than its year-earlier $4.57B, and eight cents per share lower than the sell-side analysts who follow the company were expecting.

What's worse, for Patterson's accidental bad timing, GE had not just broad weakness in its operations for the quarter, but an unexpectedly bad performance at its financial unit. The very unit which an S&P analyst quoted in Patterson's piece thought would be less exposed to credit problems than other companies with financial service components.

It's really sort of funny, when you think about it. What were the chances that Patterson would recommend that investors consider buying GE because of its buried energy-related potential, only to see its financial services unit deliver a poor performance on that very day that ruined the diversified conglomerate's earnings?

Of course, as I've written in many prior posts, such as this one, in December of last year, such disappointments wouldn't occur if GE were split into its very separate pieces. The company plods along, lagging the S&P's return under CEO Immelt's reign, because it is a smoothed-over combination of very different businesses, some fast-growing, and some not.

As I wrote in that prior post, this passage beginning with a quote from a WSJ article,

""With half its revenue coming from abroad, many of GE's businesses, notably infrastructure, are still going full steam."

Doesn't this beg the obvious? If some GE units are 'going full steam,' maybe they should be spun off as a separate entity, in order to give shareholders something that can outperform the market while King Jeff I reigns supreme at the closed-end mutual fund cum diversified industrial conglomerate."

Perhaps a better conclusion for Patterson's Friday column would have been, rather than suggest investing in the current GE, to wait for its breakup, the better to benefit from owning its energy-related businesses as a pure-play equity all its own.

Sunday, April 13, 2008

ATT's Legacy of Mediocrity, or 'Upward Failure'

This past week was a mixed one for ex-ATT executives.

Michael Armstrong failed as head of the Citigroup audit committee and was asked to step aside from that role, after missing risk management issues concerning SIVs and exotic instrument exposure

Gail McGovern moved from the Harvard Business School faculty to head the Red Cross.

ATT was a company which ran itself into the ground while attempting to cope with deregulation of its industry. Just how many of its senior executives can you honestly believe knew how to run a/their company?

From executives whom I know who knew McGovern, she was never exactly a star at ATT. Actually, one confided something less flattering, but I don't recall the exact quote. Suffice to say, though, McGovern wouldn't have been the only senior executive in a company once numbering one million employees to have been injudiciously promoted. Especially at ATT in the 1970s and '80s, when the firm was bending over backwards to settle EEOC lawsuits.

From McGovern's biography on the Harvard website, it mentions her tenure at Fidelity. I can't help but recall that Fidelity went through some very lean years recently, involving marketing missteps and losses of market share as customers headed elsewhere with their assets.

One thing I noted in McGovern's Harvard bio is an overwhelming focus on the statics of the size of the firms at which she worked, or the units with which she was affiliated. Performance of those units or companies was absent.

For example, ATT's consumer unit was not the best-managed unit at the communications behemoth. It had rather large losses in customers to startups and competitors as deregulation picked up momentum. Guess which unit Gail McGovern ran?

I found a lot of people at "the phone company," a/k/a AT&T, had worked their way up from lowly jobs like:

Jim Olsen, Vice-Chairman - outside lineman
Major Business Case Manager, Business Products - outside plant & equipment maintenance
Mid-Level Business Case Process Manager - central office frame supervisor
Mid-Level Business Marketing Manager, Major Projects - frame wiring supervisor

Now, we learn that Gail McGovern began as a computer programmer. From her biography, the bulk of her rise took place inside an ailing ATT, in the last decade or so of its vitality.

From the years which I spent at ATT, I can attest to some pretty bizarre career transformations when people rose into management ranks. The company's para-military style, once described to me as,

'The company operates on the philosophy, like that of the army, that any (fill in the blank for your chosen managerial level) Level can do any job of that level anywhere in the company.'

These weren't just words. Engineers were transferred into business management positions with no related experience, fumbling badly on some critical new product efforts.

Just because someone is a senior executive at a 'brand' name company, many believe that they must be competent, effective, and probably have demonstrated solid performance.

Not at all.

My years at Chase Manhattan enabled me to see more examples of senior corporate lending, operations and international executives blunder badly, only to be kept and shuffled into a new position. From the outside, it looked like they were being 'groomed for higher management,' instead of being pieces in a game of 'pass the trash.'

And what about Chuck Prince, late of Citigroup, or Stan O'Neal of Merrill, and Warren Spector of Bear Stearns? If the Red Cross had read any of their bio's prior to 2007, they'd probably have jumped at the chance to hire them, right? Heads of large companies. Apparently successful rises through the ranks.

Perhaps McGovern is actually better off not ever having been a CEO, so she doesn't have as much apparent direct, obvious responsibility for the ultimate performance of the companies at which she worked.

I'm not trying to pick on Gail McGovern or Mike Armstrong. Rather, I'm simply noting that their company, ATT, effectively failed in its adjustment to the competitive telecommunications era, and had to be sold off in piece after Armstrong's failed cable strategy sank the firm. How likely is it that many senior executives of such a disastrously-run company were really competent?

Last week, as I discussed this post, someone observed that Harvard's MBA program is about three or more times the size of those at Stanford and Penn, thus necessitating much larger faculties. Plus, Harvard is known for teaching the case method, whereas you're much more likely to find vibrant research being undertaken by the more content-rich curricula schools like Stanford, Penn and Columbia. I don't recall Harvard ever being among the leading marketing departments.

So perhaps even being on Harvard's marketing faculty is not the best reference among either marketing mavens, or leading business school faculties.

For the Red Cross' sake, I hope McGovern leads them to whatever success they seek. But if I were them, I'd have put less emphasis on someone just because they have been affiliated with a few 'name' brand companies or universities, and perhaps more on their specific accomplishments at their prior organizations.