Monday, November 09, 2009

NBC/Universal: The Failure of Jack Welch's Strategy

This morning's brief mention on CNBC that a valuation has been mutually agreed upon by Comcast and GE for the latter's NBC/Universal unit brought back to mind my plan to write this post.
A few weeks ago, while discussing the negotiations to sell NBC, I mentioned to a colleague that, while much delayed, this was yet another black eye for once-stellar ex-GE CEO Jack Welch.

Because my boss at Chase Manhattan at the time, Gerry Weiss, was an ex-GE senior planning executive, I remember very well the hoopla surrounding the news that morning of GE's acquisition of RCA in 1986. In actuality, all GE kept was NBC's video operations, selling off all the rest of RCA's operations and/or licensing others to manufacture products using the RCA brand.

Welch's main corporate development guy, Michael Carpenter, a former consultant, was credited with the idea, and Welch crowed incessantly at the time about how great a purchase NBC was.

Now, 23 years later, only months after Welch's successor, Immelt, once more declared how integral NBC/Universal is to the struggling diversified conglomerate, it's on its way out of the company, soon to become part of Comcast.
The first nearby price chart for GE and the S&P500 Index clearly shows that, for a period covering over 30 years, GE's performance, relative to the Index, reached its zenith just at about the time Immelt took over from Welch. Since then, the relative value of GE has plummeted, and all of the performance premium of 30 years has been lost.
Even in the past six months, when, ostensibly, firms which took TARP money have been rebounding, GE has underperformed the Index by about 50%, rising only around 10% to the S&P's nearly 20% return.
Where's the juice provided by the NBC acquisition? Or are we to believe that the rest of GE was and is so anemic that it's only this bad because of NBC?
In any case, how have things changed such that NBC has lost whatever magical synergistic effect it once had on and with the rest of GE?
They haven't. From reading available material concerning the acquisition, it seems clear that Welch viewed GE more like a closed-ended investment fund, and less as an operating entity that had to actually make some organic sense. Back in April of last year, I wrote this post comparing a non-diversified conglomerate, United Technologies, to GE. The performance difference is notable, and it hasn't been in GE's favor.
At the time of GE's NBC acquisition, there was horror among the latter's ranks, as those employees viewed themselves as privileged, delivering news and entertainment, neither of which could or should be 'managed' by accountants and financial types. Much of the ink spilled over the acquisition and its aftermath was about GE reining in NBC's expenses, and nothing regarding any sort of synergies with the rest of the company. It was largely a financially-oriented move by Welch to shore up the cashflows of GE's maturing industrial business portfolio.
Thus, nearly a quarter of a century later, NBC still doesn't provide anything to GE beyond a purely financial performance, which has been waning. After the initial feeding frenzy in which ABC went to Capital Cities and CBS went to Viacom, as GE bought NBC, traditional network media slumped in an internet age.
It's a sobering end to what began with such fanfare. Back in 1986, Jack Welch still had 15 years to go as CEO of GE, and analysts believed most anything Chairman Jack said. Mike Carpenter was still a rising star, having yet to preside over the purchase and implosion of Kidder, Peabody as a unit of GE Capital, from the infamous Joe Jett government bond trading scandal.
Media at the time blessed the GE acquisition of NBC as bold, large-scale, "big picture" thinking. They overlooked the fact that, even back then, brokerage costs had pretty much obviated the original benefits of the 1960s-era US diversified conglomerate. Investors would have been better-served by an RCA breakup with NBC available as a separate equity. Instead, it simply moved from one shell to another, never really seen clearly on its own, nor managed for long term shareholder wealth creation.
So much time has passed that all of the current analysts' and media attention is on the valuation of NBC/Universal and, only occasionally, Immelt's recent change of mind about the unit's vital importance to GE.
Nobody is asking why, if NBC is suddenly not integral to GE's future, any of GE's businesses have to be housed under a corporate umbrella? Or why GE exists at all anymore?
Even more remote are questions involving whether the NBC acquisition was ever justified? Whether this does not detract even more from a growing sense that Welch's vaunted management style and performance were really more a personality cult and less transferable skills, or even effective as a standalone approach.
After all, as I've written in numerous posts on this blog, none of Welch's spawn from GE have gone on to replicate their old boss' GE performance. And GE, itself, has become a performance disaster under Welch's hand-picked successor, Jeff Immelt, sinking to the point of taking government handouts to survive the debt crisis of 2008.
1986 was a long time ago. Many analysts from that era are retired, and the tenor of those times is long forgotten. But revisiting the event of GE's acquisition of NBC is important, if only in fulfillment of the time-honored saying reminding us that those who don't learn from history are doomed to repeat it.
From a sufficiently long perspective of time, it is clear that NBC was never the magical acquisition Welch imagined. If it was the reason for a spurt of market outperformance in Welch's latter years, then it should have been spun off or sold at its peak, rather than be ridden down in value to its current situation.
Either the acquisition, or its management and disposal, were flawed. And there's no telling how much management distraction NBC caused during its years in the GE corporate portfolio.
I think that, by all accounts, GE's acquisition of NBC was a mistake at the outset, was a drain on GE's management, and was ill-managed in terms of timing the firm's exit from the unit as its value deteriorated in the rapidly-changing media environment of the internet and digital era.

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