Monday, June 20, 2011

Dominos, Jack Welch & CNBC: Recipe for Disaster?

For the past few weeks, CNBC has been playing trailers of its new reality business consulting program starring ex-GE CEO Jack Welch and his latest wife, Suzy. Today's trailer and, evidently, the current 'client,' if one may use the term, is Domino's Pizza.

My first reaction was to remember an old Greek aphorism which says, to paraphrase,

'You cannot give what you do not have.'

What, precisely, does anyone think Jack Welch has, or ever had, in the way of demonstrating consistently superior management leading to similar total return performance? Let's dispense with his current wife, Suzy, who once was, I believe, editor of the Harvard Business Review. I haven't heard HBR cited as a valued business literature resource for over a decade. And Suzy was only an editor when she met and subsequently had the affair with Welch which contributed to ending his then-current marriage. Which is to say Suzy Welch's involvement seems to be exclusively the result of her current marriage.

Welch was CEO of GE from 1981-2001. Yahoo's stock price chart function isn't allowing comparisons now (or perhaps anymore), but this prior post contains the chart I want to display and, conveniently, is also one of the topics on which I'll remark shortly.

The chart from that post, reproduced nearby, doesn't include dividends, which would affect both series. But what it still illustrates is how closely GE tracked the S&P500 for most of the first decade of Welch's tenure as CEO.

I had the occasion to meet with him in the mid-1990s when I was with Andersen Consulting, now known as Accenture. Back then I was using the DowJones price series, rather than the more appropriate S&P. However, even with the S&P the point I made to Welch which got him scribbling on his copy of my presentation, exclaiming,

"Nobody's ever shown me this before,"

is still evident. If you look carefully at the blue curve around 1982-3, you'll see a near-vertical rise which lifted the then-ailing conglomerate's performance up above the S&P's, and was retained for nearly eight more years.

I contended to Welch that this was the initial benefit to GE's total return which his triage among the inflationary climate and GE's moribund businesses left to him by Reg Jones produced. At the time, amidst unreliable GAAP numbers due to rocketing inflation, Welch resorted to managing by market share and its growth. This was unquestionably an astute and, ultimately, successful approach. Though it earned him the moniker Neutron Jack for cutting GE's workforce, it produced excellent performance for years. But after that, for the remainder of the decade, GE largely tracked the equity indices without significant, lasting outperformance. This was what had shocked Welch as he stared at the simple but powerful graphic I had presented to him.

By the time I met with Welch, GE had become a lopsided giant, with a fast-growing, risky financial services arm outstripping the slow-growing industrial units.

Ultimately, GE's total returns of the late 1990s were produced from two sources- analysts' belief in Jack Welch and his consistent production of dividends, and a ballooning finance business which benefited from the overall halo effect on such businesses. On both an absolute basis, and relative to the S&P, GE has never again reached the heights it attained in Welch's last year.

Upon taking over as CEO at GE, Jeff Immelt was immediately assailed for the same accounting practices in units such as power generation for which pundits had given Welch a pass. GE Capital, which had lost Gary Wendt, the architect of its expansion, a few years earlier, no longer powered the conglomerate's growth.

Thus, it's unclear exactly what Welch left of enduring value at GE, given that, within months of his departure, the company's total returns fell off a cliff.

Since Welch constantly preached about good management, one would think that choosing an able replacement and handing off GE in decent shape would be key to Welch's being judged a success.

But that's not what happened. Immelt proved incapable of handling GE, which has, under his misleadership, managed to squander all of the performance margin it had accreted since 1962. Not to mention that little matter of requiring a federal government bailout under TARP to avoid insolvency in 2008-09.

Elsewhere, Welch's spawn did little better. Bob Nardelli had to be chased out of his CEO position at Home Depot, while Jim McNerney's 3M and Boeing both have struggled.

Then there is the question of Welch's major acquisitions, which I would suggest were RCA and Kidder Peabody. The latter was the subject of a huge scandal literally the week during which I met with Welch in the mid-1990s. The linked post referenced earlier in this piece discussed the RCA acquisition, ending with these observations,

"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."

In line with my continuing theme regarding GE, Welch made the firm an even more unnecessarily-diversified firm in an era in which the raison d'etre for such diversified conglomerates had long-since disappeared. If anything, Welch should have been spinning the major units of GE into separate businesses and dissolving the firm that he had run for two decades.
At the dawn of Welch's tenure, diversified conglomerates were already dinosaurs, due to falling brokerage rates. With the appearance of large discount retail brokers like Charles Schwab, there was no purpose, other than employing a bunch of headquarters staff, Welch and his CFO, for GE's existence in the form Welch had inherited.
Welch's decade of superior performance at GE was apparently more the result of luck and the bounce-back from his adroit initial handling of the mess Jones bequeathed to him. My old boss and mentor at Chase, Gerry Weiss, who had been the senior corporate planning officer at GE before being recruited by David Rockefeller, always contended that Welch should have been handsomely compensated for handling the mess he inherited, and dispatched by the end of the 1980s. His long-term growth efforts resulted in disaster for the firm.
Moreover, Welch never ran a retail business. He was a chemistry PhD who rose to run the plastics business and, from there, GE. GE, for that matter, has never been a retail presence, either.
So, if you're the CEO of Dominos, and you know all this, what is it that you think Jack Welch can do for your company? Do you want what happened to GE after Welch's magic touch to happen to your pizza delivery firm?
So just what would Welch uniquely bring to the pizza chain, if his accomplishments at GE melted away so quickly? He doesn't have a track record as a successful consultant to numerous companies in various industries.
What's the point of Welch's CNBC program if he can't provide what he never had in the first place?

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