Friday, September 09, 2011

The Wall Street Journal's Warm Fuzzy Review of 10 Years of GE Under Jeff Immelt

In this week's Tuesday edition of the Wall Street Journal, the feature article on the front page of the Marketplace section was a long piece discussing Jeff Immelt's 10-year anniversary as GE's CEO.

It's worth observing, in this age of blogging, how advertising-paid media still refrain from the blunt honesty of a blog like, well, this one. I've criticized Immelt for over five years, just based on the cold, available facts of GE's and Immelt's performance, Immelt's outrageous compensation, and the comparable S&P500 performance.

With the same information, the Journal was significantly kinder and less pointed in its evaluation of Immelt's reign.

For example, take the article's second paragraph,

"The part he might want to leave out: GE's stock ended that week in August down 15% from the start of the year and 61% lower than when he took over as chairman and chief executive of the industrial conglomerate 10 years ago."

Fine as far as it goes, but how about comparing GE to the index? The nearby price chart for GE and the S&P500 Index show that, while the index has been roughly flat for 10 years, GE has fallen precipitously. So much so, in fact, that Immelt has nearly wiped out the entire GE performance premium earned since 1960!

Great job, Jeff!

Why doesn't the Journal provide this objective measure? Probably because they'd like to continue to run GE advertising and have the occasional interview with GE senior management.

So much for real analysis of business news, eh?

But here's something even more bizarre. The next passage in the article reads,

"If I had to grade him, he is a solid B student, not lighting the world on fire," says Peter Klein, a senior portfolio manager at Fifth Third Asset Management in Cleveland, which holds GE shares. "The pieces now are probably at a point where they are getting polished and getting attention that profitability will improve." "

Is it just me, or is Klein more of an embarrassment to Fifth Third than Immelt may be to GE? Or this article to the WSJ? After reading Klein's rating of a guy who destroyed 40 years of value at GE, calling him a "solid B student," would you invest in his portfolio? Or anything at Fifth Third?

How completely destructive must a CEO be to earn a 'D' from Klein, if GE under Immelt is a "solid B?"

Then there's this laughable section,

"Inside the 131-year-old company, where executives are more accustomed to accolades than censure from Wall Street, the sluggish share price has created palpable frustration. Mr. Immelt counters that only two other companies, Exxon Mobil Corp. and Royal Dutch Shell, have made more money over the past decade. GE has paid out $87 billion in dividends over the period and is sitting on a company record $189 billion book of orders."

This is more of Immelt's deliberate ignorance of modern finance, in favor of the hoary old notion that simply being big is good enough.

Ever hear of total return, Jeff? And where's the Journal's criticism of a CEO so brazenly old-fashioned as to flaunt the notion of earning a competitive return for the risk he's taking on his shareholders' behalf?

The stupidity and ineptitude at GE clearly extends to its board, as we read in these passages,

"Size is working against GE as well. Mr. Welch took GE to nearly $130 billion in revenue from less than $30 billion. Today the company has $150 billion in revenue, but continuing double-digit gains is tough at that scale.

"Is it going to grow the way it did 25 years ago when it was a third or a quarter of the size? No, the math just works against you," says Ralph Larsen, the lead independent director on GE's board."

That's all that Larsen can manage to articulate about Immelt's colossal failure as CEO? Maybe he's best buddies with another firm's board member, a chairman, no less, currently under fire. Reading Larsen's quote, what sane investor would buy, or continue to hold, GE shares?

The Journal article at least includes someone else's criticisms of Immelt's bad timing on acquisitions and disposals,

"Some former GE executives and investors say Mr. Immelt sells late and buys too high.

"GE hasn't been as strategically adept as it was 25 years ago," says Jack De Gan, chief investment officer for Harbor Advisory Corp. in Portsmouth, N.H.

GE sold its plastics business after the market peaked and jumped into subprime lending too late to reap the rewards, exiting with a $1 billion loss, critics say. The company failed in a 2008 attempt to sell its slow-growth, low-margin appliance business and scrapped the plan a year later.

Mr. Immelt bought security companies after 9/11, agreed to a big premium to acquire U.K. medical research company Amersham in 2003 and is buying into the oil business with prices much higher than they were in the first half of his tenure. Buying Enron's wind business out of bankruptcy created a new business for GE, but multiple acquisitions in water treatment haven't paid off.

Mr. Immelt rejects the criticism. He says the dispositions of plastics and insurance were "home runs" and that the acquisitions were a mixed bag. "You can't do a lot of deals and have them all be great.""

Leave it to Immelt to simply stonewall the facts when he doesn't like them. The record on his disposal of plastics, NBC/Universal and parts of its financial business is quite clear, and it's not pretty.
The simple truth is that GE is an anachronism- a dinosaur. As a diversified conglomerate in an age of hyper-efficient capital markets and ultra-low brokerage fees, there is no longer any reason for such a corporation to exist. It should have been split into its large constituent businesses many years ago. That Jack Welch was able to confuse and bedazzle analysts and investors for so long with his charm and character just served to obscure this truth.

If Welch had truly had shareholder interests at heart, he'd have broken up GE after he stabilized it in the early 1980s. Then he'd have avoided the disastrous RCA and Kidder Peabody acquisitions, as well as the mistaken swelling of GE Capital, while allowing shareholders to directly benefit from each large unit's individual performances.

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