Yesterday, Warren Buffett gave GE the 'Goldman' treatment. I wrote about Buffett's expensive loan to Goldman Sachs here last week.
It's a tribute to GE CEO Immelt's ineptitude and the weak position to which he has misled his firm that he had to pay such a high cost to secure a $3B loan from Buffett.
Some pundits have hailed Buffett's recent moves as 'investing in' Goldman and GE. Nothing could be further from the truth. If that were the case, he'd have plunked down his money for shares of GE's (and Goldman's) common equity.
No, instead, Buffett just lent GE $3B, in the form of preferred equity, at the spectacular rate of 10%. Plus received warrants to buy $3B of common equity at $22.25/share.
With 'friends' like Buffett, you wonder what Immelt's enemies would have charged him.
As the nearby, Yahoo-sourced price chart for GE and the S&P500 Index for the past year indicate, GE has fallen almost twice as far as the index over the period.It's actually a bit worse, in that the two were at equal points of loss as recently as April of this year.
Of course, Immelt is spinning this as some sort of 'vote of confidence' and financial victory for GE.
How do you think Immelt's CFO would be treated if he came in and proudly announced giving that deal to the market at large?
Yes, I know. Everyone says Buffett's name is magic and will save GE (and Goldman). I think, instead, that Buffett knows these two firms will not vanish during the term of his investment. He said as much this morning on a phone interview with CNBC.
Oddly, Buffett actually mentioned Jack Welch twice during his explanation of his admiration for GE. Well, Warren, Jack's been gone for over seven years now. Or hadn't you noticed?
I doubt you'll see Buffett lending to many other firms. But if he does, rest assured, they will be the safest of the lot. And he will be carefully lending, not 'investing,' per se. The warrants in both Goldman's and GE's cases are sweeteners that came virtually for free.
How's that for crafting a great deal?
And Immelt? Well, he must be secretly praying in thanks for this current economic situation. Now, it's almost impossible for the private equity crowd to force him to dismantle GE. And Immelt will cry that he can't sell businesses at these too-cheap prices. He was never going to agree to a breakup/spinoff, and he certainly won't now. He'll complain that the financial markets are too turbulent to take the risk of each of GE's gigantic business units to be self-run and -funded.
And, now, the press is already opining that, with Buffett's preferred shares, Immelt can't break GE up. Which, of course, is nonsense.
It's a shame, really. Now Immelt has more excuses to mistreat his shareholders, while being paid over $10MM/year doing so.
2 comments:
1) Jack Welch's philosophy of sell the business if it is not #1 or #2. Is this an admission that GE cannot survive in a competitive marketplace? Why can't it fight and be #1 or #2? Take the easy way out and let customers and employees suffer.
2) GE is profitable and can survive only in monopolistic or oligopolistic businesses i.e. locomotives, jet engines. Sell Appliances and Lighting because the competition is more innovative and brutal. And Financial Services is just a monopoly board...
3) Jack got the religion of quality and Six Sigma 40 years after the Japanese embraced Deming and the Total Quality concept. And GE has still not been able to apply Six Sigma concepts effectively. They are forcing it down businesses that cannot apply it productively and mandating it with edicts. Latest quality flavor is LEAN and they are struggling with it.
4) Jack made his personal millions by cutting costs (which he did well) but he was lousy at growing businesses. Growing and being innovative is hard work and not as easy as eliminating waste.
5) GE is very accomplished at managing earnings and manipulating reserves. That's how bonuses are earned.
6) Company is focused solely on short term results. Leadership at every business spend extraordinary amounts of time (60 to 70%) juggling numbers. Customers and growth be damned.
7) A lot of smoke and mirrors. Stretch targets are a tool to screw the rank and file. Leadership will do whatever is necessary to make their undeserved bonuses.
8) Talking about self confidence is a joke. No employee dare present contrary opinions. The carcasses of thousands of employees who dare present contrary view points are littered through every business. Drink the Kool Aid or else...
9) Continuation of 8. Jack expresses disdain of bureaucracy. However GE is a massive bureaucratic organization with a CYA mentality. Employees are cowered into taking refuge behind bureaucratic processes.
10) GE has evolved from a mighty and innovative industrial conglomerate into a staid hedge fund. Thomas Edison is probably squirming in his grave.
anonymous-
Thank you so much for your comment.
I'm guessing, from your location in Iowa, that you are either one of my prior commentors/correspondents from the GE operations there, or another of the company's employees.
Two comments on your series of comments.
First, as to point #1, no, it's not 'taking the easy way.' I will write a post about this. But the basis for Welch's '1,2,3 or out' was, in fact, academic research funded by GE which led to the famous HBR articles based on the PIMS database. I knew the lead authors of those articles well, and worked with Don Heaney extensively later on in both of our lives.
If you go back to the seminal articles, you'll see that profit margins are inherently better in concentrated sectors.
Second, you spend a lot of your comment referencing Welch, who has been gone for over 6 years now.
You never mention Immelt.
Why?
-CN
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