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Immelt to Hand Over the Reigns at General Electric

When the well-regarded Jack Welch decided to retire from General Electric, his job became one of the most sought after in corporate America, with several insiders vying for the appointment. James McNerney, the President of GE’s Information Services lost out and left to take the top job at 3M. He later became Boeing’s CEO. Bob Nardelli, head of Power Systems, lost out and he bolted for Home Depot. The prize went to the head of GE’s Health Care business, Jeff Immelt, who assumed the mantle on September 7, 2001.

Immelt’s timing could not have been worse. Four days later terrorists struck New York City. Even before that, the high-flying stocks adored by investors in the 1990s had fallen out of favor. GE was struck again during the 2008 financial crisis since a substantial amount of profit for the company at the time came from financial services. GE’s shareholders have earned essentially no return at all, even counting dividends, since Immelt’s accession. He announced recently that he will be stepping down from the post on August 1st of this year.

Cumulative total return to GE shareholders, 2001-2016.

General Electric was founded by Thomas Edison when a company financing Edison and under the control of J.P, Morgan merged Edison’s various interests in electricity ventures. Immelt’s predecessor, Welch, took the industrial conglomerate into businesses it had never before been involved in and rode the 1980s and 1990s stock market boom to riches. But, by the time Immelt took control of the company in 2001, many of the guiding principles of Welch had become outdated.

Part of the strategy that Welch implemented was for GE to be the first or second in all the industries they operated in. Welch believed, in the main, that good business management was interchangeable and that the strength of GE’s leadership meant it could make improvements on the businesses that were purchased and by using the high priced GE stock, could achieve even more gains for shareholders by purchasing assets with a low earnings multiple with one that was higher priced.

One such company that Welch purchased was the television broadcaster NBC in 1984, part of GE’s $6 billion acquisition of RCA. The network was extremely profitable for years and aired hits such as The Cosby Show, Cheers, Seinfeld, Friends, and Fraiser. But media consolidation and changing means of content distribution meant that NBC could no longer effectively compete on its own. Immelt merged the broadcaster with Universal Entertainment and then sold the combined entity to Comcast.

The financial services business was another that was built through acquisitions. GE Capital became an enormously important provider of credit cards, business lending and leasing, and insurance. But, the worldwide financial crisis changed the game there too as banks were required to hold more capital and expose themselves to more regulation from governments. Immelt has sold down or spun-off much of the division.

Even the namesake appliance business, core to the company for decades, has had most of its competitive advantages dissipate. GE sold that unit for $5.4 billion in 2015.

Instead, Immelt has tried to focus GE on fewer business lines and has made purchases in the oil and gas business as well as Alstom’s rail transport business. The general management advantages enjoyed by GE are no longer as strong as they once were. Part of the reason is that so many GE executives have gone to work for competitors and they have taken the GE management style with them. But even beyond that, GE holds no secrets, like Six Sigma, that business schools cannot teach. Instead, Immelt has tried to focus the company in industries where GE has a specific, not general, advantage in management and knowledge. Today, GE is a linchpin to the infrastructure of the world, with strong businesses designing power plants, manufacturing renewable energy equipment, sophisticated jet engines, and rail cars.

That does not mean that GE’s income statement has sparkled in the mean time. Earnings and revenue per share have barely budged and return on shareholders equity has descended from more than 25% to 10%.

Revenue per share, earnings per share, and return on equity for GE between 1999 and 2016.

That may finally be changing, as first quarter earnings were $600 million, reversing a loss from the previous year. GE Capital contributed less than 10% of overall revenue.

At the time that Immelt became GE’s CEO the stock traded at a multiple of more than thirty times earnings. Had it sold for a more attractive multiple, shareholder returns would certainly have been more reasonable.

Price to earnings multiple on GE common stock, 1999-2015.

All of this is not to say that John Flannery, Immelt’s successor, will have an easy job or that no further changes to GE’s portfolio may be needed. But, after sixteen years at the helm, Immelt has transformed GE into a twenty-first century enterprise and a strong one at that.

GE’s long-suffering shareholders may not agree. But, they may be better off looking in the mirror and not at Immelt. Buying businesses with average growth prospects at well above market multiples is not a recipe for great investment returns, regardless of who the CEO is.

 

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