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As GE stumbles, how should Jeff Immelt respond?
Economist Staff, The Economist
April 18, 2008
Losing $47 billion in a day is quite an achievement, by any standard. Indeed, it is one of the biggest ever one-day falls in a firm's stockmarket value, though short of Intel's $91 billion plunge in September 2000. The only consolation is that General Electric, which saw its shares fall by 13% on April 11th after it revealed that it had missed its profit target by a country mile, still ended the day worth $320 billion.
This is not what investors expect from one of the few remaining triple-A-rated companies, famed for hitting its targets. Questions are now being asked about the future of GE's boss, Jeff Immelt, who did himself no favours by saying as recently as March 13th that the firm was still on course for a profit target that in December he had described as "in the bag."
GE's shares have performed disappointingly during Mr Immelt's tenure, and are now 20% below their price when he succeeded the giant conglomerate's legendary boss, Jack Welch, in 2001. On April 16th, in an apparent bid to wrest the title of "least helpful predecessor" from Alan Greenspan, the suddenly outspoken former Federal Reserve chairman, Mr Welch informed viewers of GE's business channel, CNBC, that "Jeff has a credibility issue. He's getting his ass kicked," before promising to "get a gun out and shoot him if he doesn't make what he promised now."
Though it probably did not seem that way, this was intended as a vote of confidence in Mr Immelt, and has a precedent: in 1994, after the GE Plastics unit, then run by Mr Immelt, fell short of expected profits by $50m, Mr Welch threatened to fire him if it missed its results again. It did not. Mr Welch never missed his profit targets; indeed, on his watch GE's profits grew with the sort of predictable consistency that was made possible by laxer accounting standards and a talent for making good any unexpected shortfall with last-minute sales of assets held by the firm's notoriously opaque finance arm, GE Capital.
Although today's accounting rules are somewhat tougher, it seems that the main cause of GE's last-minute failure to hit its latest target was that the seizure of the capital markets prevented several asset sales from being completed in time. Despite its image as an industrial company—making wind turbines, lightbulbs and so on—40% of GE's revenue now comes from GE Capital, so these incomplete deals made a big difference to the overall results.
Behind the headlines, GE provides some comfort to those who hope that the rest of the global economy is decoupling from America's. GE's industrial portfolio, especially its infrastructure units (transport, oil, gas, energy and aerospace), is increasingly international and is still growing solidly. The weakness is at GE Capital. As well as its recent inability to sell assets, it has been hit by a deterioration in its consumer-credit portfolio.
The disappointing results have prompted some investors to call for GE to break itself up. They argue that GE is now suffering from the traditional conglomerate discount that, under Mr Welch, it somehow avoided. Yet if Mr Immelt is tempted to do something dramatic to save his skin, it could hardly be at a worse time. With private-equity firms unable to raise debt, and strategic buyers not exactly flush with cash, getting a good price for bits of GE's industrial portfolio would be hard—and selling chunks of GE Capital in today's market could happen only at distressed prices.
What about spinning off GE Capital as a separate public company? Richard Hoffman of CreditSights, a research firm, notes that GE Capital's model relies on being able to borrow cheaply thanks to its triple-A rating, which it has only because of GE's industrial units. He notes that CIT, a much smaller firm that is similar to GE Capital in some respects, is now practically frozen out of the capital markets.
GE does not need to sell. Despite its shortfall, it made a profit of $4.4 billion in the first quarter of this year. The best strategy for Mr Immelt is to continue shuffling GE's portfolio to raise profit margins, while pursuing his ambitious green "ecomagination" policy. Will shareholders let him?