Westinghouse, GE: A Contrast : Strategy for Global Competition Sets GE, Westinghouse Apart
It was a dramatic contrast of failure and success. Once proud Westinghouse Electric Corp. submitted to major surgery Monday--announcing plans to liquidate a money-losing credit business, take a $1.13-billion write-off and slash its dividend--in an attempt to save itself.
Meanwhile, General Electric Co. decided to sell its defense aerospace business to Martin Marietta for $3 billion in cash and stock, although it might just as easily have purchased Martin’s defense business if it had been for sale.
Either way, GE was master of its fate and able to make moves that should strengthen its profitability and competitiveness in global markets. The stock market approved and sent GE shares up $2.125 a share to $82.125, an all-time high.
Westinghouse stock rose also, up $2.625 a share to $12.125--less than a third of its price only two years ago. The market was cheering because management of the Pittsburgh-based company had been forced to drastic action by pension fund shareholders who practically dictated terms to Westinghouse Chairman Paul Lego in a meeting last month.
Among other suggestions, the shareholders told Lego to sell subsidiaries in office furniture and real estate development, to focus once again on electric power plants--the 106-year-old company’s most traditional business--and to rethink everything else it does.
The shareholders--some of the company’s 290 pension fund owners, including the California Public Employees Retirement System--stepped in with stern advice because they feared a corporate disaster and losses for pension funds from a management that has been slow to react to red ink and a severely declining stock price.
But those same pension fund shareholders applaud GE for, among other things, adding $50 billion to the market value of its stock in the last decade. And they applauded again Monday.
So the useful question for all business is, where did Westinghouse go wrong and GE go right? The answer from shareholders boils down to tough-mindedness. Shareholders want to see decisiveness in running a business--but there is no formula.
“If it works, it works,” says Nell Minow of Lens Inc., an investment fund she and Robert Monks, former head of pension fund regulation in the Labor Department, set up to prod laggard companies.
Monday’s decision by GE Chairman John F. Welch Jr. filled their bill. Welch knew GE Aerospace--a maker of radars, satellites and defense communications systems--was a good, profitable business. But that was not enough.
“While GE Aerospace is a world leader in technology, it is one of several,” Welch told a press conference. “So we looked for a business combination that could make us unique, not just to survive but to boldly move in the direction of global growth.” He originally thought of buying Martin Marietta--a $6-billion revenue company that could fit in one corner of $60-billion revenue GE. But the Bethesda, Md., company said it wasn’t for sale, so Welch sold it the aerospace business that will make Martin Marietta No. 1 in defense electronics.
The deal reflects the philosophy that Welch has used to streamline 114-year-old GE. “You must be No. 1 or No. 2 in the marketplace,” Welch said again Monday, because No. 3 is just not good enough. “When you’re No. 3, if the leader sneezes you catch pneumonia.”
Guided by that code, Welch has sold GE’s television set and semiconductor businesses in the past, but kept aircraft engines, electric power plants, home appliances, light bulbs, locomotives and financial services. GE still holds the NBC television network, but since it no longer leads its field, analysts expect it to be sold when and if Welch gets his price.
Westinghouse in a way missed the transition to global markets. A decade ago it was still a rival to GE in electric power plants, and it remains a runner-up in the United States. But the market is now global. GE’s big rivals are Toshiba of Japan, Asea Brown Boveri of Switzerland and Siemens of Germany. Westinghouse is an also-ran in that company.
For much of the 1980s, Westinghouse’s decline was masked by what appeared to be good earnings and a rising stock price. In 1988, Forbes magazine lauded the company for its profitability and called it misunderstood by Wall Street.
But much of the earnings growth came from Westinghouse’s financial services subsidiary, which lingered too long into the decade making risky loans on real estate and leveraged buyouts. Many of those loans went bad in the late 1980s, and the burden of those losses lately threatened the entire $13-billion revenue corporation.
Westinghouse made other moves. It got out of appliances, where Westinghouse had been a brand name for generations. By contrast, GE worked to whip its appliance business into competitive shape.
Westinghouse bought into and later sold short-term profit-enhancing businesses such as soft-drink bottling. Such profitability, while it lasted, didn’t impress institutional shareholders. “There was no seam to the company,” said one large shareholder Monday--no vision of world markets or a cohesive business.
The truth is, institutional shareholders don’t like to see short-term thinking. Gradually, big holders withdraw from the stock of such a company. That’s one reason Westinghouse is held by about 290 pension funds, but GE is owned by more than 760.
