GE’s Turn Under the Microscope
General Electric Co. is suddenly the best proof that, in the post-Enron world, every company’s financial dealings are fair game for intense scrutiny.
For more than a decade, the double-digit gains in GE’s quarterly sales and profit were nearly as predictable as the seasons. With legendary Chief Executive John F. “Jack” Welch Jr. at the helm, it seemed the conglomerate could deliver those gains regardless of recessions, interest rate swings and the myriad acquisitions and asset sales by which Welch transformed the gigantic company.
It all kept Wall Street cheering and enriched millions of Americans even if they hadn’t bought GE’s appliances or signed for its car loans. They include mutual fund owners, workers with 401(k) plans and others who have invested in GE’s blue-chip stock, which is among the most widely held, with a total market value of $372 billion, the nation’s highest.
But now--a few months after Jeffrey Immelt succeeded Welch as chairman and CEO--GE’s numbers, its financial disclosure and its enormous borrowing are getting called into question. And not just by a gadfly, but by the likes of Bill Gross, head of the nation’s biggest bond fund.
Gross also raised questions about exactly how Welch and now Immelt managed to frequently post numbers that bested Wall Street’s forecasts. In effect, he poked a hole in the legacy that GE’s growth entirely reflected GE’s ironfisted approach to cost cutting, innovation, decentralized bureaucracy and deft acquisitions.
The comments by Gross, head of Newport Beach-based Pacific Investment Management Co., helped knock 6.5% off of GE’s stock price Wednesday and Thursday, erasing $24.4 billion of GE’s market value. But the stock steadied Friday--gaining 42 cents to $37.87 a share on the New York Stock Exchange--and the Gross flap could end up being a brief tempest.
“GE is still doing much better than the average company in corporate America,” said Bill Fiala, an analyst at brokerage firm Edward Jones & Co. in St. Louis. But regardless of Gross’ comments, GE’s growth rate is indeed slowing and “GE could be more straightforward” about its debt activities and its future potential, Fiala said.
Gross’ remarks aren’t the only controversy swirling about the Fairfield, Conn.-based concern. Others have recently chided GE about its lack of financial disclosure in the wake of the Enron and Andersen debacles. It’s also being criticized for belonging to an advocacy group that has called for more disclosure by Fannie Mae, the huge mortgage buyer, even as the spotlight on GE itself is getting hotter.
Then there was the recent disclosure of Welch’s extramarital affair with the former editor of the Harvard Business Review, which sparked a furor at the publication and was followed by Welch, 66, ending up in divorce proceedings.
It’s all an abrupt change for GE, which spent most of the last 20 years basking in praise. Welch, especially, has been celebrated as the best manager of his generation because of the way GE and its stock price had grown.
GE’s numbers are indeed staggering. The company last year posted revenue of $126 billion and, after paying all of its expenses, turned a profit of $13.7billion. The company employs more than 300,000 people in 100 countries, and its debt carries triple-A ratings.
But Gross said GE--mainly its GE Capital Services unit--was carrying too much short-term debt and wasn’t disclosing enough details about that debt and other financial matters. The financial services behemoth accounts for about 40% of the profit at GE, which also makes plastics, energy power systems and jet engines and owns the NBC television network.
GE responded by saying it planned to issue more long-term debt to balance its portfolio, and reiterated its forecast of 2002 earnings per share of about $1.65 before accounting charges, which would be a 17% gain from last year. It declined to comment about selling securities to boost earnings. But GE spokesman Gary Sheffer said, “The strength of our business model [and] the strength of our products and services are what drive our growth.”
The controversy over GE’s debt shouldn’t take investors’ eyes off GE’s history of earning big returns from invested capital, training managers to stay on top of technological change and keeping its subsidiaries No. 1 or 2 in their industries, said Noel Tichy, a University of Michigan professor, former GE manager and coauthor of the GE book “Control Your Destiny or Someone Else Will.”
Conversely, Fiala of Edward Jones said many on Wall Street remained too optimistic about GE’s prospects, noting that analysts’ consensus forecast had GE’s per-share earnings growing 15% annually for the next five years. Fiala said it would be more like 12% a year.
