General Electric Chief Executive Immelt Plays the Difficult Hand Jack Dealt Him
Jack Welch, once the most admired of chief executives when he ran General Electric Co., has given plenty of people reason to be upset with him in the last six months.
Among them has been his Mrs. of 13 years, Jane Beasley Welch, who filed for divorce after he had a much-publicized affair. There also have been GE shareholders, who felt aggrieved after learning of Welch’s lavish retirement package, which included everything from the use of corporate jets to company-furnished flowers, wine and maid service.
But in the end, the person with the most complaints could rightfully be Welch’s hand-picked successor, Jeffrey Immelt.
Welch’s GE was praised to the skies. Immelt’s GE is treated by Wall Street as a virtual has-been.
When Immelt went before investment analysts again last week to explain how he was fixing problems at the company and hoping to make the most of “a slow-growth economy,” GE’s stock hardly budged. It sells today at around $26, about half its price of two years ago.
There is, in short, a cloud of skepticism hanging over GE, as though its past success was not quite genuine.
In that respect, the Fairfield, Conn., company has become a microcosm for U.S. industry, reflecting widespread questioning of whether the gains of the 1990s were real or illusory.
The answer is that most of the gains of the past were real, and most of the promise of the future is, too.
But given the situation that Welch left behind, Immelt has his work cut out for him if GE is to rebound to the great heights it once enjoyed.
Under Welch, GE racked up heady gains in profit year after year. All the while, he preached the rigors of self-improvement to GE employees. Wall Street and the public ate it up.
Welch’s success wasn’t just built on hype, either. He was an extraordinary leader and a true business visionary.
But a large part of GE’s success also was due to Welch’s adroit use of finance. In particular, he made great use of General Electric’s finance division, GE Capital Services, building it from a credit facility for home appliances into the largest unregulated bank in the world with $425 billion in assets.
GE Capital, because it enjoyed the privilege of GE’s AAA credit rating, could raise money at the most favorable rates. (Only six other U.S. companies carry AAA credit ratings, according to Standard & Poor’s.)
That ability to borrow on the cheap, in turn, gave GE a powerful edge. Its jet engines could be sold under advantageous financial conditions to the world’s airlines, and its power plants could be peddled to electric utilities on similarly easy terms.
But Immelt doesn’t have that same edge today. That’s in large part because Welch went too far during his last year in office.
In 2001, Welch tried to acquire Honeywell International Inc. in a $44-billion deal. But Mario Monti, the top antitrust regulator for the European Union, raised tough questions. He focused on the financial power of GE Capital and its position as a world leader in the leasing of planes to airlines.
Monti listened to GE’s competitors in the jet-engine business: Pratt & Whitney parent United Technologies Corp. and Britain’s Rolls Royce. And he demanded that GE allow its rivals to buy into GE Capital so they could enjoy the same financial benefits.
Welch angrily rejected the idea. But he made a tactical error.
Though he headed a global company, he underestimated the European antitrust police. Ultimately, the EU nixed the deal.
Meanwhile, Welch had opened his prize GE Capital division to the scrutiny of Wall Street investment managers.
Having postponed his retirement to handle the Honeywell deal, Welch stepped down shortly after the debacle.
That left Immelt to handle the growing reservations about GE Capital, which last year accounted for 40% of the parent corporation’s $14 billion in operating profit. Such concerns -- which relate in part to the amount of debt held by GE Capital -- only increased after the collapse of Enron Corp. and other accounting scandals.
Immelt last week took a big step toward mollifying those with worries about GE Capital, telling analysts that GE would inject $4.5 billion into the unit. That way, it can secure a AAA credit rating of its own.
“To say that GE today faces no challenges is a vast understatement,” says analyst Nicholas Heymann of Prudential Securities. “But to believe that it lacks the resources to deal with them defies logic.”
GE is pushing hard into two new fields. One is water purification and treatment. The other is homeland security, where GE is developing sensors and detection devices.
Immelt also is expanding the NBC franchise, with the purchase of Telemundo and Bravo. He sees NBC at the heart of a GE business that eventually will bring entertainment and other services into the home via the Internet.
Immelt, who at 46 could lead GE for almost two more decades, can certainly bring back the company’s glory days. But to do so, he must shrewdly play the difficult hand that his friend and mentor, Jack, dealt him.
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James Flanigan can be reached at jim.flanigan@la times.com
