Jeff Immelt Isn't to Blame for GE's Stock Woes

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(Bloomberg View) -- "The one thing I will fight to my death, this will not be laid on Jack Welch." Former GE board member Ken Langone, to CNBC

Retirement has not been kind to former General Electric Chief Executive Jeff Immelt. Ever since his successor, John Flannery, took over this storied but troubled conglomerate last August, vowing to fix what ails it, observers have rushed to lay the blame for GE's problems at Immelt's feet.

Immelt bought back too much stock at too high a price. Immelt mismanaged the company's electrical power business. Immelt was a poor deployer of capital. He didn't shed GE Capital quickly enough. He stubbornly clung to earnings targets that were unrealistic.

"Mr. Immelt," said the Wall Street Journal in late February, "projected an optimism about GE's business and its future that didn't always match the reality of its operations or its markets."

There are plenty of people who worked with Immelt during his 16 years at the helm who are furious about this characterization. While Immelt certainly made mistakes, they say, it's a gross overstatement to claim that he inherited a smooth-functioning machine from Jack Welch, his predecessor, and then proceeded to make a hash of the place.

"As a CEO, his job was to inspire and promote confidence and make people believe," said Jeff Zucker, the president of CNN who ran NBCUniversal when it was owned by GE. "Was he overly optimistic? I never experienced that."

"I thought he was a tough-minded optimist who took the company through unbelievable challenges," said Matt Rose, the chief executive of Burlington Northern Santa Fe, LLC, a long-time GE customer. "From the outside looking in, he was a great leader who was dealt a really tough hand."

"We were never asked to sign on to an operating plan that was unrealistic," said John Rice, who served as GE's vice-chairman under Immelt. "We were asked to be aggressive. And run our business well. And if we couldn't achieve our target, and could defend what we did, we lived to fight another day."

These three and the handful of others who spoke to me (Immelt himself did not) are obviously biased. But then, so are those who are criticizing him anonymously to journalists at the Journal and elsewhere. So let's try to evaluate Immelt's tenure in a different way. As they say in boxing, let's go to the tale of the tape.

Here's a chart tracking GE's stock performance during Welch's 20 years as chief executive:

It's mind-boggling, isn't it? The stock was up 2,790 percent, while GE's valuation rose something like 4,000 percent. No wonder Fortune magazine named Welch the "Manager of the Century" in 1999! He had that knack — if that's what you can call it — of always seeming to beat quarterly earnings estimates by a penny. Early on, he fired so many people he gained the nickname "Neutron Jack." He bought RCA, which yielded NBC, and built GE Capital into a monster division, growing it twice as fast as the rest of the company. When Welch started, GE's earnings were $1.65 billion; when he left they were $12.74 billion.

But take another look. See where the stock really begins to climb? It's during the summer and fall of 1995 — which is to say that it was right around the time Netscape went public, triggering a raging bull market in tech stocks that lasted for the next five years. And do you see where it peaks? August of 2000, just months after the Internet bubble burst.

I'm not saying that the market viewed GE under Welch as a tech stock. But during those giddy five years, certain iconic U.S. companies with superstar CEOs who knew how to stoke earnings — the Coca-Cola Co. under Roberto Goizueta also springs to mind — were treated like go-go growth companies rather than the dividend stocks they had been for decades. With each quarter's earnings report, the market rewarded them with multiples that became increasingly ridiculous. For most of Welch's tenure, GE's stock had a price-to-earnings ratio in the low teens. But in 2000, it reached 59. That number was unsustainable no matter who sat in the chief executive's chair.

Sure enough, the stock began dropping precipitously even before Welch stepped down. And, as you can see in this second chart, which tracks GE's stock performance during Immelt's tenure, it kept dropping for next year and a half, falling nearly 50 percent.

Was the new CEO the reason the stock plunged? Hardly. Partly, it fell because it had been insanely overpriced. But it also fell because the 9/11 attacks, which took place shortly after Immelt took over, deepened a recession that was already taking hold. The aftermath of the terrorist attacks saw sectors important to GE, such as transportation, get hit hard.

Immelt appeared to right the ship starting in early 2003, and the stock nearly doubled over the next four years. During that stretch, Immelt was generally regarded as a worthy successor to the legendary Welch.

He then ran smack into the financial crisis, an event that crushed GE's stock. (It bottomed out at around $7.) Why? The primary reason was the crisis exposed the problem with depending so heavily on GE Capital for earnings growth. Because it was a non-bank financial institution, it had only the tiniest sliver of capital backing up its loans. And it relied too heavily on short-term corporate paper to fund itself. During the crisis, GE Capital came so close to collapse, imperiling the entire company, that it required $50 billion in bailout loans from the government.

Maybe you can say that Immelt shouldn't have been so reliant of GE Capital. But if you're going to make that argument, then don't you have to say the same about Welch? What the Ken Langones of the world won't acknowledge is that their man Jack had the wind at his back. And Immelt didn't.

In fact, Immelt had been trying to get more earnings out of the company's industrial divisions rather than GE Capital; he doubled R&D spending, for instance. Still, as James Surowiecki noted in the New Yorker, "Dependence on finance was a hard habit to break." (Indeed, GE paid a $50 million fine in 2009 after the Securities and Exchange Commission charged that the techniques it used to smooth out its earnings violated accounting rules. GE Capital was the tool it used to smooth out earnings.)

Yet from March of 2009, when the stock bottomed out, to July of 2016, the stock once again rose remarkably, nearly quintupling in price. During that time, Immelt sold off most of GE Capital, and as many pieces of GE's insurance business as others would buy.

He bought a power business from Alstom, the French railway company, and an oil and gas equipment firm, which he merged with the company's Baker Hughes division. He shed NBCUniversal, GE Water, GE Appliances and dozens of other businesses.

And he bought back stock. Lots and lots of stock: some $29 billion worth during his last three years, according to the Journal. In the fall of 2015, Trian Fund Management LP, the hedge fund run by the shareholder activist Nelson Peltz, bought about one percent of the stock. It did so not because Peltz was critical of the company but because he felt that GE under Immelt had undergone a transformation that investors had failed to notice. Trian's primary recommendation: more stock buybacks.

From then on, the stock basically bumped up and down until Immelt left. His biggest mistake, it seems clear, was his failure to see that GE's power unit was in trouble--and that the Alstom deal was mistimed. When Immelt finally had to acknowledge a big earnings shortfall, his credibility was damaged.

But I also think that he wound up being spooked by Wall Street's incessant demands that he get the stock price up, which caused him to make earnings promises that turned out to be impossible to keep.

Critics point out that the stock fell 25 percent during Immelt's 16 years. But when he took over, GE stock had a multiple of about 40. When he left it was still in the mid-20s. Do you know what Apple's multiple is? A little over 18. GE is not, and never was, a growth company, Jack Welch notwithstanding. It needed to return to a multiple more befitting a 126-year-old conglomerate that people own primarily for the dividend. That, in large part, is what's been happening.

Here's a final chart, which tracks GE stock during John Flannery's first year as chief executive.

It's ugly, isn't it? But nobody has yet criticized Flannery because he has ostentatiously cut costs and promised to bring GE back. His first year has been an implicit rebuke of Immelt's tenure. Trian, which amazingly has been spared criticism, now has a representative on the board. There's been some rumbling about breaking up the company, but it is hard to believe that a GE lifer like Flannery would really go down that road.

The stock is now around $13.50, down from $30 when he took over. Let's suppose that it doubles over the next year. (It won't, but just suppose.) That would make it a $27 stock. Would that mean that Flannery did a good job reviving the stock? Or would it mean that he remains an underperformer because the stock is still lower than when Immelt left? If it's the latter, then maybe then he'll understand what it was like to be Jeff Immelt.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg View columnist. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is the co-author of "Indentured: The Inside Story of the Rebellion Against the NCAA."

For more columns from Bloomberg View, visit http://www.bloomberg.com/view.

©2018 Bloomberg L.P.

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