Ten years after he took the helm of General Electric Co., Jeffrey Immelt is searching for the formula that will revitalize the company and secure his position as chairman and chief executive for another decade.
But the 55-year old CEO is facing headwinds. GE's market capitalization has dropped to about $195 billion from $298 billion in August 2008, before the financial crisis hit. The company is still managing losses in its massive real estate portfolio and shrinking its GE Capital division that had ballooned to more than $600 billion in assets before the crisis. With second quarter earnings coming this Friday, Immelt will again try to pique Wall Street's interest and regain its trust. Analysts expect a modest increase from last year.
Bad Choices, Bad Results
Immelt lost credibility between 2007 and 2010 after real estate and finance companies that GE owned took a beating in the recession. In early 2009, GE lost its triple-A credit rating and cut its quarterly dividend by 68 percent. As the company's stock price dropped from $41.03 in October 2007 to $6.66 in February 2009, many investors and retirees found themselves with shrunken portfolios, dividends and stock values.
Still, people close to Immelt say he is tirelessly devoted to America's largest conglomerate, the company Thomas Edison spawned in the late 1800s. Many at GE believe Immelt (whose father worked at GE) would like to spend the next 10 years there and go down in corporate history with as illustrious a record as his predecessor, Jack Welch, who led the company from 1981-2001, when revenues more than quadrupled and its market value rose to $410 billion.
Welch also left Immelt with a few challenges, including problematic insurance and plastics businesses to sell and the repercussions of a botched attempt to acquire Honeywell Inc. And Immelt became CEO in September 2001, a few days before terrorist attacks rattled the economy and the insurance industry, where GE was a major player and faced heavy losses.
But Immelt can't blame all his woes on being dealt a bad hand. He “made capital allocation mistakes under his own watch” said Jeff Sprague, an analyst who follows GE at Vertical Research Partners. He points to expansion into homeland security, real estate and the mortgage industry as lousy moves, heading directly into overvalued bubbles. (The company declined to make Immelt available for comment for this article and he didn’t respond to emailed questions. Welch also didn’t respond to requests for comment.)
From 2001 until mid-2010, GE went on a shopping spree and announced 624 deals for $181.9 billion of acquisitions, according to Dealogic. Most of the money went into real estate, with 93 deals totaling $42.9 billion, and finance, with 115 deals for $42.5 billion. Most notably, it acquired sub-prime lender WMC Mortgage in 2004 for an undisclosed sum. The Burbank, Calif., company made $33.2 billion in loans in 2006 and ranked fifth among sub-prime lenders, according to trade publication Inside B&C Lending.
Blowing the Big One
In 2006, senior leadership of GE Real Estate met with Immelt in an offsite strategy session and Michael Pralle, then CEO of the real estate division, and his team suggested that GE sell 51 percent of its real estate assets as a way to cash in from the real estate boom and to protect the company from losses and risk of a bubble.
People present at the meeting say Mr. Immelt rejected the proposal as the "dumbest f***ing idea" and said, "Why would I sell half of the best real estate business in the world?" But real estate took the biggest hit during the recession and damaged the company severely. In 2007, GE abandoned subprime lending and sold WMC for $100 million after a total of about $1 billion in reported losses.
Amid the company’s woes, the government threw GE a life preserver in the form of loans from the Federal Reserve and the FDIC's Temporary Liquidity Guarantee Program in 2008 and 2009. Now, as the company continues to manage foreclosures, payment delinquencies and credit losses, its commercial real estate division alone chalked up a $358 million loss in the first quarter of 2011. Keith Sherin, chief financial officer said during the earnings conference call that the company is “seeing early signs of improvement” in real estate.
Crawling Out of the Hole
GE has taken steps to stabilize its operations and its shareholder base. The stock still trades at less than $20 a share but the company has increased its dividend three times in nine months and plans to increase it more. It's also considering buying back shares, which would increase per-share earnings and likely boost the share price. It also plans, by October, to repay Warren Buffett for the $3 billion of preferred shares he bought in GE in 2009. (Buffett stands to make a $1.2 billion profit on the investment.)
Earnings rose 15 percent last year and GE paid Immelt $21.41 million in total compensation in 2010, including $3.3 million in salary, two million stock options and a $4 million bonus – the first he’s taken since 2007.
In January, President Obama named Immelt to head the new Council on Jobs and Competitiveness, charged with finding ways to improve the economy, increase U.S. exports and expand hiring in the U.S. – issues he also faces at GE.
In the past decade, GE executives and board members have had several discussions about how large GE or GE Capital should become. "There was a belief that GE could handle additional growth and handle it well because of the managerial discipline and systems inside the company," said Robert Swieringa, a GE board member and an accounting professor at Cornell University. "Today, we might come to a different conclusion."
The choice of where to spend money now, Immelt said during the conference call after the company's first quarter earnings report April, “is key for GE.” In the past year, the bulk of GE's deal-making has been in what it calls “fast growth energy” areas such as the $3.2 billion deal for 90 percent of power-equipment maker Converteam in March, $3 billion for oil-and-gas equipment maker Dresser Inc. in October, $2.8 billion for oilfield services firm John Wood Group Plc in February and $1.25 billion for deepwater-drilling specialist Wellstream Holdings PLC December.
“Our major transactions are done for 2011,” said Mr. Immelt during the first quarter call, noting that GE wouldn't look for deals larger than $3 billion. Instead, executives say, GE will spend more on research and development to commercialize existing technologies. “Immelt will have to set a course and reinforce it with action,” said Sprague.