Embattled GE CEO Defends Strategy

Embattled GE CEO Defends Strategy
Immelt Scolded By Welch on TV; Appliance Sale?

By KATHRYN KRANHOLD and CAROL HYMOWITZ
April 17, 2008; Page A1

Five days after General Electric Co. disappointed investors with a surprise first-quarter earnings slump, Chief Executive Jeffrey R. Immelt defended his strategy and dismissed cries to split up and remake the conglomerate.

But even as he moves to address rising investor pressure, he came under criticism Wednesday from another important constituent: GE's high-profile former CEO, Jack Welch.

HAPPIER DAYS: JackWelch, shown here with successor Jeffrey Immelt in 2000, yesterday criticized his protégé.

Mr. Immelt has a "credibility problem," Mr. Welch said on CNBC, a cable network owned by GE. Citing GE's missed earnings forecast, he said: "Here's the screw-up: You made a promise that you'd deliver this, and you missed three weeks later."

Mr. Welch defended his former protégé and GE's sprawling portfolio of businesses in a subsequent interview. "I truly believe this nonsense about breaking up GE and Immelt's in trouble is crazy," Mr. Welch said.

But his unprecedented public criticism of Mr. Immelt -- who declined to respond -- points to the rising pressure on GE's chief. Mr. Immelt faces conflicting cries to sell businesses and remake the company.
A Letdown
"We let people down. That's not what we want people to expect of GE," said Mr. Immelt in one of his first interviews since GE on Friday reported an unexpected drop in first-quarter earnings and lowered its forecast for the rest of the year. It prompted the biggest one-day decline in GE shares in more than 20 years.

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Mr. Immelt, 52 years old, said his team will shed underperforming businesses, as they have done in recent years, but wouldn't necessarily accelerate sales. "We're going to continue to be very aggressive around the portfolio," he said. Parts of GE's consumer-finance business, including its private-label credit-card unit, already are on the block. One person close to the company said GE may sell its venerable appliance unit.
He also said weak performers among the company's executive ranks won't be kept on. "This has always been a performance company -- and that didn't change in the first quarter of this year," he said. Managers who are considered underperformers would be reassigned or leave, said one person familiar with the matter.
Mr. Immelt stressed that GE's earnings miss stemmed primarily from the credit crisis, which forced the company to record expenses to reduce the value of loans and prevented it from completing real-estate sales at the end of the quarter.
"The last two weeks of March proved as difficult as any time we've seen," Mr. Immelt said. "You have to be fair-minded," he added.
On his CNBC appearance, Mr. Welch said, "I'd be shocked beyond belief and I'd get a gun out and shoot him if he doesn't make what he promised now." But in an interview afterward, Mr. Welch defended the man he chose over two other candidates to replace him 6½ years ago. "He got his a- kicked because he said one thing and did another. That's the first time. This guy has a hell of a track record," he said.
GE's Portfolio
Mr. Welch also defended GE's portfolio, which he managed for 20 years and spans businesses as diverse as jet engines, movies and credit cards. Many of those businesses were added by Mr. Welch during his tenure.
Mr. Welch's public criticism of the man he mentored points to differences in their management philosophies. Mr. Welch favored boosting returns through cost cutting and deals, while Mr. Immelt has focused on internal growth.
"Jeff is moving in all the right directions to create growth for the future in what is a very difficult time and therefore will take time," said Warren Bennis, a business professor at the University of Southern California who has written about GE.
While he may sell some units, Mr. Immelt said he doesn't see a problem with GE's structure, and said he isn't planning a drastic overhaul. "I don't see big flaws in where the company is," he said. "We have a tremendous number of growth engines in energy, aviation, and other infrastructure businesses, in emerging markets and environmental technologies...and we've been able to use size to drive growth aggressively," he added.
Mr. Immelt, a 26-year GE veteran who has worked in a variety of businesses from appliances to health care, has shifted GE's portfolio to emphasize higher-growth technology businesses. He sold off the reinsurance business and GE's plastics unit and invested in biosciences, water treatment, security technologies and a film studio.
GE's diverse businesses have in the past balanced one another, even in tough times, to produce relatively smooth results. That formula failed in the first-quarter, however, when the credit-market problems in GE's finance units were compounded by slowdowns in its health-care, appliances and media businesses.
Some investors advocate dramatically simplifying the conglomerate, saying GE's mix of businesses no longer yields predictable results and may be too broad to manage effectively under one corporate roof. These investors suggest GE sell parts of its commercial-finance unit, such as real estate, or shed its media and entertainment group, NBC Universal.
'Shocked by the Results'
"I was shocked by the results," said JP Morgan analyst Steve Tusa. "GE has to take a look at the portfolio and reduce the complexity -- not only for financial management but to provide better predictability for investors," he added.
Citigroup analyst Jeff Sprague wrote in a report that "we appear stuck in a framework where something is always underperforming."

The complexity of Mr. Immelt's task is highlighted by the lack of consensus among his critics about what GE ought to sell, or whether it ought to sell anything at all. The financial-services units have helped GE's bottom line by lowering its tax rate and providing assets that can be sold to make up for shortfalls elsewhere. In addition, some analysts note that GE's industrial businesses benefit from providing financing to customers who buy GE equipment.

'Tough Spot'
Mr. Immelt is "in a tough spot. He can't create value by breaking it up or keeping it together," says Morgan Stanley analyst Scott Davis. He notes that Tyco International Ltd. broke itself into three companies but didn't create near-term value for shareholders.
And Jim Medvedeff, a senior analyst with Boston-based Evergreen Investments, which reported owning 11 million GE shares as of Dec. 31, said GE's industrial cash flows are expected to increase more than 10%, as projected in January. "It's a good thing," he says.
In the interview, Mr. Immelt said GE's business model is solid. "All those basic long-term growth drivers are still intact," he said.

Wall Street is still upset about getting no warning of GE's difficulties and concerned about how deep the problems are. Mr. Immelt said GE entered the final weeks of the quarter with a typical assortment of "opportunities and risks." This time, however, "things that were opportunities didn't come through the way they would normally come through," he said.