Immelt Vs. Welch

http://www.investors.com/NewsAndAnalysis/Article/581295/201108121608/A-Tale-Of-Two-Chiefs-GEs-Immelt-Vs-Welch.htm

By GARY M. STERN, FOR INVESTOR'S BUSINESS DAILY
Posted 08/12/2011 04:08 PM ET

Winning was everything to Jack Welch. The CEO of General Electric (GE) from 1981 to 2001 described his main mission in his best-selling "Winning" as making GE "the most competitive enterprise in the world by being No. 1 and 2 in every market." Businesses that weren't No. 1 or 2 were fixed, sold or discarded.

Being the dominant business in many markets boosted GE's financial performance. Under Welch, GE's revenue rose from $26.8 billion in 1981 to $130 billion in 2001. Its market cap skyrocketed from $12 billion to $280 billion. Welch was a winner.

Under successor Jeffrey Immelt, GE's faced tougher times, slashing its dividend and seeing its share price falter. How does Immelt's management style differ from Welch's? And is GE ripe to regain its mojo?

Immelt, Welch's successor since 2001, has faced a tougher road boosting GE's revenue and share price. When Immelt assumed the mantle, GE's stock sold for $40 a share. But earlier this year, its stock hovered under $20, about half of what it was under Welch.

Immelt's modified some of Welch's precepts about making every business a leader, says Daniel Holland, an equities analyst at Morningstar in Chicago, who covers GE. Immelt has strengthened its business in energy, health care and aerospace markets but avoided selling off many less-than-stellar businesses.

Different Managing Styles

Holland describes Immelt's management style as "more collaborative" than Welch's. GE's senior managers describe Immelt as "more approachable at working out issues and getting everyone involved" to find solutions, Holland says. Welch solved problems by obtaining data and making executive decisions.

Welch created a Darwinian culture where the strong thrived and the weakest performers fell by the wayside. He urged managers to separate employees into the top 20, middle 70 and bottom 10, identify and cultivate staff who had the skills to become leaders, and ax the bottom 10%.

But GE paid a price for slashing the bottom rung of performers. When GE cut 10% of its senior execs, many "valuable assets were walking out the door," Holland said. Immelt has been more tolerant, giving senior execs time to develop, halting the talent drain.

One reason GE stock nose-dived under Immelt was its lofty valuation of 60 times earnings couldn't be sustained. Since most industrial conglomerates are valued at 15 to 20 times earnings, GE returned to earth by 2011, trading until the recent market tumult at about 15 times earnings.

Under Welch, GE Capital was a money dynamo, generating about 40% of revenue. By overly relying on GE Capital, it "began to look more like a financial than an industrial firm," Holland said. Moreover, its commercial real-estate portfolio plunged during the financial crisis.

Immelt's New Recipe

Immelt developed a more balanced approach. In 2010 GE's profit depended on five major businesses: GE Technology Infrastructure, providing 39% of profit; GE Energy Infrastructure 35%; NBC Universal 12%; GE Capital 12%; and GE Consumer & Industrial 2%. Immelt sold off GE Plastics to Saudi Basic Industries for $11.6 billion in 2007. He also sold the troubled subprime mortgage business in 2007, cutting GE's losses.

GE's portfolio of diversified businesses should sustain steady profits and be less susceptible to downturns. Holland said, "Energy infrastructure forms the backbone of the firm's growth." That strategy should produce continued profits as the U.S. downplays reliance on coal and turns to natural gas, wind turbines and solar. Energy products take advantage of GE's strengths: global scale, service and highly engineered products.

Ill-Timed Coronation

Immelt was jinxed from the minute he was named to replace Welch on Sept. 7, 2001. Four days later, 9/11 happened, the stock market dipped and GE's insurance business lost $600 million in a day, notes David Magee, author of "Jeff Immelt and the New GE Way." Immelt has endured 9/11, a deep recession and still managed to turn around GE's business mix.

Change and evolution are the cornerstones of Immelt's management style. Immelt's most strategic decision at GE was "remaking the business," Magee said. Immelt inherited businesses like appliances and plastics, which were fading, and GE Capital, which was on the downswing.

Immelt invested heavily in R&D, acquired a wind business from Enron for a minimal amount, which turned into a multibillion-dollar business, and began to transform GE.

Magee faults Immelt for not saying five years ago that GE wasn't going to rebound quickly and needed a major overhaul. Nonetheless, Magee gives Immelt credit for redirecting "mature businesses that were worn out and changing GE into a 21st century company."

GE is showing signs of bouncing back. Until this month's stock market tumble, GE's share price had spiked 26% over the last year vs. a 23% rise in the Dow Jones industrial average. To keep the momentum going, Immelt must show "increased revenue and organic growth," Magee said.

Holland expects GE to produce "single-digit revenue growth over the next four years in GE's industrial business and improved results in health care, transportation and GE Capital." If those businesses prosper, Immelt could take a page out of Welch's playbook and start a new winning streak for GE.