Repositioning GE

Jeffrey Immelt, General Electric’s affable chief executive, never seems frustrated. His smile is invariably warm, his handshake welcoming, his demeanor calm and good-natured.

But make no mistake, this is one frustrated man. As he sees it, GE proves again and again that its diversified portfolio of businesses gives it an advantage over single-focused competitors. Where Immelt sees a group of businesses that build on each other’s technological, managerial and customer service strengths, however, investors see a mélange of companies that do not belong under the same umbrella. To make matters worse, GE derives about 45 percent of its revenue from financial services, a sector that, even in the best of times, trades at lower multiples than industrial companies do.

The upshot: GE shares have been getting hammered. Problem loans, a critically weak real estate market and troubles in the health care unit and with consumer finance in Japan converged on GE earlier this year. It reported first-quarter earnings of 43 cents a share. Analysts had forecast 51 cents, and furious investors sent the stock plummeting by 13 percent, to $32.05.

GE got back on its usual game — meet or beat expectations by a penny — last quarter, just in time to get swept up in the financial meltdown. GE Capital, in fact, has had no trouble financing itself and remains quite solvent. And GE still has a triple-A credit rating.

Still, the perception out there persists that GE is crumbling along with Wall Street firms. The U.S. government put the company on its no-short list. GE suspended its stock buyback program on September 25 and revised its full-year earnings estimate to $1.95 to $2.10 a share, from $2.20 to $2.30 a share. It raised $15 billion in capital in October, including a $3 billion investment from Warren Buffett and a $12 billion stock issue at $22.25 a share. Investors are spooked. GE’s shares, which peaked above $60 in 2000, have not made it out of the $20s for months. They were trading at $27.15 on October 2.

The irony, of course, is that, in the eight years he has been CEO, Immelt has dramatically reduced the number of businesses GE runs, while turning it into a truly international company that counts the governments of emerging countries as major customers. GE just created an $8 billion joint venture with Mubadala Development Co., a state investment vehicle in Abu Dhabi, to invest in areas such as clean energy. Mubadala has also promised to buy enough shares to make it one of GE’s ten largest shareholders.

Immelt is certain that he has hit on a winning strategy. In a recent conversation with Institutional Investor Contributing Writer Claudia Deutsch, he explained why.

Institutional Investor: Analysts and investors are constantly clamoring for you to completely break up GE. Why do you resist?

Immelt: This company has averaged 11 percent earnings growth over the past 30 years, while the S&P has averaged 7 percent. Our margins are invariably higher than those of our competitors. And if you look at businesses we’ve sold over the years — which one do you hear saying, ‘Wow, I’m performing like a champ now that I’m away from GE!’? Our businesses share best practices and intellectual capabilities, they share technologies, they offer scale. Everyone says we should sell NBC Universal, but I’m telling you, the people there don’t want to be sold.

But you have sold off chunks of GE. Reinsurance and plastics are gone. You’re selling your private-label credit card business and consumer lending in Japan. And you’ve just put legacy businesses like appliances and lighting up for auction. Aren’t you, de facto, breaking up the company?

Not at all. Yes, I’ve sold more than 40 percent of GE. Some businesses, like plastics, we probably should have sold in the late ’90s, when earnings had peaked and the number of competitors had already increased by a factor of four. But it was hard to be tough-minded about the portfolio when we were in such an artificially buoyant economy.

But you’re right, I never expected to reshape the portfolio to this extent. I certainly never expected that I’d sell reinsurance, for example. In 2001, 20 percent of our earnings were from insurance. We were a 50 P/E stock, and you sure don’t think of selling a business that provides that large a chunk of earnings.

But don’t forget, I’ve bought lots of companies too. Renewable energy, water, life sciences, cable television — all these businesses were built on companies we acquired.

When you took over GE, it had 11 businesses. You reduced that to six a while ago. And recently, you whittled it to four. It sure looks like you are at least trying to give the appearance of deconglomeratizing.

We’re simplifying the company, not dismantling it. And one of the benefits is that we can give some of our best leaders, people like John Rice [president of the technology infrastructure division] or Mike Neal [president of capital and capital services] or Jeff Zucker [president of NBC Universal], even more responsibility than they have now.

Health care, the unit you last ran, was once one of GE’s shining stars. But under the new structure, it no longer reports to the CEO. Have you decided to downplay that business?

Anything but. Half of our television advertising budget is devoted to health care. It is one of this company’s most important faces.

You have publicly said that you expect 60 percent of GE’s revenue to come from outside the U.S. by 2010. Does the conglomerate structure help or hinder you overseas?

It definitely helps.We have a global CEO program, where we teach some of our methods to the heads of companies from Africa or India or Southeast Asia. And I’m telling you, they all crave to be conglomerates, they think it’s the best business structure around.

And we sell to governments that don’t have lots of managers and MBAs, that want big relationships that can simplify their lives. It is much simpler to buy aircraft engines and medical equipment and power systems from one big company.

GE’s disparate businesses blanketed the Beijing Olympics. GE equipment provided water and electricity, NBC broadcast the games. Were the Olympics as lucrative for the company as it looked?

Sure, we made money on the Olympics, but far more important, it will have been a springboard for rapid future growth. The GE name was plastered all over China, not just as the parent of NBC but as a driver of technology. You got off your plane in Beijing, and there were our ads, right in the airport. And there, right on the Olympics ground, was our "Imagination Center" showcasing all of our technologies. The Olympics let us really show the interplay we get between media and infrastructure businesses. It’s the kind of thing that Disney or Honeywell can’t do.

One thing you couldn’t really show off at the Olympics was the hefty portfolio of financial services, which still provides about 45 percent of your revenue. Isn’t that too high, particularly these days?

We try not to be constrained by boundary conditions, by the idea that you can’t invest in any good business. But, yes, there was a time when financial services represented more than half of earnings, and investors made it clear they weren’t comfortable with that. And in the past year financial services has become a really tough neighborhood to be in. We’re now on track to get up to 60 percent of earnings from industrial businesses.

That’s a major change for GE. Have there been other radical shifts in management philosophies on your watch?

For the past five years, we’ve really worked on repositioning the GE brand from consumer to industrial. We get a lot more brand equity from our ecomagination products than we ever got from appliances.

We are more customer-focused and more focused on technology and innovation. And, as we have globalized, we have embraced partnerships. Before, we wouldn’t have realized that to succeed in the Mideast we need a partner like Mubadala. I hate to call it less arrogance on our part — let’s just refer to it as more openness to learning from others.

What can GE offer a sovereign wealth fund in a rich country like Abu Dhabi?

We’ll build a headquarters and a research center in Abu Dhabi, and we’ll help develop people and skill sets. We’ll invest in Mubadala’s clean energy fund, they’ll put money in our industrial investment fun. It’s a true partnership, the kind they can’t get by investing in a hedge fund.

You are choosing to dump appliances and lighting, which, in the current housing environment, are a pretty tough sell. But why wouldn’t you want to be poised to jump into those markets when affluence hits consumers in China, India and other developing countries to which GE has pegged its future?

There are already 200 lighting companies and 50 appliance companies in China. And whoever buys the appliance division will continue to use the GE brand. We’ll pay close attention to quality, to make sure nothing threatens our reputation. But, overall, we’re better off sticking to high-tech infrastructure businesses as our calling cards overseas.