Friday, May 16, 2008

Immelt to Wall Street's Blackjack Dealers: “Hit Me!”

GE May Shed Storied Appliance Unit

May 15, 2008; Page A1

General Electric Co. is preparing to sell or divest itself of its century-old appliances business, one of the best-known American consumer brands, as Chief Executive Jeffrey Immelt seeks to revive his weakened conglomerate.

GE could receive between $5 billion and $8 billion from a sale of the business, according to people familiar with the matter. A sale would come as the company faces pressure to trim a portfolio that ranges from credit cards to aircraft engines to television broadcasting, following a disappointing first-quarter earnings report.
—The Wall Street Journal

“Gin rummy managerial behavior (discard your least promising business at each turn) is not our style.” —Warren E. Buffett, Berkshire Hathaway “Owner’s Manual”

“Hit me!” —Jeff Immelt, GE CEO, to Wall Street Investment Banking Blackjack Dealers

Not much more than a year after GE agreed to buy oil service company Vetco Gray from a private equity group for 3.5 times the PE group’s cost; and a bit less than a year after GE backed out of a head-scratching deal to buy two of Abbott Lab’s diagnostics businesses for what looked like 25-times trailing 12-month operating income; and one month after GE reported shockingly poor earnings from one of the few AAA credits left in this world, comes the announcement of further asset-shuffling at the American business icon: the sale of the GE appliance business.

What gives?

Did Jack Welch—whose on-air rant (“Here’s the screw-up: you made a promise that you’d deliver this and you missed three weeks later…”) helped loosen the fast-shifting earth beneath his successor’s feet so quickly that Immelt is now described as “embattled”—leave so much of a mess behind him after twenty years' worth of “delivering” on promises that nobody could stop the cracks from spreading under the whole foundation?

Or is Jeff Immelt really that bad a CEO?

If we had to bet, it'd be on the former, not the latter.

Jeff Matthews
I Am Not Making This Up

© 2008 Not Making This Up LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.


jimmy105 said...

I have long believed that Jack Welch's "roll up" style (acquiring businesses not because of their ability to add to the long term assets of GE, but because of accounting benefits for immediate gratification) of beating the number would come back to haunt GE. His appearances on CNBC and the fawning over him reminded me of the story of the emperor who wore no clothes. I think we're seeing that happen.

jimmy105 said...

As an aside to my above comment, doesn't it seem as if Helicopter Ben is interchangeable with Jeff Immelt?

John Hempton said...

Neither. Immelt sold plastics too - which hasn't had a great innovation for about 10 years.

Immelt buys tech which he can put through GEs sales machine (usually a good deal) or builds tech himself (in turbines - which is a better deal).

But the "storied" in GE appliances was 50 years ago.

Welch should have got rid of it too.

Immelt was neither shaken by Welch or that bad.

Within the financials - the one area I know really well - he is FANTASTIC.

Against that - the most problematic division in the last results was medical (not finance). Medical is Immelts old division.

That must hurt.

Tahoe Kid said...

What ever happened to the great GE so many folks were barking about at $42 last October? Time exposes the cracks in every company. For some, like GE, it just takes longer.

John Hempton said...

I was short GE at $55 many years ago - the biggest short position I ever had (at least at that time).

Sure Pets.Com was a better short - but in those days most of GE was a bad finance company. And it was 35 times. That was when people were really loopy about this stock.

Immelt has got rid of the mortgage insurer (darn good move that).

He has got rid of the US liability risk (ie litigation risk) business. That will probably be a good move.

He has got rid of the really crappy business of insuring people against needing to get into a nursing home. A brilliant move.

He got rid of plastics. That might not have been a good move. The input costs were killing them - and he did not like that. The input costs just went up and up. But the main use of the plastics was aerospace - and last I looked aerospace was having a massive massive boom - driven by the Chinese wanting to fly.

I wish I knew how the private equity buyers faired with the plastics. But my guess is that they probably did well.

He should have got rid of the appliance business two years ago. Appliances are housing cycle driven - and he is selling them WAY too late. He would have got a really good price a while ago. Its a billion dollars - and the timing is not fantastic.

The real puzzler though. The worst performing division in GE is medical. That was Immelt's own business.

The head-scratching acquisitions which Jeff M points to - that was in medical too.

In the area I know (finance) Immelt is fabulous.