Rescue Memo: Jeffrey R. Immelt
To: Jeffrey Immelt
From: Jack Flack
Subject: Free to Be Jeff's G.E.
Few C.E.O.'s understand business spin as well as you do. But after last week's fun, I can't resist offering three observations and three recommendations.
Let's start the observations.
1. It's now about you.
Until last week, the G.E. story concentrated on a once-vaunted company treading water in the new century. Analysts, shareholders and journalists may have increasingly questioned whether the massive conglomerate model was still appropriate, but your leadership was not doubted, even in immediate aftermath of the earnings miss.
But then your mentor went on CNBC and personalized things, howling that you had lost credibility, and giving the Wall Street Journal, the New York Times and the rest of the pack perfect reason to do the same. I know he backtracked after he was criticized. But once the story has been forwarded, you can't rewind it, and you'll have to keep it moving.
2. The story needed to change anyway.
G.E.'s golden past has become a steel cage. The 40-plus price-to-earnings multiple came from a nutty euphoria generated by recurring Fortune covers, Six-Sigma fever, unnaturally consistent earnings and Welch's need to publicly front the narrative. A revered story about the G.E. formula was created, and now you and your company are its prisoners.
Understand that you will not deliver the shareholder returns of the 1990s by employing the strategies of the 1990s, no matter how nicely those strategies have been incrementally improved.
You know G.E. was never as good as it was hyped, and you understand what had to happen every quarter to deliver the required numbers. You also know that G.E. is far stronger than its current valuation, but that strength is somehow not being properly recognized by the Street. That's because.
3. The model can't win.
The business model is no longer simply questioned; it is widely assumed to be broken.
Yes, you have dramatically changed the components, creating a much better portfolio of businesses. But the overall model is still that of a mass conglomerate. That approach might well work, in terms of operational performance. But it can't win, at least in terms of stock price appreciation.
Why? Because the Street has decided to you are too big and complicated for either management or industrial analysts to understand, and that you've got businesses with completely different fundamentals that cannot be properly valued within the hull of the aircraft carrier.
That shallow logic undoubtedly irks you, because you appreciate the competitive value of unmatched scale. You likely resent the psychology of the Street, because it undervalues so many things you understand from actually having run the business. But unless you are content with the stock continuing to under-perform the business, the only way you'll start winning the valuation game is to change the game itself.
And until you do, the dynamic will get worse, not better. The company's revenue is now more than twice the size of the G.E. you inherited, and you will likely double its size at an even quicker rate in the years ahead. As the company gets bigger, you simply will not be able to deliver results that sparkle enough to convert the disbelievers in your "totality" argument.
So what's the way forward? Here are my three recommendations:
1. Embrace the Welch outburst as a turning point.
Nobody in business has more media mileage than Welch, and so you should understand the incident was not a careless mistake. It was an intuitive signal from someone who is highly invested in G.E.'s past. He defended the business model and attacked you, effectively notifying the world that you and G.E. are not inseparable.
He actually did you a favor by implicitly demonstrating that the old G.E. magic has clearly passed its sell-by date. If that doesn't give you permission to create your own model, nothing will.
2. Change your language.
Quit saying you don't want to be defensive or stubborn about the strategy, which only confirms you're being defensive and stubborn about the strategy. Instead say, at the upcoming shareholder meeting, say something like, "We believe our current business model carries unique benefits, and we would never abandon those competitive advantages unless there were compelling benefits for our shareholders." The analysts will assume that you're at least evaluating the possibilities, which will loosen things up considerably.
3. Take it back to the core.
The only way to really change the game to one you can win is to change your structure. Specifically, you must refocus the company on Industrial and Infrastructure. Not by coincidence, those are not only the businesses G.E. understands best, but also the ones that attract the best multiples.
Here's how the story will play best.
- Sell NBC Universal to an entertainment player. Stop assuming you can get NBC back to its glory days, and get the deal done before the Olympics if you can. I know owning a network, not to mention having the Squawk Box guys on staff, is nice. But the longer you hang onto a show biz operation that is so different from your other sectors, the more it will be perceived as an irrational vanity holding.
- Bundle G.E. Finance and G.E. Money together and spin them off to your shareholders as a separate entity (without "G.E." in the name). This will allow the natural P/E of your core businesses to shine through, without having to sell during a buyer's market.
- Nobody really understands your Healthcare business, so you can get rid of it however Wanchoo sees fit.
You'll be surprised how taking things back to the core will energize your people and the stock. You'll also put yourself in a far better position to make "Ecomagination" the theme that defines your G.E. as the strongest numbers will better shine through.
Oh, one last thing. You obviously need to have a man-to-man chat with Welch. He genuinely believes he was trying to help, which indicates how much he's lost perspective. Humbly explain you need him to be as loyal to you and your future as you have been to him and his past.
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