Kryptonite Caused GE's Miss
The sub-prime problem is Kryptonite to GE.
I'll get to that in a minute, but before I do, a brief review. Last week, I questioned CNBC's embarrassingly softball interview of GE CEO Jeff Immelt. As noted, it would have behooved Immelt to demand his reporters ask him tough questions in order to protect the NBC/CNBC brand.
I suggested ordering the anchors not to go soft on him: "I expect you to maintain our reputation as the pre-eminent business news channel, and if you are too soft on me, it costs the company its reputation. Ask me tough questions. Raise difficult issues. Challenge me as if this were 60 Minutes. Anyone who pulls their punches or throws me a softball question is fired."
That did not happen.
Now, less than a week later, both the WSJ and the NYT are questioning GE's strategies. And even more intriguingly, analysts are rethinking their decade of unswerving support about this whole industrial conglomerate thingie.
As is so often the case, many of the fundie guys completely miss the point. They seem to barely get just why GE missed so badly this quarter. Even worse, they misunderstand how GE was such a wonderfully consistent and predictable beat-by-a-penny machine for so long.
The answer to both of these issues can be summed up in two words: GE Capital.
Over the years, GE Capital was this wonderful black box straight from planet Krypton. It had super powers under the Earth's yellow sun that other merely mortal companies did not. Jack Welch played the role of Superman, with an ability to make this enormous global conglomerate meet or beat every quarter, regardless of economic conditions. His unearthly powers were unmatched by other companies.
Transparency? Ha! No analyst ever really knew what was going on in there. It was a highly leveraged hedge fund, but that never really mattered, just so long as GE kept up the illusion that these profits were the result of ordinary industrial -- rather than leveraged financial -- operations.
Unfortunately for Immelt, he is facing not just a run of the mill domestic slowdown, but a much more important problem for GE: The credit crunch and subprime debacle. This has hamstrung GE Capital's ability to pull a penny or two out as necessary.
In other words, sub-prime is Kryptonite to GE. Not only has it lost its ability to fly and repel bullets -- i.e., beat every quarter, regardless -- but it actually weighed the company's earnings down with its losses.
Jack Welch went on CNBC yesterday, and again today, to defend the GE conglomerate model; it was a futile effort to those who know how GE managed their earnings for so many years during the Welch regime. His appearance only served to remind viewers of how wonderful life was when Jack's magic black box had all its superpowers. Even worse, Immelt is stuck with a superhero -- but no superpowers.
GE Capital has been exposed to Kryptonite, and as everyone knows, when exposed to particles of its home planet, Superman becomes powerless.
As has GE Capital. . .
>
Previously:
Surprise: Gee! No, G.E.
http://bigpicture.typepad.com/comments/2008/04/gee-no-ge.html
Sources:
G.E.’s Shortfall Calls Credibility Into Question
NELSON D. SCHWARTZ and CLAUDIA H. DEUTSCH
NYT, April 17, 2008
http://www.nytimes.com/2008/04/17/business/17electric.html
Embattled GE CEO Defends Strategy
Immelt Scolded By Welch on TV; Appliance Sale?
KATHRYN KRANHOLD and CAROL HYMOWITZ
WSJ, April 17, 2008; Page A1
http://online.wsj.com/article/SB120839179207621423.html
Thursday, April 17, 2008 | 07:26 AM | Permalink
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Comments
Does it make any sense for the same company to build aircraft engines, light bulbs, run a finance arm and own an entertainment network? I say without a dout NO. Conflicts and inefficiencies inherently abound, not the least of which I commented under the O'Neill blog entry that Welch's retraction on CNBC today of calling Immelt a screw-up yesterday made me want to hurl. The only reason to have all these different businesses combined was to feed Welch's massive ego. It would unlock value to split the company up.
Posted by: Steve Barry | Apr 17, 2008 7:53:35 AM
If investors want to diversify, they can do it by buying funds or different companies...they don't need GE to do it for them.
And since so many articles are out today about what Welch said on CNBC yesterday, I am awaiting a torrent tomorrow about his pitiful retraction this morning...here, see this garbage for yourself
Posted by: Steve Barry | Apr 17, 2008 8:01:15 AM
Welch should join Greenspan on the "Legacy Defense Tour".
Posted by: Glenn | Apr 17, 2008 8:02:11 AM
Ahh... back to the halcyon days of LTV!! But I'm showing my age...
Posted by: EB | Apr 17, 2008 8:07:47 AM
Welch in my opinion was made into some sort of ubermanager when in reality he didn't have to deal with anything like what Immelt is facing.
He had such unique advantages as the CEO of a company that included a defense contracting business during the Reagan military buildup, and a consumer business in the unprecedented expansion of consumer credit during both decades, one of the oldest American industrial companies, etc.
Then he disgraced himself with the absurd retirement package which would have been too much for Queen Elizabeth. Oh and then dumped his second wife for a woman half his age.
GE turned into a bank and is suffering as a bank would in these turbulent markets. Jack Welch had a lot to do with that.
Posted by: Wade Black | Apr 17, 2008 8:38:27 AM
Profit warnings rarely happen in singles. I wouldn't be shocked if they miss at the next qtrly results
Posted by: Lloyd | Apr 17, 2008 8:48:37 AM
welch was one of the great earnings manipulators of his era. as you pointed out, ge capital was the engine for earnings manipulation. i've looked at many ge 10k's over the years and a lot of fine print stuff was going on during his years. look at the "booked" loss on the insurance business last year. gee, they were underreserved? i'm shocked! extending the depreciatable (sp)life of their plane leasing business? sure, adds a couple of hundred million to the income line. this is old news, immelt has been trying to clean things up, but ge is/was the underrated star of accounting manipulation.
Posted by: clipb | Apr 17, 2008 8:52:39 AM
EB,
Damn guy, we're from the same era! LTV, Gulf & Western, ITT, Teledyne and Bernie Cornfeld's Fund Of Funds!
Personally I have wondered for years when the black box of financial engineering would blow up at GE. I will say I LOVE the other businesses they are in.
When a company decides to get into the shylockery business, they lose some measure of credibility...
Another 'financial engineering' company is IBM, but that's a saga for another day.
Posted by: Ross | Apr 17, 2008 8:53:34 AM
Jack Welch..ergo, Immelt is not as good a number BS'er as I was. The flies are coming out of the closets now. Talk about drowning in your own kool-aid.
Posted by: stuart | Apr 17, 2008 9:02:41 AM
I must retract a portion of my prior comment that I love GE's other businesses.
I dislike also their cartoon network, CNBC.
Posted by: Ross | Apr 17, 2008 9:11:56 AM
Damn, everybody remembers the 60s when conglomerates were the new way....they all went down in flames and gotta agree welch was a master manipulator of numbers, like taking the overvalue in the pension fund and bringing it to the bottom line...read those 10Qs and see for yourself....he was full of it then and he's full of it now...
Posted by: grumpyoldvet | Apr 17, 2008 9:13:34 AM
Any company that consistently makes "the number" is managing earnings. Nothing goes up in a straight line and if you are taking any risks, you will make mistakes in judgement. The unwind of these managements can be very long. Just take a look at KO which managed earnings under the great Roberto and Ivester till the clock ran out on them.
Posted by: larster | Apr 17, 2008 9:37:56 AM
Perhaps CNBC should have unleashed Charlie Gasparino on Immelt. That guy can NOT have a conversation without it turning confrontational.
Posted by: Trader Mike | Apr 17, 2008 9:42:08 AM
Mike Metz advised staying away from GE for just this reason on the NBR a few months back. A pro's pro in my eyes.
Posted by: catman | Apr 17, 2008 10:01:02 AM
The article is right it is the credit crunch that caused GE to miss the targets but not only because GE capital lost money. The reality is one of the key ways GE manages their earning is through buying and selling companies/business units/divisions out of GE capital.
If they need another $200 M to hit the targets they just sell one of the thousands of divisions they have. The slowing economy hurt their bottom line and the credit crunch prevented them from selling or buying the assets necessary to hit the targets anyway.
What value does a conglomerate have? Well if the company management culture really is superior to the average company then that should provide value across a wide range of industries. I for one do believe they have a better management and for them the conglomerate is fine. I do question the value of NBC as I don't think the management culture adds much value to the entertainment industry. But people have been asking them about NBC for many years.
Posted by: Dominic | Apr 17, 2008 10:06:11 AM
What would an analyst (investment peddlers) rather have happen...
A company that hit's it's earning numbers for 5 years straight & then has a massive write down that completely wipes out these so called earnings.
Or a company that "misses" every other quarter, (whatever hell that means,,, isn't the analyst that miss?) but in 5 years has made money?
Posted by: steve | Apr 17, 2008 10:08:54 AM
holy crap... -24...
Wait for it.... Economists were "surprised" by the poor Philly fed index. We need a new batch of economists.
Posted by: stuart | Apr 17, 2008 10:14:45 AM
Probably your best post ever. It is about time someone called out Mr. financial manipulator.
I guess Welch doesn't remember IBM paying a fine for Gerstner manipulating earnings the same way.
Earth to Jack, the days of Enron are over, you can't do that anymore, duh.
And speaking of the genius, have ANY of his disciples succeeded after him? I mean Nardelli ruined Home Depot and is doing the same for Chrysler. That guy at Albertson's didn't work out too well and then weren't there some that bankrupted the company?
This is the same guy that prided himself on "firing" the bottom 10% every year. If he was so damn smart, why do only 90% of his hires make it? 90% is no even an "" in Georgia schools.
Posted by: me | Apr 17, 2008 11:28:17 AM
While Welch was a good CEO, no way was he "the best CEO of all time" as some folks posited. A lot of his/GE's success was simply timing - proving that one should never confuse brains with a bull market...
Posted by: ed | Apr 17, 2008 12:15:05 PM
When Welch was in charge every division was first or second in market share in their industry. No fiddling with numbers needed.
Today using NBC as an example, NBC is 4 of 4 in broadcast and MSNBC is 3 of 3 in cable news, and Immelt doesn't care.
Posted by: Dave | Apr 17, 2008 12:46:31 PM
I expect you to maintain our reputation as the pre-eminent business news channel
You're presuming they had such a reputation to defend. CNBC has always pandered to the worst hyperactive market cheerleader instincts, the plastic must-always-be-positive vacuousness of corporate PR.
Posted by: Mike G | Apr 17, 2008 2:32:50 PM
Yes, Welch basically resigned during a firestorm of ethics problems! His wives were fighting it out, and the past one outed him while the current one was using her (conflict of interest) position to get his books and articles published, and to schedule speaking engagements.
Puhleeeze.....
Posted by: Kevin W | Apr 17, 2008 5:25:09 PM
NBC's value to welch wasn't as a generator of earnings but as a lever of popular perceptions. remember, welch ordered john ellis and his other lackeys at nbc to call the election for bush in 2000. reality for welch is an infinitely plastic substance anyway, which he can reshape at a moment's notice to suit his tactical advantage. it's a very rove-ian outlook. he has an imperial mindset, and he arrogates to himself the emperor's prerogative to reshape reality to his liking.
for the record, i'm one of the (former) harvard business review editors who revolted against his terrifying attempt--aided and abetted by his hideous moll, suzy wetlaufer--to corrupt and take over the harvard business review. he has told someone we know in common that he (welch) hates me. i consider it a singular honor.
if you want to know why the harvard business school didn't try to stop him, consider that the school's number-two dean at the time was jim cash, a ge director. nasty, nasty, dirty business. the whole story has never come out.
Posted by: he hate me | Apr 18, 2008 10:23:45 AM
