GEWatcher- At Last...Spinoff strategy is accepted!

Since 2000, I have written several articles, my book The Secret to GE's Success, and numerous blogs suggesting to GE management that they could enhance shareholder value, maintain control over the GE Monogram and reduce complexity by creating "tracking stocks" and allowing GE stockholders to purchase parts of the company, as well as the whole company if they preferred.

These are some quotes from two of my articles in Chief Executive Magazine:

In March 2000 article entitled: "Succeeding a Legend" (note this article was writtend before Immelt was appointed and was addressed to all of the candidates for the job)

I wrote:

The first step in the evolution is to create at least three companies and establish tracking stocks:

1- TRADITIONAL GE. This would include the electrical, electro-mechanical and chemical based components of the company. Lighting, power systems, aircraft engine, and plastics would be part of this company. Its mission would be to continue to grow profitable sales and maintain strong positions, using the skills and resources of GE Capital as required. In essence, this is the continuation of the current strategies. There may be, however, some pruning required with Major Appliances as a disposition candidate.

2- GE FINANCIAL SERVICES. In essence, it is now a separate company and behaves like one. This company should aggressively but selectively continue to gain position and be the financial arm of the other components, which would enable GE to adapt to the dynamic changes in the industry. It may require the acquisition of or merger with a major financial services company.

3 GE TECHNOLOGY. This is the major change in the portfolio and Welch strategy. Jack elected not to be a major player in the information and communications, biotechnology and new IT-based markets. GE has made many acquisitions in the medical systems and communications area, but nothing real dramatic; most have been either line or market extensions. It has not really decided how to use NBC as a platform for the revolutions taking place in the information, communications and entertainment arenas. The new CEO must take decisive and major steps in these markets before it's too late. New ventures, creating new products and services and so on, all of which GE did before the Welch era.

By creating these three companies the new CEO would be able to focus each one and be positioned to participate in new markets. The tracking stocks are likely to increase overall stockholder value and reduce the need for debt. But most importantly, it would enable the company to clarify what it really is and develop the most appropriate management and teams to meet the unique needs of the three companies. Integration and communication need not suffer if they are managed.

In June, 2007 article entitled: Decision Time for Immelt and Buffett, I recommended:

Imagine if GE gives the investor an opportunity to invest in selective sectors of the company and not just in the total company portfolio. In this scenario, GE decides to offer stock in its key areas/sectors. For instance, it creates separate stock offerings in GE Healthcare, GE Infrastructure, GE Money, GE NBC/Universal, GE Commercial Financing and other key components of the company. These would replicate the current building blocks of the company. So investors could invest in either the total company or selective parts of the company. This is not unrealistic since many companies have done this and have been successful in doing so. Of course, this will require more evaluation.

· GE is major stockholder of new companies. The GE Corporation would continue. The company would only sell a part of the new companies and retain majority control over the businesses. I would recommend that GE retain 75 percent of the companies and sell the other 25 percent on the open market.

· GE would focus on maintaining GE traditional success factors. Under this new scenario, the GE corporate staff would be significantly reduced and focused on a few key areas. For instance, the company would continue to work on succession plans for the key management positions in the company and especially the next CEO. The corporate staff would monitor external changes and help the subsidiaries anticipate and respond to change, as well as change the portfolio as required. It would continue to have company wide training at all levels, take stands on political issues as needed and continue the strong financial, strategic and manpower networks that have contributed to its past success.

The anticipated results could be very positive to all of the key stakeholders. The stock should rise overall, the investor will have more options and the company will continue to retain its AAA rating and have a strong and deep bench.

Unfortunately, GE management ignored my recommendations, until July 10, 2008.

Because they have not been able to sell the appliance business, Immelt and team are now accepting the spin off idea as a viable strategic alternative. The only problem with "belated acceptance of the tracking stock/ spin off idea" is timing. Both the consumer and industrial products markets are now slow and negatively impacted by the global recession. The spin-off would have been more effective when everything was growing and not when they are declining.

However, as a GE stockholder and alumni, I am happy to see that the Immelt team is finally using its imagination to create stakeholder value. I believe that the employees of this new company will be better off being managed by their own experienced management and not by some foreign company that doesn't understand the culture and the "GE success factors".

In my book I cited five key elements to GE's success, one was Adaptability... which has enabled the company to adapt to change and this may be a sign that this trait is still alive in the GE management team.

Bill Rothschild, author of The Secret to GE's Success, now available in Chinese, Korean, Indonesian, Japanese, as well as many English versions.

GEWatcher - Why the rush?

Since 2000, I have written several articles, blogs and my book THE SECRET TO GE's SUCCESS and in all of them recommended that Immelt consider selling its traditional consumer and industrial businesses and focus on infrastructure, health care and other new technology based businesses, while using the financial services businesses to help sell the complex solutions and provide a means of managing short term earnings.

These are some of my comments:

• "There may be, however, some pruning required with Major Appliances as a disposition candidate. ("Succeeding a legend" Chief Executive Magazine- March 2000)
• "I think that broadcasting and even additional parts of the traditional GE lines, like major appliances and lighting, could be divested. These moves would permit the company to focus on its major solutions, technology business, while maintaining its strong financial services operations. (Decision Time for Immelt and Buffett Chief Executive Magazine- June 2007)

Therefore I am not against the disposition of the traditional GE, but I am concerned about the timing and appearance of panic. Why has Immelt decided to make these moves now, when the value of the traditional GE businesses are low and could get lower. Why is he now taking time and effort to be auctioneer and not trying to fix the problems he has? Why is the company increasingly looking like a "giant hedge fund" and not an operating business?

In my book, The Secret to GE's Success, I discussed the Welch era in-depth and had positive and negative assessments of his reign, but one of the things Jack did well was selling off assets and getting top dollar. I think that Immelt is not doing this. So why not?

Bill Rothschild, Rothschild Strategies Unlimited LLC.

"T" stands for TALENT (home grown)

As I was writing THE SECRET TO GE's SUCCESS, I concluded that I could use one word LATIN to summarize why GE has not only survived but prospered over 126 years while its peer companies, like Westinghouse, no longer exist. The T stands for TALENT, but not just the everyday type of talent, but HOME GROWN TALENT.

Since GE's beginning, led by Charles Coffin, who was the first CEO of General Electric, after Edison merged his company with Thomson Houston, GE has been committed to growing its own talent in all functions and at all leadership level. It did this by recruiting bright people from middle class backgrounds and providing a combination of training and tough evaluations. It was always competitive and the survival of the fittest.

Many think that it was Jack Welch was the architect of this type of tough minded "up or out" mentality, but this human resource strategy, started in the late 1890s and was continued by all of the leaders over the 126 years. (I personally experienced the selection and evaluation process and even held positions where I had to make the tough the decisions.)

Immelt has continued this heritage and it was clearly demonstrated this week when the head of the Aircraft engine business left and was immediately replaced. This is very rare in today's environment which I call the Just In Time SUCCESSION planning system. Most companies don't recruit early, train, evaluate and have a DEEP bench...they just wait until someone leaves, then they hire a "headhunter" to recruit someone from another company, which most often is GE.

GE and Immelt are to be applauded that they have continued the "GROW YOUR OWN" tradition and still have the deepest bench in all of American and probably global companies.

Unfortunately, as I pointed out in the conclusion of my book... GE is the first choice of most "head hunters" and they will make very attractive offers to the GE team. This is going to be a problem for GE as time goes on and many of the GE trained and developed executives and professionals are offer deals they can't resist. Further since they know who the best and brightest are they will move in and recruit others from the GE bench.

So, the issue is whether Immelt and his successors will continue to be the training ground for other companies or revert to the more opportunistic " JIT" system. I hope they continue since this is one of the reasons that GE continues to prosper and has differentiated itself from the rest of the "also-rans".

Bill Rothschild, author of THE SECRET TO GE's SUCCESS, now in Chinese, Indonesian, Korean, Japanese, Spanish and many English multi-media versions.

Complete confidence in the game plan...

I just received the Annual Meeting summary and am now completely convinced that Immelt and his team have no reservations about their game plan and its ultimate success. They have rationalized that the first quarter "miss" was a fluke and that what they are doing is right and it will make GE even greater.

Immelt accepts that the investment community and he stakeholders, reaction to his miss was justified, but they are "continuing looking in the mirror and asking the tough questions". He asserts " we will not let others define our future". He continues to stress his great results and that he has a great team that will do the job. He emphasizes the significant opportunities in Infrastructure ($10 trillion investments in the next decade) and takes great pride in "Ecomagination".

In short, Immelt appears to be totally convinced that he will win.... I hope he is right and that he doesn't repeat the first quarter surprise. Only the results will tell the total story...

Bill Rothschild, author of The Secret to GE's Success" now available in Korean, Chinese, Japanese, Indonesian, Spanish and English print and multimedia versions.

Putting the ELECTRIC back in General ELECTRIC

Edison started General Electric to provide total electrical solutions and to "light up the world". In 1893 his Edison General Electric merged with Thomson Houston to become General Electric. Up until the 1950s... the GE game plan was simple... create increasing demand for electricity by providing electrical products like light bulbs, irons, refrigerators, cooking products, etc. so that electric utilities required more generators, transformers, switchgear equipment and total systems. This was called the BENIGN CYCLE and it was the essence of GE.

In the 1950's GE moved into other products, primarily those that were by- products or offshoots of their electrical and chemical technologies, such as plastics, jet engines, locomotives etc. It added financial services to help provide financing to consumers and industrial/ commercial customers. Again this worked and GE grew.

In the 1960's, because of the Great Electrical Conspiracy (price fixing) GE's growth plateaued at $5 billion and so it created its GROWTH COUNCIL to identify markets growing faster than the GNP that GE has some expertise...this was the beginning of the massive diversification of the company. Diversification moved to "portfolio management" in the 1970s and it was the underpinning strategy of Welch and Immelt.

Interestingly today, GE is returning to its roots as a global leader in electrical systems. Even though it has spun off many of its consumer products and is in the process of selling home appliances, GE now offers a full array of generation products and systems and in recent months has received billions of dollars of orders to produce electrical systems in Iraq, Middle East and has become a leader in wind turbines.

GE is likely to benefit from the current need for the United States to reduce its dependence on oil since it is one of the leaders in Nuclear Energy and Wind Turbines, as well as being able to supply complete electrical systems. In addition, most of the electrical utilities have been harvesting their facilities and now need to invest in new generation, transmission and distributions systems.

This is a great illustration of history repeating itself and shows that it is beneficial to stay the course even when markets are down and out of popularity.

If you want to get the complete story of GE's successes and failures and the genius of GE's early leaders, read my book: The Secret to GE's Success.



Bill Rothschild, CEO of Rothschild Strategies Unlimited LLC and author of GEWatcher blogs.

From Surgeon to Risktaker/Undertakers

In 1993, when I wrote my book: Risktaker, Caretaker, Surgeon, Undertaker- the four faces to strategic leadership, I found that many of the major corporations were being led by Surgeons, that it individuals who were skilled at managing a strategic portfolio and divest or liquidate the "poor businesses" and invest in what they considered to be winners.

On the other hand, I had problems identifying leaders who thought that they were risk takers but in actually were undertakers. But today, this seems to be the most prevalent type of leader globally.

Almost every week, there is a story of individuals who were willing to bet the future of their companies on focusing on businesses that had immediate financial rewards, that have proven to be lead to the destruction on their companies. They didn't do their homework and were surprised that where they bet were major losers, such as sub-prime mortgages and other creative financial instruments. The strange thing about all of these undertaker leaders is that they have been personally rewarded to destroy their companies.

I hope that this is only a short time phenomena and that we will be able to have more real risk takers and caretakers who do their homework, bet on realism not wishful thinking and are more concerned about their companies than their own personal rewards.

Bill Rothschild, author of Risktaker, Caretaker, Surgeon, Undertaker- the four faces of strategic leadership.

GEWatcher 15- Financial Analysts have discovered what has always existed!

Open Season on GE!
Since Jeff Immelt and his team were unable to meet the "very high expectations" that they promised in the first quarter, GE has been under a microscope and many of the surprised "analysts" are now running in the opposite direction.

For instance: "C. Stephen Tusa Jr., who follows GE for JPMorgan Securities, cut his rating on
the stock to "neutral" (i.e., "hold") from "overweight" ("buy"), saying the company faces too
many near-term challenges -- including senior management's damaged credibility and the possibility that lower-level managers won't be willing to tell their hard-driving bosses the truth about things."

The result is that it is open season on GE and the stock has declined by over 20% since Immelt's miss.

But except for the Miss...nothing has changed!
Obviously, missing expectations is a serious problem since it impacts credibility. However, the Immelt's GO BIG/ GO GLOBAL/ PORTFOLIO CHANGE strategy is the same as it was when he took over and his management team and philosophies have not changed.

Immelt brags that he has sold over $50 billion in assets and acquired another $45 billion. He has moved business unit headquarters to Europe, aggressively targeted China, India, Middle East and has been even willing to invest in major research centers in "unsafe" areas like China and India. He has acquired financial service companies in Japan and Australia and then within four years put them on the block to be sold, while then making acquisitions in Poland.

Confusion about what GE really is.
Immelt has made GE into a giant global mutual/ hedge fund and made it clear that "no one and nothing is sacred." Of course this was the same philosophy of Jack Welch, but Immelt has made it even more complex since he had added systems, technological solutions oriented projects and businesses that were not part of the Welch game plan. The result is that GE is so complex that it appears that even the company leadership aren't sure what is going on.

It is clear to me that the disciplines of sound strategic thinking and review, which stressed being realistic and avoiding surprising yourself and the other key stakeholders, have been replaced with "imagination and dreaming programs" that stress innovation and creativity over sound business assessments. Tusa puts it this way: "We also think the high bar for success in such a competitive environment could create a scenario in which bad news is not tolerated, making necessary communication with senior-level managers a challenge until it's too late to fix."

Nothing really new... but concerns continue.

Last year, I wrote an article in the June,2007 issue of Chief Executive Magazine entitled: Decision Time for Immelt and Buffet and made the following recommendations

"Reduce Complexity

• Make It Simpler. Make the company less complex.


• Continue to Prune the Portfolio....I think that broadcasting and even additional parts of the traditional GE lines, like major appliances and lighting, could be divested. These moves would permit the company to focus on its major solutions, technology business, while maintaining its strong financial services operations. This portfolio approach may build more confidence among investors, since they recognize that the primary goal of the company is to continue to increase the bottom line.
  

What if neither works? In this case, I think we need to adopt the new company motto “Imagination at Work” and look for a more creative approach that may initiate the next stage of the company.

• 
  Let’s imagine that:
  

  · GE gives the investor an opportunity to invest in selective sectors of the company and not just in the total company portfolio. In this scenario, GE decides to offer stock in its key areas/sectors. For instance, it creates separate stock offerings in GE Healthcare, GE Infrastructure, GE Money, GE NBC/Universal, GE Commercial Financing and other key components of the company. These would replicate the current building blocks of the company. So investors could invest in either the total company or selective parts of the company. This is not unrealistic since many companies have done this and have been successful in doing so. Of course, this will require more evaluation.
  ·
  GE is major stockholder of new companies. The GE Corporation would continue. The company would only sell a part of the new companies and retain majority control over the businesses. I would recommend that GE retain 75 percent of the companies and sell the other 25 percent on the open market.
  ·
  GE would focus on maintaining GE traditional success factors. Under this new scenario, the GE corporate staff would be significantly reduced and focused on a few key areas. For instance, the company would continue to work on succession plans for the key management positions in the company and especially the next CEO. The corporate staff would monitor external changes and help the subsidiaries anticipate and respond to change, as well as change the portfolio as required. It would continue to have company wide training at all levels, take stands on political issues as needed and continue the strong financial, strategic and manpower networks that have contributed to its past success.

The anticipated results could be very positive to all of the key stakeholders. The stock should rise overall, the investor will have more options and the company will continue to retain its AAA rating and have a strong and deep bench.

In my latest book, The Secret to GE’s Success, I describe the company as remarkable, since it has had the ability to succeed and prosper for over 127 years. I use the word “Latin” to capture the five reasons for this success. These include leadership, adaptability, talent, influence and networks. Though all are important, I think one of the most important is the company’s ability to adapt and admit mistakes.
Immelt and his team have adapted and created a solid, though complex, game plan. (The real question is whether it will work and whether the investment community will reward the company if it does.
The verdict will be in within the next few years. I continue to believe GE is a remarkable company and hope that if and when the company must adapt, it will do so as effectively as it has in the past."

The point is that GE has not changed, Immelt continues to pursue his same strategy, but he has lost credibility because he missed his numbers and has downgraded his optimism of the past. Now the vultures are circling to see what they can pick apart and all of the key GE stakeholders are suffering.

I still assert that GE is TOO COMPLEX and that it must simplify the company and focus on not size and being global but having the best products and services in the segments it selects. It can't "be all things to all people", believe it can do anything because it is GE and continually act like a hedge and mutual fund, buying and selling assets and business. Further it can't have headquarters and R&D around the world since it is costly, inefficient, insecure and very costly.

GE leadership and management must renew the attributes that made it successful for over 127 years and not just change for the sake of change. The key element is willingness to admit mistakes and adapt to reality... this was done in the past and is one of the major reasons the company has not only survived but has prospered... a rare exception to most major companies over the past 100 years.

If you really want to understand GE issues and challenges, read my book and my many GEWatcher Blogs and then compare my insights and recommendations with the current situation. I still am a strong believer in GE but it must be able to admit mistakes and adapt and not just continue to purse "imagination dreams".

Bill Rothschild, author of The Secret to GE's Success... in six languages and a "global best seller" and GEWatcher blogs.