AS GROWTH FAILED to materialize, the price of GE’s shares stayed irritatingly stuck. The incredible growth under Welch just wasn’t resuming its climb. Whenever Immelt went on TV, he was always asked about the stock price. He knew it was the most important and most unforgiving yardstick used to measure the success of a corporate leader.
In the fall of 2003, GE shares were down 23 percent from the day Immelt became CEO. Like Welch before him, the new boss saw the route to a new era of earnings growth through acquisitions: he would buy success by making deals. Wasting no time, GE made three major moves over three consecutive days in October that showed the company’s enormous ambition.
It finalized its $14 billion purchase of the film and television assets of Vivendi, which would be rolled into NBC to create NBC Universal.
The next day GE closed the acquisition of Instrumentarium, a Finnish medical devices maker, for $2.4 billion as it sought to move its Healthcare business deeper into technology and patient monitoring.
Finally, the third day brought a deal to buy Amersham, a British life sciences company, for $9.5 billion, then the second-biggest acquisition that GE had ever made.
It was a lot to swallow for a company that was showing problems with its performance and whose young CEO had barely been in the job two years. A few months earlier, GE had agreed to pay the Dutch insurance giant Aegon $5.4 billion for most of the commercial lending business of Transamerica Finance Corporation.
To some, the turbo-charged deal-making looked like a series of desperate moves. In mid-October, the Economist remarked that “it was not wholly clear whether Jeffrey Immelt, the firm’s boss, was climbing out of a hole, or digging himself deeper in.”
Strategically, the deals seemed to make sense for the relevant divisions. The Amersham deal would bring the Healthcare division closer to the cutting edge of medicine. It was a long-term bet on the future of medicine, Immelt argued. Still, few could stomach the price he had paid.
GE had shelled out a price that was a 45 percent premium on Amersham’s stock price, measured from the day before the news of the deal leaked out. While Immelt and Sherin defended the deal, analysts openly questioned the rich premium. Even worse in the view of Wall Street was that GE had issued shares of its own stock in order to make the Amersham deal in the first place, further diluting a stock that wasn’t doing well to begin with and increasing the cost of the dividend paid on each share.
The deal made an impression on a lot of GE watchers. Some board members would later say that it had helped to form a poor impression of Immelt’s deal-making skills. The knock on Immelt was that he chased trends, arrived too late, and paid handsomely. One rival CEO joked that he was “fad surfing.”
That isn’t to say that Welch’s record had been unblemished. For instance, some had questioned the real value of NBC to a company like GE. But Welch loved the CNBC network, which was closely watched by CEOs, trading desks, and investment offices all over the country and played no small part in promoting GE to shareholders. Welch personally involved himself in suggesting stories and coverage, calling CNBC a “pet project” and the on-air anchors friends.
Immelt approached deals with a self-righteous resolve. Some of his earliest deals were his best, like the move to snap up the wind turbine manufacturing division of Enron at a bankruptcy auction for just $358 million. It would become the backbone of a major business for GE and give it an important foothold in the renewable energy industry.
But he also made plenty of bad bets. Following 9/11, Immelt began a push to build up a security division that would sell security cameras and fire detection and related systems for homes and businesses. It never took off and GE later sold it.
Then, in a string of deals, Immelt moved GE into the water processing business. But in pursuit of his dream of profits from building out water filtration infrastructure around the world, the company put its sales force in an increasingly impossible position by having them sell different and competing technologies to potential customers.
Some executives, watching Immelt’s frenetic assembly of acquisitions into new industrial business lines, wondered if the CEO misunderstood the meaning and the limits of GE’s management magic. The company prided itself on training good managers who could be asked to range across diverse businesses in the conglomerate in order to wring out greater results and improve performance. But the managers didn’t walk on water. They couldn’t be expected to solve larger strategic problems—especially the question of whether a potential acquisition should be part of GE in the first place. GE’s management system couldn’t take the place of a strategic rationale.
Immelt had little patience for these concerns. When one company executive who expressed concern about the magpie nature of GE’s acquisitions in this period was pushed out of the company over the issue, company veterans were demoralized. Welch had also aggressively bought and sold, moving GE in and out of business sectors, restlessly searching for higher-value operations. In contrast, Immelt’s detractors saw his rapid changes as more about inoculating GE from the old and tired and chasing what was shiny and new. Immelt’s view was that he was culling pieces of the portfolio that might come to harm the larger entity in some unforeseen way.
There was also a downside to the athletic zeal that made Immelt such a relentless, compelling, and successful salesman. On the buyer’s side of the table, once a deal made sense to Immelt, price became less important to him than the story of the strategy and where the deal would fit, his colleagues said. His vision of how a target could be integrated into the company—all the doors to new markets it would open for GE—made price considerations irrelevant, as well as the question of whether it made better sense to walk away. At least that was his rationale. Immelt rarely folded his hand, even when some of his lieutenants thought he should. To him, leadership was perseverance in the face of doubt. And opposition to that approach wasn’t just disagreement but something worse. To Immelt, naysaying in these situations was a form of betrayal.
Immelt wasn’t only on a spending spree. He was also selling.
With Welch’s exit came the souring of GE’s massive insurance bets. Like other companies that had tried to make money in the business, GE had to boost the reserves of capital it held to cover future responsibilities as it became clear that previous expectations had been too conservative. Immelt had to plow $9.4 billion into the insurance units in just his first five years at the helm, to increase reserves.
The issue was reinsurance—the insurance that GE had sold to backstop other insurance companies. GE had sold this coverage to help companies shrink the risk of their business, with costs pegged to the level of risk that the threshold to make payment would be reached.
A reinsurance policy can protect a company from excessive losses. For the seller, the art lies in pricing the policy correctly to turn a profit. In the meantime, the seller uses the cash from premiums to invest and get even higher returns. GE saw an opportunity.
Welch had snapped up Employers Reinsurance Corporation (ERC) in 1984 for more than $1 billion. Other deals followed as GE dived into a niche that seemed like an easy profit center. Welch later reversed himself, admitting that GE had mismanaged a business it didn’t know well enough. It was too aggressive and mispriced what it was selling, a potentially fatal move in the insurance industry. As a result, GE had to put up hundreds of millions in reserves in the late 1990s.
But Welch had loved the business, once declaring that GE’s experience in insurance “gave us the confidence we could do more.” These GE acquisitions, he wrote, “seemed like easy additions to a good thing.” Instead, they exploded under Immelt, who had to simultaneously shore up GE’s insurance businesses and then exit the industry. Immelt ruefully joked that GE had no business in an industry that had until recently sold insurance for pets.
Immelt would prove his worth as Welch’s successor, he knew, by getting out of businesses as much as by getting into new ones. And he viewed insurance as a business to get out of. He would time it right, just as the market was peaking, and not wait so long that a major financial crisis could squeeze the unit’s earnings. The new boss wasn’t wrong. Deeper credit emergencies were coming, even though GE executives, including CFO Sherin, repeatedly declared over the years that the reinsurance risk was gone. Immelt himself, defending the company in a letter to Barron’s, noted that the company’s auditors had signed off on their books. “Each quarter and every year, GE uses a rigorous process to review reinsurance claims and estimate reserves,” he wrote.
The company spun off most of its insurance holdings into Genworth Financial in 2004 and sold much of the rest to the Swiss Reinsurance Company two years later. But there was some fine print in the deals.
Genworth had a block of reinsurance that covered a variety of long-term care insurance policies, which cover expenses like nursing homes and assisted living. This coverage was gobbled up by customers, but it was priced all wrong and eventually wreaked havoc across the industry. When preparing for the Genworth spin-off, GE’s bankers advised not making the long-term care business part of the offering. So to make the deal more attractive, GE agreed to cover any losses from that group of policies.
In short, the buck stopped at GE Capital. And what was the risk? What could possibly threaten GE’s cash machine?