By Ted Mann
After more than a decade rebuilding General Electric Co. to be a
simpler industrial machine, Chief Executive Jeff Immelt finds his
creation running rough.
The problem: too much oil.
Investors have long pushed Mr. Immelt to pare down GE's finance
business and more tightly focus its industrial side. Last year, he
edged out of businesses like appliances and store-branded credit
cards, and he made a $17 billion deal to buy Alstom SA's
power-generation business. That capped a long-running
rehabilitation in which he estimates he sold 65% of the company he
inherited over 13 years ago from Jack Welch.
This was supposed to be the time Mr. Immelt began reaping the
rewards.
Instead, the oil-price drop is raising a fresh growth impediment
and new questions about his legacy. Some investors and executives
fear it could now be even longer before GE shares escape their
losing streak--down 34% since Mr. Immelt ascended in September 2001
and down 7% since 2013's close--deepening their frustrations as the
CEO moves through his tenure's latter stages.
GE's latest results were better than Wall Street expected, with
$5.2 billion in profit on $42 billion in revenue the last three
months of 2014. But at its peak, in the 2007 fourth quarter, GE's
net income was $6.7 billion on $48.5 billion in revenue.
And oil has clouded the picture. GE's stock is down 3% since
June's oil-price peak, compared with an 8% rise in the S&P 500.
In a report headlined "Are We There Yet?," analysts at J.P. Morgan
Chase say GE's latest results could be as good as it gets as the
oil impact looms.
That leaves the 59-year-old Mr. Immelt in a familiar position:
prove-it mode. "I think what they've done with these moves is very
bold," says Robert Spremulli, an analyst at fund manager TIAA-CREF,
GE's 19th largest shareholder according to FactSet. "He needs to
demonstrate the success of it."
GE might not seem an obvious candidate for oil-market victim.
The company Thomas Edison founded is now known for turbines that
generate much of the world's electricity, jet engines used on
planes like Boeing Co.'s Dreamliner and CT scanners that make 3-D
images of internal organs. It is also essentially one of the
country's biggest banks through its GE Capital unit.
But Mr. Immelt also bet on the energy boom, spending $14 billion
on companies that help oil and gas drillers pump and transport. He
put a promising young executive, Lorenzo Simonelli, in charge of
the business. Oil and gas accounted directly or indirectly for a
quarter of GE's $100 billion industrial revenue in 2014.
GE was touting the business to investors as recently as
September. But Mr. Immelt's annual investor meeting in December
included a warning on oil and gas: The business could see revenue
and earnings each decline up to 5% in 2015.
The prospects of oil's denting GE earnings has compounded the
view among some on Wall Street that Mr. Immelt wasn't moving fast
enough to remake GE's portfolio even before crude prices fell. "The
scariest thought in the world is that this is a company that could
take two decades to get back to where its previous high of 60 bucks
was" in 2000, says Nick Heymann, a William Blair & Co. analyst
who has covered GE for decades. "It's like the lost decades in
Japan."
In public statements since December, Mr. Immelt and other
executives have said they remain committed to oil long term. Chief
Financial Officer Jeffrey Bornstein said in a January interview
that GE would manage through an expected downturn in orders from
the oil-price crash, using it as a chance to streamline and
outmaneuver struggling competitors.
"We're going to use this as an opportunity," he said.
Mr. Immelt is well versed in the criticism of his tenure,
including that he has taken too long reducing reliance on GE
Capital, which has been the greatest concern to GE investors. Deep
change takes time, he said in a September interview, adding that he
has made investments on products like jet engines and gas turbines
that will pay off over decades.
"The way I look at that," he said, "as our earnings grow and
continue to grow, we deliver on the things that we've laid out to
investors, the stock's going to go up."
The son of a GE Aviation middle manager, Mr. Immelt spent a
career at GE working up through appliances, plastics and medical
devices. The 6'4" former Dartmouth College lineman won a divisive
three-way race for the top job.
Mr. Immelt had a tough CEO act to follow in Mr. Welch, an empire
builder who delivered steady profit growth and sent GE's shares
soaring during the 1990s. Four days after Mr. Immelt took charge in
2001, the Sept. 11 attacks flattened GE's aviation business. Later,
the financial crisis turned its giant banking business into a
liability, forcing GE to cut its dividend the first time since the
Great Depression.
For much of the decade, Mr. Immelt's mantra was to focus on
businesses that provided the high-end infrastructure equipment
developed nations need--engines, turbines, health-care
technologies-- and get out of other businesses, particularly in
consumer markets.
He shed some flagship businesses. Mr. Welch had bought RCA and
its NBC network, and Mr. Immelt spent nearly $12 billion on Vivendi
Universal Entertainment. Mr. Immelt reversed course, selling
NBCUniversal, saying it distracted from GE's core mission.
Mr. Welch loaded up on insurers; Mr. Immelt exited the industry
in 2005. He jettisoned GE Plastics and GE Appliances, one of the
last tangible connections to consumers. He bought industrial
businesses like Enron Corp.'s wind-power division and life-sciences
firm Amersham PLC.
GE's acquisitions and research spending have helped it increase
or maintain market share in key industries, especially aviation. It
will build on a strong position in power-generation equipment if
its Alstom deal is approved.
Some bets didn't pan out. He bought a string of security
companies after 9/11 that didn't pay off. He aggressively invested
in office buildings and other commercial property through GE
Capital before the real-estate collapse.
But in 2010, energy seemed to fit Mr. Immelt's vision for GE's
portfolio: a growing global industry into which it could sell
infrastructure equipment. He oversaw a string of acquisitions
beginning that year, with Brent crude at $80 to $100 a barrel. In
2011, GE bought the well-support division of John Wood PLC, which
makes submersible electric pumps that help extract oil, and
Wellstream PLC, which makes flexible subsea risers that connect
wells to the surface and pipelines.
GE bought Dresser Inc., which makes valves and controls for oil
production. In 2013, Mr. Immelt paid $3.3 billion for Lufkin
Industries Inc., a drilling-equipment maker positioned to benefit
from North American shale drilling.
In September 2014, the oil bet still seemed sound. GE that month
told investors at a briefing on its oil-and-gas operations that it
expected to reap strong growth selling services to frackers in the
U.S. and to companies exploring off the Norwegian and Scottish
coasts.
One slide listed a price assumption for Brent crude: $100 a
barrel. Andrew Way, a vice president in the business, told the
investors: "We love this space."
By year's end, Mr. Immelt was striking a valedictory tone. The
portfolio moves he had described for years would finally let GE
"pivot" and focus on organic growth in its industrial units, he
told investors in the December presentation.
He just needed investors to see that.
GE's share price hadn't topped $30--half its record $60 in
2000--since 2008, closing at a low under $7 during the
recession.
And through the fall, Wall Street had continued to give Mr.
Immelt a mixed report card. Fans included activist investor Nelson
Peltz, who said Mr. Immelt is "doing what I think are the right
things, and at a certain point in time the market is going to
appreciate what he's accomplished."
Detractors included a portfolio manager at one of GE's 10
largest shareholders who has long been frustrated with its
performance. "It wouldn't surprise me if one of the big hedge funds
went after them," the manager said in October. "Somebody went after
Microsoft. Somebody went after DuPont."
Mr. Immelt was deeply frustrated, not understanding why
investors weren't giving more credit for his changes, people close
to him say. "He has said to me and others, 'I keep saying it over
and over again, and nothing changes,' " one of those people
says.
Meanwhile, GE executives and directors had kept an eye on
activists to understand what issues investors had, people familiar
with the company say. GE invited Mr. Peltz, for example, to address
its top 200 executives in 2013.
"Of course we have talked about activism and asked ourselves,
'How might somebody look at GE?' " Mr. Bornstein, the CFO, said in
a September interview.
Mr. Immelt put a personal stamp on GE's December investor
meeting. On the "Saturday Night Live" set at NBC studios, he stood
before a projected slide that read: "I am running GE
differently."
It was the final slide, intended as a declaration of
responsibility--an answer to investors who see Mr. Immelt as
talking a good game but not delivering.
But by that time, Brent was trading at about $60, down from
nearly $100 when GE gave its September oil-and-gas
presentation.
Brent is still trading at about $60, prompting an industry
contraction. Schlumberger Ltd., the world's largest oil-services
company and a GE competitor, in January said it would lay off 9,000
workers and cut its 2015 investment plans 25%. BP PLC, a major GE
customer, said in January it would lay off 300 workers in Aberdeen,
Scotland, as part of North Sea cost-cutting. Other big oil
companies have announced spending cuts.
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GE executives say 60% of the company's oil-and-gas business is
in booked orders and that the difficulty some of its customers have
in stopping oil operations will help the business. For some
customers' offshore operations, for instance, GE says halting
production would be costlier than selling oil at lower prices,
meaning demand for GE equipment and services should hold up.
Still, GE officials acknowledge customers are likely to delay
future exploration and production. They say they will trim costs
from the oil-and-gas business through layoffs, eliminating
management layers and consolidating factories. Lufkin, the 2013
acquisition, is expected to take a hard hit, Mr. Bornstein said at
a conference this month.
GE's oil-and-gas unit had a $19 billion order book at year's
end, but orders fell 10% in its oil-and-gas business in the final
2014 quarter, including a 72% decline for equipment like blowout
preventers.
Mr. Immelt on a January earnings call said he is getting calls
from clients looking to modify terms. A person familiar with those
discussions says customers are likely to seek discounts or
reductions in existing orders as the industry faces the sudden need
to save cash and cut capital expenditures.
GE is also trying to squeeze savings out of its industrial
supply chain in the oil-and-gas business, this person says, looking
to cut costs until new orders return.
And concerns linger about Mr. Immelt's speed in remaking the
rest of GE. Mr. Bornstein said at the conference that investors
continue to feel "uncertainty" about GE Capital and that the
company is continuing to pare back investments that have most
concerned shareholders who recall GE's near-collapse in the
financial crisis.
When Mr. Immelt faces stress, he has a coping mechanism: 1970s
rock 'n' roll. He has a soft spot for the Allman Brothers and the
Marshall Tucker Band, he once told a Dartmouth audience.
He cranks up the music to blow off steam, says someone familiar
with his habits. It is salve for a CEO working to prove he can fix
a machine that is no longer his predecessor's creation. "In one
way, shape or form, I created all the problems," he said in
September, discussing efforts to cut corporate-bureaucracy layers
that have built up over his tenure.
"It's not like I can say...this was Jack Welch's fault. It's our
fault, and my fault."
Write to Ted Mann at ted.mann@wsj.com
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