General Electric: with friends like these
The company and activist investor Nelson Peltz mostly agree — for now
But for a dreary stock price chart tracing chief executive Jeff Immelt’s 14-year tenure, Nelson Peltz’s presentation on General Electric could have been published by the company itself.
On Monday, Mr Peltz’s Trian Partners disclosed that it owned a whopping $2.5bn of GE, a 1 per cent stake. Unlike its recent agitation at DuPont, Trian is not trying to engineer a coup at GE. While Mr Peltz is happy to point out the weak performance of the company’s shares, he is largely supportive of Mr Immelt’s overhaul of the conglomerate. So Mr Immelt need not panic yet. But Mr Peltz’s compliments are distinctly backhanded.
When Mr Immelt succeeded Jack Welch in 2001, he inherited trouble. The dotcom bust was taking hold and the global economy was heading for a recession. Then the 2008 financial crisis exposed the time bomb that GE’s sprawling bank, GE Capital, had become. In the years since, Mr Immelt has been directing the company towards its industrial roots, emphasising areas such as power, water, oil and gas, aviation and healthcare — all long-term growth areas in an urbanising world.
Mr Immelt is no innocent victim of his predecessor’s risk taking. He was happy to take the earnings contribution from GE Capital — about half of the total — before the financial crisis and did not anticipate the impending calamity. After the crisis he committed to a more modest paring of the volatile contribution of GE Capital. Only this year did he decide to bring it below 10 per cent of earnings.
Even though Mr Immelt’s reformed view of GE’s strategy fits with Mr Peltz’s, there will be tension over capital allocation. The investor noted that the company had spent $30bn on M&A in recent years, mostly at high valuations. He is asking for a better explanation of returns from dealmaking. He also wants GE to sacrifice a notch or two of its credit rating to issue debt, using the proceeds to buy back shares.
If GE’s shares rally — due to earnings growth or a better valuation multiple — the battle over capital allocation or any specific prescription may never be joined. Mr Peltz’s investments at bank Lazard and restaurant Domino’s Pizza succeeded while avoiding acrimony. Should GE shares continue to sputter, however, Mr Immelt’s job will not be safe for long.