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Immelting down

17 Mar 2015 By Rob Cox

Almost nothing General Electric does registers with its stockholders. A big asset sale? Shares hardly budge. A mega-billion-dollar acquisition? Yawn. Aggressive shrinkage of its irritating financial business? Crickets. It seems investors no longer give a damn about the $254 billion company run by Jeff Immelt. If only GE had an activist who cared.

The problem is that diagnosing GE’s “unchanged” problem isn’t so easy. It’s not that the company owns lousy assets or harbors an entrenched aversion to reordering its portfolio of businesses. Nor is it a case of demonstrably bad management or terribly allocated capital, the sorts of things that usually exercise investors to grasp the corporate cage and give it a good rattle.

Rather, GE faces something slightly more existential, and pernicious, as an investment. The market seems to think GE stock is dead money. As Microsoft showed in the days before Satya Nadella took over as chief executive, such a perception may be even more difficult to shake off.

Immelt is by no means standing still. Though he has been at the company for nigh on 14 years, its corporate finance department has been a beehive of activity. As Immelt is quick to accentuate, including in the opening paragraph of his most recent letter to shareholders, issued on Monday: “We have been profoundly changing our company.”

Just in the past 12 months, GE offloaded its appliances business to Electrolux for $3.3 billion; began to spin off Synchrony Financial, a $26.5 billion retail financial services company, from GE Capital; and in GE’s largest-ever takeover, agreed to pay $17 billion for the power and grid businesses of France’s Alstom last May. Sure, GE is a big company, but this $50 billion flurry of wheeling and dealing merited not even a golf clap.

Despite all of the maneuvers and various hints that the company is moving as fast as banking regulators will allow to whittle down its exposure to the financial services business, over the past year GE stock has gained precisely 1.35 percent, or to put it in Wall Street parlance, “unch.” As in unchanged.

Even on Monday, after unveiling the sale of GE Capital’s portfolio of credit cards and consumer loans in Australia for $6.3 billion, the largest-ever private equity deal Down Under, it was a snooze-fest for GE shareholders. The stock increased 1.5 percent. While that may be a lot for a company the size of GE, in reality it was just a bit better than the overall market performance.

“What’s most notable and concerning to us is that most large, long-term investors seem to have ‘thrown in the towel’ on GE stock,” wrote Scott Davis, an analyst who covers GE for Barclays Capital, last year. Davis cited anecdotal evidence from his own experience: While GE made up a third of the market value for industrial companies in his purview, it only amounted to 5 percent of incoming call volume from investors. A decade ago it was 80 percent.

It’s not that Davis isn’t worth calling for his views on GE. He’s easily one of the best in the business. It’s more indicative that GE’s share roster is dominated by index funds and ETFs that mimic the movement of the Dow Jones industrial average, in which GE has been a member since its 1896 formation.

In short, the GE story has about as much flavor as a loaf of white bread. It houses best-of-breed businesses, like aircraft engines and energy turbines. The company hires talented people, trains them and they generally like working there. Its headquarters are lean (nobody really much uses the helipad in Fairfield, Connecticut) and it regularly prunes its portfolio. But Immelt’s plans to reduce GE Capital’s contribution to less than a quarter of the bottom line mean earnings are basically flat.

In a way, GE’s conundrum recalls that of another sprawling enterprise not so long ago: Microsoft. Up until August 2013, shares of the software company captained by Steve Ballmer with a board led by founder Bill Gates had pretty much flat-lined for more than a decade. As with GE, inertia wasn’t an issue. During that time, Microsoft acquired aQuantive for $6 billion, Nokia’s handset arm for $7.2 billion; Skype for $8.5 billion and a stake in Facebook. It also offered to buy Yahoo for $45 billion.

And then, shortly after quietly pushy investor ValueAct Capital took a shine to Microsoft, Ballmer bowed out and Gates stepped aside as chairman. The company’s market value swelled by over $100 billion from the day Ballmer said he would hand over the CEO role to the time he left the board for good last August. Since taking over, Nadella hasn’t really done much that could be considered splashy. He spent $2 billion on the maker of video game Minecraft, but otherwise has moved methodically and mostly avoided his predecessor’s mistakes.

Microsoft isn’t the sort of comparison Immelt will relish. Shareholders are nevertheless fickle. Sometimes a change of face is all that’s needed to revisit and reconsider long-held beliefs. Davis, of Barclays, recently updated his own view of GE two weeks ago with a simple conclusion: “Management changes down the road should help to get folks off the sidelines.”


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