Jeff Immelt, feeling the pressure for a stock price that has vastly underperformed the overall market during his tenure as CEO at General Electric (NYSE:GE), has finally taken financial engineering to an entirely new level. Despite being in the era of Central Bank Liquidity and ZIRP, GE`s stock price can best be described as treading water. The stock is down almost 13% over the last 7 years, and this is with record shares being taken off the market due to enormous stock buybacks by the company.
I would hate to see the stock price in an environment with normal interest rates and much higher borrowing costs. When you factor in the cheap borrowing costs paving the way for enormous stock buybacks. GE`s under-performance is stunning to say the least. GE has been one dog of a stock the last 7 years for shareholders of this iconic American company. However, Jeff Immelt thinks he has a solution for this problem after 15 years at the helm of GE. You guessed it -- sell off more revenue generating assets, and buy back even more shares of the stock. Financial engineering at its finest!
Beware of Wall Street Investment Banks
Of course every investment firm on Wall Street has been advising GE to do this for years, that it will create more shareholder value by dumping the financial and real estate portion of the company, that GE`s valuation will catch up to its peers in the industry; shorthand for raising the stock price. This is true in the short run, but in the long run Jeff Immelt and GE just devalued the company, and will hurt its long-term profit potential.
Of course, none of this really matters to Jeff Immelt and GE as he will have long since retired from the company. The smart shareholders will take the quick profits from the stock buyback run in the stock! And over time the reduced earnings will ultimately punish any bag holders not smart enough to realize this is just a financial gimmick from a company just like IBM (NYSE:IBM) that saw its best days a decade ago.
Energy Splitting: Upstream and Downstream Operations - Bad Advice
This is similar to how all the Investment bankers advised the big Energy companies to jettison their downstream refining operations to take advantage of the perceived higher margins in the upstream portion of the business, i.e., your stock prices will rise. Forgetting to properly analyze that downstream operations are a hedge for when oil prices drop like we currently have now in a supply glut environment where refiners are doing much better than producers in this bear market pricing environment.
Well, GE`s financial and real estate portfolio (when they aren`t leveraged to the hilt in bad loans) is a hedge and financing function that enables more deals to be made with their partners who lack the credit capabilities to finance many of GE`s deals on the open market when everyone isn`t throwing around free money during the credit booms that come and go during the business cycles. Make no mistake, size matters in business, and just like the oil producers at ConocoPhillips (NYSE:COP) and Marathon Oil Corporation (NYSE:MRO) who now regret splitting up their companies and reducing their natural economic hedges and profit generation capabilities over the long haul of the business cycles, GE is less valuable as a company for getting smaller.
Short-Term and Long-Term Value for Shareholders:
Will the stock rise through this gimmickry? Of course it will for goodness sake, they are buying their own stock to the tune of 50 Billion Dollars! However, mark my words, the financials will progressively deteriorate over time at GE. Earnings will disappoint quarter after quarter, and in five years GE will be a shadow of its former self.
Wishing they never listened to the Wall Street Investment bankers and became a smaller fish in a larger global ocean. Size is power, the more size you have as a company the more synergies that can be leveraged, the more business deals that can be completed, the larger profits that can be reaped through economies of scale, and competitive advantages across the divergent business segments of the company can be realized. Deals often happen on a grand scale, and the more resources a company has at its disposal the greater potential there is for business development. Just ask a salesperson or deal maker at GE, this just made their job twice as hard.
Liquidation of Core Assets
Thank you Jeff Immelt for running GE into the ground during your tenure, instead of being fired 10 years ago by the gutless GE board for incompetent leadership, or shareholders putting pressure on him to resign, they just dumped the stock as an investment. And now to hang on for as long as possible GE and Jeff Immelt have taken the final step in the gutting of this once great company. Liquidating revenue generating assets for a short term pop in the stock to get shareholders off the company`s back for a couple more years. Furthermore, mark my words Jeff Immelt will not be at the company in three years when the realization hits home with shareholders that GE is worse off as a result of this financial engineering gimmickry. He will have long since benefitted from cashing out his robust stock options and retire with his golden parachute while the stock price is higher, only to leave his predecessors and long-term investors dealing with the unintended consequences of liquidating GE`s assets and resources at fire sale prices.
GE isn`t taking a first quarter ‘restructuring charge’ because they are getting a good deal on these asset sales; and expect more and more of these ‘restructuring charges’ in the future quarters as the years go by as the fallout from this deal peels off on the financials. Sure there is an immediate difference between the book value and goodwill on the GE books of these assets worth versus what they can get for these assets in the marketplace. But what about the future revenue that these same assets generate for the company`s earnings? First there is the ‘restructuring charge’ language but there will be some other euphemistic accounting terminology for future quarterly earning’s statements reflecting deteriorating revenue generation conditions at GE. Make no mistake this is pure and simple a fire sale, one giant money grab by GE, with no vision or respect for the future of GE as a going concern.
Financial Markets: The Greater Fool Theory
This is part of the reason that ultimately the stock and financial markets are giant Ponzi schemes, all these investments need future investors to come in and be a greater fool than previous investors, prop up the giant charade that is financial markets, ultimately leaving somebody holding the bag when all the stock buybacks have dried up, the zero percent borrowing stops in the next business cycle, and there are no more employees to fire or assets to liquidate. It’s the same reason 401ks become cut in half during the next bear market cycle, companies continue to get kicked out of the indexes, and legitimate long-term investing is a thing of the past. You better Market Time as well as possible given the circumstances of the modern era of financial markets. Shoot, GE will probably not even be in the Dow Industrials in 10 years if history is our guide. Therefore, enjoy the ride if you are a GE shareholder, just get out before the music stops in this once proud American Icon of a company. Financial engineering is usually a last ditch gimmick to try and squeeze a little more value out of an incompetently run company which has lost its competitive edge in the marketplace and is no longer growing its businesses versus its historic growth metrics.
GE Management Training Program
Any other coach would have long since been fired for such poor performance, it is quite a feat for Jeff Immelt to have survived this long at GE, but just like at Microsoft (NASDAQ:MSFT) the Peter Principle is alive and well in many companies of the Fortune 500, and CEOs can continue to thrive as long as others are more incompetent, and this latest financial engineering just smacks of incompetent desperation at the top of GE Management. Rather ironic considering their much vaunted Management Training Program of the past, GE sure has produced a bunch of incompetent leaders over the years.
Give me a Steve Jobs over Jeff Immelt any day and twice on Sunday and he never went through a vaunted Management Training program. Shoot, he didn`t even have a college degree. But Apple's (NASDAQ:AAPL) innovation over the same tenure as Jeff Immelt at the helm of GE is the biggest indictment of the upper management at GE. Jeff Immelt must really be good at playing the ‘corporate game’ because his survival sure isn`t based upon performance at GE.