BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
COVER STORY

The Man Who Would Be Welch
Much of the GE empire will be virgin territory for Jeffrey Immelt

When Jack Welch pulled the lid off his most closely held company secret on Nov. 27 and introduced Jeffrey R. Immelt as his chosen successor, by all appearances the two were Jack and Jack Jr. The executives showed up for the big announcement in NBC's Saturday Night Live studio in identical blue shirts open at the collar, navy sport coats--even matching tasseled loafers. The look was unintentional: Immelt, the 44-year-old head of GE's medical imaging business (GE), had been vacationing on the South Carolina coast and was caught by surprise when Welch, 65, called him with the news at 5:30 p.m. the previous Friday. In need of proper attire, his wife scrambled to find him a blazer and wound up matching his boss's.

Still, it's a level of familiarity that Immelt had better get used to. He and Welch will be roommates of sorts for the next year: Welch will be firmly ensconced at GE's headquarters in Fairfield, Conn., as chairman, while Immelt will be tentatively perched in a nearby office. And investors will be watching closely for signs that Immelt has what it takes to follow Welch.

Yet it is a much different world that Immelt stands to inherit. Like Welch, who took over from Reginald H. Jones in 1981, Immelt is replacing an icon. But the pressure to perform is much higher today than 20 years ago, due to Welch's success and the market's rising valuation of all stocks--a combination that has bumped up GE's market value by almost $500 billion since 1981. And Immelt is taking over at a time of extreme turbulence in executive suites, as corporations from Coca-Cola (KO) to Procter & Gamble (PG) to Xerox (XRX) toss CEOs for missteps that might have been tolerated in a more patient and forgiving environment. Says Roger M. Kenny, a managing partner at New York-based Boardroom Consultants: ''The honeymoon is getting shorter and shorter. We're seeing a very quick-tempered investment community.''

Initially, at least, Immelt will be buffered from some of those pressures. Welch extended by eight months his original departure date of April, 2001, so that he could oversee his $45 billion purchase of Honeywell International Inc. (HON) And before the Honeywell merger, analysts were projecting that GE had locked in earnings growth of 15% or more through 2002. That comes after an expected increase of 18% for this year.

Still, there will be nothing easy about this transition. GE will be wrestling with the most massive merger in its history just as the economy is showing signs of a serious slowdown. Moreover, while Welch has symbolically handed the reins to Immelt, how the two will share decision-making and how much latitude Immelt will have in guiding GE is very much a ''work in progress,'' concedes GE Vice-Chairman Robert C. Wright, president of NBC. Wright is one of two mentors Welch appointed to help ease Immelt's transition; the other is Vice-Chairman Dennis D. Dammerman, who is also chairman of GE Capital Services. Several management gurus say that while Immelt's promotion has been presented as a done deal, its structure--which gives him only the president's title for now--could make his position tenuous if he fails critical tests in the coming year.

Once Immelt does make it into the corner office, he will be under enormous pressure to match Welch's recent record of profit gains. If he falls short, he could quickly face investor pressure to break up the complex conglomerate. Under Welch, GE has expanded its yearly revenues from $27.9 billion to $130 billion. Yet the company is a glaring exception to Wall Street's preference for pure plays. With the purchase of aerospace and industrial conglomerate Honeywell, GE will become even bigger and more complex, with estimated 2001 revenues of $176 billion and 450,000 employees, up from 340,000 today. Holding that mass together may prove a challenge too daunting for anyone besides Welch. ''What this feels like is Yugoslavia when Tito died,'' says James J. O'Toole, a management expert at the University of Southern California's Center for Effective Organizations who has written extensively about GE. ''This whole thing is going to give Wall Street pause.''

MUM ABOUT CHANGE. But if Immelt plans to shake things up, as Welch did soon after taking over 20 years ago, he's not talking about it. In his coming-out appearances, Immelt spoke in broad terms of deepening existing businesses, continuing initiatives to expand globally in China and India, and weaving the Internet more completely into everything GE does. ''The way the company is run is the way I'm most comfortable with,'' he told a group of analysts after his promotion was announced. In an interview with BUSINESS WEEK, he added: ''We've got incredible opportunities in our core businesses.''

In fact, much of the GE empire will be virgin territory for Immelt. He has never worked overseas and has held assignments in only three of GE's 10 major divisions. Like Welch, most of his career was spent in GE's highly entrepreneurial Plastics division. Immelt did two stints there, eventually rising to vice-president and general manager of GE Plastics' Americas division. Immelt passed an important career test in 1989, when he landed at the Appliances unit just as it was roiled by one of the largest recalls in GE's history. As vice-president for consumer service, Immelt had to manage the crisis and round up enough workers to install replacement compressors on millions of refrigerators. By the time he landed at Medical Systems as CEO in 1997, Immelt was already viewed as a potential Welch successor.

Immelt's year of transition should help him become acquainted with GE's other key businesses, including the GE Capital unit, which accounts for 41% of its earnings. But several factors could complicate that learning process. Chief among them is the Honeywell merger, which greatly enlarges GE Aircraft Engines and GE Power Systems. Both of these units are themselves likely to experience a change in leadership. W. James McNerney at the aircraft unit and Robert L. Nardelli at the turbine manufacturing business lost out in the succession race and are expected to move on. Given the importance of those businesses, Immelt plans to spend many of his first days on the job meeting with their key customers, assuring them that the months ahead will go smoothly. ''This is no different than any job I've ever taken,'' Immelt says. ''The first emphasis is on the marketplace.''

That's where Immelt is likely to shine. A former high school basketball player in Finneytown, Ohio, and later an offensive tackle on the Dartmouth College football team, the 6-foot-4-inch Immelt exudes personality. At Dartmouth, he juggled a dual economics and applied-math major and was president of his fraternity, Phi Delta Alpha. Classmates call him a natural leader, and they still hoot over his humorous class notes for the Dartmouth alumni magazine, to which he contributed for five years, finally concluding in 1983 by urging classmates to stay involved. He signed off by quoting John Travolta: ''Excuse me while I strut.''

Those leadership skills are a big reason Immelt got to where he is today. ''People follow him,'' Welch says. Dr. James H. Thrall, chairman of radiology at Massachusetts General Hospital in Boston, a big Medical Systems customer, witnessed several frank exchanges between Immelt and subordinates: ''I was impressed that people had enough confidence in him to ask him tough questions.'' And he got results. Soon after Immelt took the Medical Systems job, Thrall approached him with a long-standing gripe about tedious contract negotiations on each piece of equipment the hospital purchased from GE. He wanted to negotiate pricing and other terms in a single multiyear contract. ''I tried to sell [the idea] to everybody at GE for the longest time,'' Thrall recalls. ''The first time I met Jeff, I told him this story. He made the decision in a minute. He told me: 'That makes total sense. We'll do it.'''

RAPID-FIRE ACQUISITIONS. The turnaround at Medical Systems also burnished Immelt's reputation for encouraging innovation. Before he arrived in 1997, the unit had endured three years of flat revenues. That was quickly reversed, and in 1999 revenues grew 23%. Immelt figured out that customers wanted more than just GE's traditional line of scanners and embarked on a rapid-fire series of acquisitions--60 in all--that brought new lines such as Ultrasound, which he grew from a scant $100 million in revenues to $700 million, and digital X-ray technology. Information systems software grew from scratch to a $500 million business on his watch. ''Before he came in, there wasn't a lot of excitement within GE,'' notes Gary M. Glazer, chairman of the department of radiology at Stanford University School of Medicine. ''What Jeff was able to do in a very short time was restore the confidence that GE was committed to innovation.''

Wall Street may demand that Immelt bring a similar mindset to the rest of GE. Analysts already speculate that he may have to jettison the struggling Appliances division which, though recovering from weak sales, is no standout. Moreover, NBC looks to be at a disadvantage in a world of ever-growing media corporations that link studios with television networks. And Honeywell, which was stumbling badly with underperforming businesses prior to the merger announcement, will also pose pressing issues about what to sell and what to build. Given today's preferences for highly focused companies, Immelt could face enormous pressures to sell chunks of GE, especially if it fails to continue to meet investor expectations and maintain the gravity-defying stock multiple it has enjoyed under Welch. GE shares trade today at about 40 times projected 2001 earnings, more than four times the company's price-earnings ratio of 1981.

Immelt faces what could be a very tricky year in waiting. He will be helping to implement a megamerger while trying to keep in step with a still very vigorous Jack Welch. Meanwhile, Wall Street will be scrutinizing Immelt's every move to divine any hints of future strategy. After winning the beauty contest, GE's next CEO must sit tight for another year before he gets to wear the crown.

By Pamela L. Moore in New York, with Nanette Byrnes

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