Is GE Really Too Big?

Posted by: Diane Brady on July 22, 2007

Why the continued angst over GE’s size? With more than $160 billion in sales last year and a market cap of $413 billion, it’s not small but it doesn’t exactly tower over the world’s largest companies, either. Wal-Mart, General Motors and a handful of energy companies draw more sales. What bothers investors is the memory of the $60 highs that GE stock hit during the dot-com glory days of Jack Welch’s final years. What if that was the anomaly, rather than what we’re seeing with the share performance now?

The New York Times is the latest publication to take on what has become a monthly debate: Is GE too big for its own good? I read the piece with interest because, as someone who covers GE, it’s a question that has filtered into my reporting as well. The issue isn’t really whether GE can continue to deliver strong growth in the immediate term because, frankly, it has. Earnings and revenue growth were both in the double-digits in the second quarter and the stock hit a five-year high last week as a result.

The bummer, as everyone likes to point out, is that it’s still only two-thirds what it was seven years ago. But think of the mindset that helped propel GE into the $60 range. Investors were euphoric about cutting-edge giants and Welch had basically cast GE as a digitally savvy player for the new millennium. Add to that the premium of being, well, Jack Welch. Dot-com madness meets management icon. The stock rocketed into the stratosphere,and then crashed back to earth (helped in no small part by the events of 9/11).

The problem for Jeff Immelt is that the comparison for GE is always against that elusive high. Yes, there are issues in finding consistent double-digit growth at such a size, regardless of how many nimble little fiefdoms and armies of entrepreneurs GE has. And investors, who are more inclined to caution than euphoria these days, have a hard time understanding exactly what they’re getting with GE. There always seems to be some moody child (NBCU/the now booted Plastics) to drag the rest of the family down. But the real issue may be the wistful fixation on a period in GE history that’s not about to be repeated.

Immelt knows that patience is wearing thin. He has known it for years. I wonder if investor paranoia about GE’s size may have played some role in nixing the company’s proposed $8 billion acquisition of Abbott Diagnostics. The only thing investors seem to want GE to buy these days is its own stock.

Reader Comments

Thomas

July 23, 2007 8:24 AM

Diane,

It's funny you mentioned Jack Welch because GE has one of the most aggressive and forward thinking managers in the world. I'm not a big fan of Jack Welch but I am of his people which probably speaks even better of him. So if they can't make the business work then few can. To me, asking is GE too big is like asking whether the Yankees has too many talented players. There's tremendous value in the brand and I often wonder whether the individual businesses would flounder aimlessly without it. What they gave up in autonomy they gained in strength. The real question should be whether GE can outperform the markets they operate in and how well they manage their capital however large that might be.

In addition, to say the dot com trading days were an anomaly is an understatement. One has to only look at the 3Com/Palm paradox to realize we were either on drugs or should have been on some! :-)

Thomas

John A. Byrne

July 24, 2007 10:36 PM

Jack Welch knows so well the problems that come when an organization grows too big. He forever fought against big company disease, and he proved that bigness can be a big advantage. When I collaborated with Jack on his biography a few years ago, we wrote that it's necessary to "Forget the Zeros." As Jack puts it, "The worst thing a company can do with size is to focus on managing it. Size either liberates or paralyzes. We tried every day to remember that the benefit of size was that it allowed us to take more swings" (make more investments and a greater number of bets on new products and services).

KenLay

July 30, 2007 12:21 AM

Dear Jack, I was once a big, popular and idolized CEO at Enron and BusinessWeek. I too fought against corporate disease, unrestrained rapid grow. But in the end I forgot the zeros in our ledger book. I remember Jack's idea about being too focus on managing Enron and decided I need a bunch of smaller ones outside the corporate ledger. I was able to build-up enron stock to over $75/share which is higher than GE. Enron size was so big it allowed me to really "swing" without full disclosure to our CPA and SEC. Jack, you may have wrote a book now selling at bargain basement prices, but I spoke at the Republican Convention viewed by millions of Americans. The only thing you have over me, Jack, is that you married a real younger babe than I. For that may she divorce you and take you to the cleaners.

Lou Coco

August 19, 2007 1:03 PM

As a stockholder I am only interested in realizing an increase in the price of GE's stock. This is the only reason I own it. GE management must understand that it has a responsibility to its stockholders to insure the price of its stock appreciates (especially in a bull market). If they can't appreiate the price via earnings then an increase in the dividend rate over what you can earn in a bank is warranted.

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