- Jeff Immelt did not change much at GE until the Great Recession hit and then he started making some major changes that were needed at GE.
- Satya Nadella does not seem to be making many changes at Microsoft even though investors did not seem that happy with the way Microsoft was conducting business.
- Jeff Immelt did move to make GE a more focused company; might Mr. Nadella learn something from this?
In taking over the position of CEO at Microsoft Corp. (NASDAQ:MSFT), Satya Nadella had over Jeff Immelt when he took over the CEO's job at General Electric (NYSE:GE) is that Mr. Nadella replaced Steve Ballmer whereas Mr. Immelt had to step into the seat of "ruler of the universe" Jack Welch.
Steve Ballmer had been the CEO of Microsoft for ten years and Microsoft's stock price was roughly the same when he left as it was when he took over the role.
Adjusting for stock splits, etc., the stock price of General Electric was roughly $2.50 per share when Mr. Welch took over in 1981. It was around $40.00 per share when he turned the reins over to Mr. Immelt.
Microsoft shareholders were not particularly happy with the way the company's stock had performed during Mr. Ballmer's tenure and were generally pleased to have someone else take over.
Becoming CEO at GE after Jack Welch is somewhat like becoming the basketball coach at UCLA upon the retirement of John Wooden. There was just no way a successor could hope to live up to what had just gone before.
GE's return on shareholder's equity was well above 15.0 percent for most of the time Jack Welch was Chairman and CEO of General Electric. Mr. Welch created a platform of sustainable competitive advantages.
And, the stock of General Electric did not perform that well after Mr. Immelt took over. Even though GE earned a return on shareholder's equity in excess of 15.0 percent for the first seven years Immelt was CEO, the price of the company's stock remained in a relatively narrow band…roughly flat.
In Mr. Ballmer's case, Microsoft also earned a return on equity above 15.0 percent all the while he was CEO, most of the time it was above 30.0 and even in 2008 it neared a 50.0 percent return. Microsoft had developed a platform of sustainable competitive advantages.
The problem with the stock price in both Mr. Ballmer's case and Mr. Immelt's case for the first seven years of his tenure is that both leaders did not use the retained earnings of their company's well. This often happens when a company has a well-secured platform that produces sustainable earnings in excess of the company's cost of capital. Both companies were throwing off a lot of cash…but, how they used this cash raised a lot of questions…at least in the minds of shareholders.
Both Mr. Ballmer and Mr. Immelt, in the first seven years as CEO, did not did little, or nothing, to create additional shareholder value.
General Electric ran into trouble in the financial meltdown of 2007 and the following Great Recession. One of the reasons for this is that a lot of GE's earlier performance was based on the fact that it was earning 50 percent or more of its profits from its financial subsidiaries.
The financial subsidiaries suffered badly during the Great Recession. GE's return on shareholder's equity fell from 17.9 percent in 2007 to 9.7 percent in 2008. The highest it has been since then is 13.1 percent, which was achieved in 2012.
This "wakeup call" finally kicked Mr. Immelt and General Electric into action. It is hard to change a company that seems to be doing very well, but is having trouble making decisions about where it is going to put its retained earnings.
Well, Mr. Immelt started to make some dramatic changes in GE, the most dramatic being the reduction in GE's reliance on its financial subsidiaries. Last Friday, GE began marketing Synchrony Financial, it's consumer finance business. Over the last couple of years it has been getting rid of this financial wing and that financial wing. Immelt wants to reduce its reliance on the financial part of the business to below one-third of profits.
The lesson here is that the finance business, although it produced more than 50 percent of GE earnings at one time was a distraction from GE's main business. Immelt believes that the company needs to be focused on a more narrow range of products for its optimal health. So, he is getting rid of those divisions that do not contribute to his vision of what the company should be.
Furthermore, in the middle of May it was reported that GE was going to spin off its consumer products division. This is the core area of the original General Electric. The rumor has continued. Obviously, for years, it has not been at the core of the twenty-first century GE. Even though this division is an $8 billion business, its profit margins are low and it is not within the mainstream of where the company is headed.
It is hard for a CEO to get rid of a division that could be so closely identified with the history of the company. Yet, if this area does not contribute to what Mr. Immelt believes to be the future "core" of General Electric, it has to go.
Jeff Immelt is now making a difference at General Electric. Whereas General Electric stock hit a bottom of around $7.50 per share during the recession, it now has returned to a level of around $26.00.
Immelt still says he has work to do to get General Electric focused, but he seems to be moving in a coherent direction. Expectations are for GE's return on equity to break 15.0 percent once again over the next two to three years. I believe there is a good change Immelt will make this goal.
As far as Mr. Nadella is concerned, he has less legacy baggage to contend with. The legacy baggage that Microsoft presents is connected with Bill Gates, but that was fourteen years ago…ancient history…and anyway, his direct comparison is only going to be Steve Ballmer.
With the earnings numbers that Microsoft is putting up, Mr. Nadella can do very little and the results will still look awfully good. But, the question will have to be asked…how is Mr. Nadella using all the retained earnings that Microsoft is throwing off?
Mr. Nadella must develop a new vision of Microsoft much as Mr. Immelt has for General Electric. Microsoft right now is a mish-mash of past decisions and thirteen years of un-inspired leadership.
No one really knows what Microsoft stands for these days.
The price of Microsoft's stock has increased since Mr. Nadella became the CEO. Investors expressed much hope and he seemed to get off to a good start. But the basic performance at the most recent release of earnings was not very inspirational. In fact, it was reported that one analyst was not real happy about Mr. Nadella's "new" strategy: "The strategy is mostly a continuation, but with refinement and adjustments." Others did not disagree.
Microsoft needs to be re-focused. We need to know what it stands for. There are areas of Microsoft, like the financial areas of GE, don't fit into Microsoft's future picture that need pruning. Maybe there are some "older" areas in Microsoft, like the consumer products business in GE, that need to be let go.
We, the outsiders, can make suggestions but Mr. Nadella needs to give us his vision...what fits and what doesn't fit.
Then, we can vote on the decisions...buy the stock...or sell the stock.
Right, now, as the one analyst seemed to be saying, "The strategy is mostly a continuation...." We want more than that.
Mr. Nadella needs to take a page out of Mr. Immelt's second half performance and start changing Microsoft right now while he is still on his honeymoon. It is the only way that Microsoft is going to move on into the future…and it is the only way that Microsoft is going to start using its retained earnings in a productive manner. One hopes Mr. Nadella does not have to wait for a "wakeup call."
Disclosure: The author is long MSFT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.