Motley Fool Hidden Gems Investing - Best-of: William Cohan on GE’s Legacy

Episode Date: July 1, 2023

Before the mega-cap tech giants, there was General Electric.  William D. Cohan is a Founding Partner of Puck and the author of “Power Failure: The Rise and Fall of an American Icon.” Cohan joined Ricky Mulvey to discuss:  - Jack Welch, and the religion of earnings consistency. - The mythology behind General Electric’s birth.  -General Electric’s “time of death”.  - Why Cohan believes a combination between Warner Brothers Discovery and NBCUniversal is “inevitable.”  Host: Ricky Mulvey Guest: William D. Cohan  Engineer: Dan Boyd, Rick Engdahl, Tim Sparks, Annie Franks Companies discussed: GE, DIS, WBD, CMCSA  Learn more about your ad choices. Visit megaphone.fm/adchoices

You know, I think it becomes psychological almost. Either they don't want somebody to choose somebody as their successor who will outperform them and show them up. It seemed like that was the case with Bob Iger, and I think on some subliminal basis it might have been the case with Jack Welch as well. I'm Mary Long, and that's William Cohen, a founding partner of the digital news company Puck. He's also the author of Power Failure, the Rise and Fall of an American Icon. It's July 4th weekend, so we're highlighting some of our favorite conversations from the year.

Back in January, Ricky Mulvey caught up with Cohen to talk about his corporate autopsy of General Electric. They discussed what caused the fall of one of America's most powerful companies, the key differences between former CEOs Jack Welch and Jeff Immelt, and why large companies struggle with leadership succession. Joining us now is William Cohen. He's the author of Power Failure, The Rise and Fall of an American Icon. Talking General Electric today and appreciate you joining us on Motley Fool Money. Thank you, Ricky, for having me. So General Electric is this myth-making machine. That was one of the key things I picked up from your book.

It was born on a myth of Thomas Edison's involvement, and possibly it may be dying even on myths such as John Flannery's ouster. When you were researching General Electric and doing these interviews, I know you worked there for a couple of years. Was there any ideas that you held to be true that turned out to be myth that surprised you in the process? No, absolutely. You know, right from the outset, in fact, you know, it was always sort of drummed into not only employees heads, but of course, everybody's in America's head that, you know, Thomas Edison was one of the founders, you know, was the founder of GE.

I mean, and if you go to the research center outside of Albany, you know, you walk into this incredibly big place and the lobby is filled with Thomas Edison sort of memorabilia. But in fact, you know, he had very little to do with the founding of the company. He was against the founding of the company and the merger that created the company. and he very quickly sold the stock that he had that resulted from the merger and he was never an executive of the company. The first executive was this guy, Charles Coffin, who was quite a remarkable businessman and a leader of the company. I mean, that's just one example. This company then becomes one of the largest in American history or it becomes the largest

by market cap at the time in the 20th century. And one of its major problems that a lot of companies face is finding a CEO. Your book highlights the pageantry involved in General Electric's succession process. Jack Welch had to participate in a letter-writing contest. It was this reality show style elimination thing where the CEO at the time, Reg Jones, is keeping all the contenders very, very close. He ends up rejecting that and looking for his CEO maybe to his detriment in Jeff Immelt, but he still makes Jeff Immelt give a sales pitch to the board. Whether it's General Electric or recently at Disney, you have very smart people who know these jobs very well, and yet they seem to have so much trouble finding successors for

the CEO seat. Why do you think these smart people who know the job well struggle so mightily with that process? I think it becomes psychological almost. Either they don't want to choose somebody as their successor who will outperform them and show them up. That certainly was the case. It seemed like that was the case with Bob Iger. And I think on some subliminal basis, it might have in the case with Jack Welch as well, choosing somebody who, on some level, they thought would do a good job and certainly endorsed when they first announced the choice, but maybe on some level knew that they would not do a particularly good job and would not somehow supersede their own performance as CEO. Beyond that, I mean, people, it's hard to know how someone is actually

going to perform in the job once they have it. People are very good sort of politicians sometimes and very good at sucking up to get what they want. And then when they actually get the job, they may never have been qualified for it. I appreciate the complex picture you've given to Welch. I think a lot of his legacy has been turned into headlines of this is good or bad, when really it's a complex person who did some terrible things. He was abrasive. He was a Womanizer. He also helped develop CEOs and created one of the most valuable companies in American history. He also encouraged disagreement, dissenting opinions among the people who worked for him. So why did so many of the people you spoke with you think actually enjoy working with

Neutron Jack? I mean, that's an important point. All of the people who I spoke with who were senior GE executives really appraised Jack and the opportunity they had to work for him and his willingness to, you know, get the most out of them, to believe in them and to support them and to welcome dissenting opinions, being sort of a fun guy to be around and to really giving them huge opportunities that they wouldn't have had elsewhere. Now, obviously, I didn't talk to the people who felt tormented by him, or they were much harder to find, and they were not in the company after he sort of got rid of them. But I mean, even just taking one example of Dave Cody, who Jack fired when he was head of the major appliance business at GE, which was probably the

most poorly performing business, and who went on to become the CEO, the very successful CEO of Honeywell. In fact, at one point, Honeywell's market cap was higher than GE's. And even Dave Cody, who was fired by Jack and didn't understand why, praised him to the hilt. So he did engender an incredible amount of loyalty, at least among the survivors and the ones who would talk to me. Clearly, the people who he insulted or made fun of or was fired early on probably don't have a whole lot of love for him. One of the greatest legacies was his ability to consistently hit earnings estimates that Wall Street analysts would say, you're going to hit X sales, X earnings, and he hit it to a penny with great consistency. GE Capital was one of the levers that he was

able to pull in order to do that. A bit of a two-part question. Setting the table, what would it have meant if General Electric in the Jack Welch era missed earnings by just a penny? We came in one penny short of earnings. Because in my mind, it almost would have given those numbers a little bit more legitimacy to say, nope, you guys were off by a penny. And yet, it was so important to Welch at the time and many CEOs to consistently hit earnings estimates if only by that single cent. Yeah. I mean, part of what Jack was able to do is create a cult of Jack among Wall Street research analysts, most of whom had followed the company for a long time, knew well the industrial side of the business, but not the G capital or financial side

of the business. And they came to rely on Jack's promise of the earnings numbers that he would project to make every quarter. And along the way, as you point out, I think it was like 80 straight quarters, Jack hit those numbers to the penny or a penny over, never under. And that's how GE, which had a AAA credit rating, was the most valuable company in the world for a period of time, and the most respected, never missed earnings. And Jack just felt like this was his religion, in effect. If he told the analysts what he was going to do, he was intent on doing it. And, you know, he tells the story in his own book, which I asked him about and repeat the story in my book when after he had bought Kidder Peabody, which turned out to be a disastrous acquisition. And, you know, Kidder did something in one quarter that was going to make Jack miss his numbers.

he actually went to the other division heads and said, can you generate, can you give me something so that I can make sure that I make these earnings, that we make these earnings? And they all sort of coughed up some sort of profit number or some sort of contribution to the gap that was created by Kidder Peabody to make it possible for Jack and GE to make the number that quarter, which was kind of prima facie evidence of earnings manipulation. And of course, he was trying to convince me the whole time that he never did that, but it was, and yet he's sort of admitting it in his own book that he pressured everybody to come up with what he needed. So he really just was, as I say, this was his religion, making those numbers every quarter. And it was

very effective. When Jack took over the company, it was worth $12 billion. In August of 2000, nine months or so before he left, the company was worth $650 billion. That's quite an increase in value. That's basically the job of the CEO, is to do that kind of thing. To set the table a little bit, Kidder Peabody was a Wall Street investment bank that, when it joined GE, there was a severe culture clash between the General Electric Capital folks and the Kidder Peabody investment banking folks. So, both Immelt and Welch used GE Capital, to my understanding, I could be totally wrong, as sort of a candy store to hit a lot of earnings numbers. In Immelt's case, he gave himself maybe loftier expectations, this sort of $2

earnings per share mantra. And Welch was just kind of consistently hitting those earnings numbers. So, how did both of them use GE Capital as that sort of candy store to hit earnings numbers? Do you think Welch was better at the manipulation, or was Immelt unlucky? Before he became CEO, one of his final tests was to take over the running of GE Capital. Jack did not have a finance background. He was an engineer, and he ran the plastics division and made the plastics division at GE incredibly commercial and incredibly profitable. But he took to GE Capital like a duck to water. He really sort of got off on this ability to arbitrage GE's AAA credit rating, which

allowed GE Capital to borrow very cheaply in the commercial paper markets and then lend out to customers and clients rather expensively. And when I was there, I was financing leveraged buyouts, and we would get complaints all the time from customers that we were charging more than Wall Street charged and other banks. And we were so pricey. But in fact, I think really what we were doing is actually charging appropriately for the risks we were taking. But Jack really got that into a well-oiled machine. I also spent a year working for the chief credit officer at G Capital. So I got to see all the businesses at GE Capital and how they generated an incredible amount of earnings and really how clever they

were under Gary Wendt to become an earnings machine. And over time, GE Capital became the most important business at GE, which most people didn't recognize or realize. 40% of the earnings under Immelt, it was 50% of the earnings. So by the time Jack turned it over to Jeff Immelt, GE Capital was generating between 40% and 50% of GE's earnings. And it was a well oiled machine, first under Gary Wendt and then under Dennis Naden. But Jeff Immelt was in part unlucky because, of course, he started as a CEO on... His first day in the office was September 10th, 2001. And the next day, of course, was September 11th. And he was in Seattle. And of course, the world changed. GE made the engines on those jets, had reinsured the buildings down at

the World Financial Center, owned NBC, which went without advertising for at least a week after 9-11, costing the company hundreds of millions of dollars in revenue. And of course, there was the scandals involving big companies like Enron and WorldCom that resulted in the Sarbanes-Oxley Act being passed, which was much more stringent and required CEOs to sign off on financial statements. But nevertheless, throughout that, GE Capital continued to perform. And I just think that Jeff didn't understand GE Capital as well as Jack did and didn't understand the risks as well and didn't have the same team in place that jack did and so come the 2008 financial crisis people didn't really realize it at the time because everyone was focused on what was going

on on wall street which was of course a meltdown but ge capital also melted down but unlike uh the wall street banks wasn't regulated by the fed uh and so uh you know or wasn't regulated really in the same way by the SEC as they were. And basically, Jeff Immelt had to go hat in hand to Hank Paulson, the Treasury Secretary, and Sheila Baer, the head of the FDIC, to get included in the various lines of credit that were being made available to banks so that GE Capital wouldn't be at a disadvantage to the other banks. You know, essentially, he just did not like the price that he had to pay for that protection and keeping GE Capital out of bankruptcy, which would have happened. When GE Capital became a SIFI, a systemically important financial

institution, Jeff Elmite hated that even more and eventually made the decision to sell GE Capital, which, you know, getting back to your $2 a share proclamation that he kept making that they were going to do in 2018. By then, he had sold off GE Capital and using the proceeds, had bought back $35 billion or so worth of GE stock at a high price and could never make that $2 a share number, even though he kept promising it over and over again. People told him that they weren't going to make it, but he insisted that they were. Essentially, that's what cost him his job. I want to talk about Jeff Immelt for a little bit because you have a fantastic anecdote in the story where he has this security guard named Ed Galanick and he essentially forces the guy to

climb Mount Kilimanjaro with him. And I think this is illustrative of the way he ran GE of essentially not listening to others, even in very serious circumstances and essentially only listening to opinions that affirmed his own. Ed Galanick was, you described him as sort of this tough East coaster who had no business climbing a mountain. And he even says to Immelt, quote, and I'm going to paraphrase, I think it's really unfair to kill me just to have a court jester go up a mountain. So this is to say, you spent time with Jeff Immelt. Did you get a chance to ask him about his side of the story on this? Or were you focused on other, understandably focused on other things. I was focused on many, many other things, but of course I asked him about the trip up

Kilimanjaro and he didn't want to talk about it. So that was one thing for some reason he didn't want to talk about, maybe because he knew or maybe he didn't know what Ed Galanick had told me. And by the way, you know, speaking to Ed Galanick was it was total serendipity because it turns out that after Ed Galanick was working directly for Jeff as his head of security, he ended up when I met him, he was working sort of at the security door at CNBC in Times Square. So when I would go and be on CNBC, you know, Ed Galanick would be the guy to let me in the door. And, you know, he eventually figured out that I was the guy writing this book about GE. And so he just, you know, kept pulling me aside and couldn't wait to tell me all these various stories that he was on the record for in the book, including this story of Kilimanjaro, which, you know, I just think is the most revealing, as you said, story about Jeff and forcing poor Ed Galanick. who had you know i mean jeff had trained you know because this was his daughter's uh graduation from college wish you know he said to her you know i've been preoccupied with ge you know i probably

haven't been the best father you know and you're graduating from college what do you want to do i'll do anything you want i'll go anywhere you want and she said i want to climb mount kilimanjaro so you know she had trained and her friend that came with them had trained and jeff had trained, you know, such as you can to climb a mountain. But Ed Galanick had not trained and did not want to go. And Jeff forced him to go. And literally, I think it almost killed Ed Galanick. He was very good natured about it. When he told me about it, he thought it was kind of like a lark, even though, you know, it was very dangerous for him. And he never even made it to the top because he had to turn back. And I just couldn't believe that Jeff had forced this. And of course,

Jeff didn't want to talk about that because he knew what he had done was over the bounds. One of Immelt's most famous deals was selling NBC Universal. Immelt described it as a luxury that it could no longer afford. I don't know if I necessarily agree with that, but one of the things going on as NBC Universal was being prepared to be sold was that they would make these random cuts to programming and content. We need to get $100 million of expenses off before the end of the year, and then we're going to reposition this production schedule to fit in better with our expense management. Now, you might be seeing a similar situation at Warner Brothers Discovery, where the company is slashing and burning content. You have some of the similar

players of David Zaslav running Warner Brothers Discovery. Is your studying of the history of NBC Universal influence your viewpoint that perhaps Warner Brothers Discovery may be prepared for getting sold or combined into another company? Well, I've been writing at Puck regularly about my sense that NBCUniversal, which is now owned by Comcast, and Warner Brothers Discovery, which is, of course, run by David Zasloff and a public company, that they're both sort of, they kind of need each other, and they're both undersized compared to Disney and the threats posed to their business model by Amazon and Apple, which obviously are much larger capitalized companies, much bigger. And so I've been sort of advocating, you know, for the last, you know,

six months or so, the inevitable combination between NBC Universal and Warner Brothers Discovery. Of course, you know, the people at those companies, you know, poo-poo it at the moment because of course they have to because of the uh rules that allowed warner brothers just you know discovered to be formed in the first place under the morris trust reverse morris trust rules and under those rules you know there can't be a change of ownership or a change of structure for two years so that would put it at april 2024 however both there's no question that they need each other. And I suspect at some point soon, those discussions will begin if they haven't started already, even though there won't be any announcement for some time. It takes

a long time to figure out the structure of that kind of complicated combination, and as well as any regulatory approval would take a very long time too. So I suspect that it'll happen. You You know, David Zaslav is really a pioneer in cable business and has, I think, done a good job leading Discovery. He probably got snookered a little bit by the AT&T folks who loaded up Warner Brothers Discovery with $55 billion of debt, which was sort of the price of admission for David Zaslav to get control of the old time Warner. And then now he's got to sort of live with that burden.

And so I think that's why he's cutting and burning, slashing and burning as best he can to make sure that the EBITDA for Warner Brothers Discovery is what he's telling the street it is. You know, the good news is that after a pretty bad 2022 where the stock fell something like 60 percent, it's sort of off to the races so far this year. It was up like 18 percent last time I checked. But I think the combination of the two is pretty much inevitable, even though I may be among only a handful of people who believe that at the moment. What makes it corporations don't necessarily have to merge?

They can they can exist and live and die on their own. What makes it inevitable? Well, what I think makes it inevitable is just the competitive landscape and the ambitions of the people involved. You know, Brian Roberts has always been, you know, ambitious for Comcast to make it, you know, as big as it is, a $200 billion market value company. But I think, you know, he clearly got NBCUniversal at a bargain price from GE. Jeff Immelt sold it without an auction, you know, soon after the financial crisis in 2009. You know, at one point pre-pandemic, that business was probably worth about $100 billion. The pandemic has been kind of rough on linear TV, and so those numbers are down.

And so I'm sure Brian Roberts is smart enough to know that NBCUniversal is no longer a size where it can compete effectively against Disney or Apple or Amazon. You know, the streaming business, you know, is costing him a lot of money. And also, you know, Warner Brothers Discovery is sort of subsized and has a lot of great assets, but too much debt, as we were talking about, you know, struggling kind of on the EBITDA line. And it's got its own costs related to the streaming business. So combining the two would make for a major league competitor to Disney and Apple and Amazon and would help spread out that debt over more assets and more cash flow. And so it might mean that, of course, Comcast has to control 51 percent of it because I think Brian Roberts would want to have at least ownership control as he did during the first phase of the NBC Universal deal. but I think it's a deal that could get done that would allow David Zaslav to run the combined company, which is, I think, his goal. So I think it's a way to make it all worthwhile and make a

major league competitor to Disney. As we get towards the end of the conversation, going to turn it back to General Electric, you've described your book as a corporate autopsy. Do you have a time of death? There's plenty of finger-pointing reasons, and those can be found in the pages, But do you have a time of death for your corporate autopsy of General Electric? There were a number of important moments where the death spiral began. Among them, the decision to sell NBCU in 2009 without an auction for a total of around $30 billion to Comcast. That was number one.

Number two was the decision to buy Alstom and wildly overpay for it when actually Jeff probably could have gotten out of the deal and chose not to and chose to close the deal. That was number two. Number three was the decision to sell GE Capital and make an announcement that you were doing that so buyers knew that you had to sell it and probably got his pocket picked by some smart buyers like Blackstone and Wells Fargo. And number four was bringing in Nelson Peltz at Tryon Partners as a hedge fund, an activist hedge fund. Jeff's idea was he was going to sort of ratify his brilliant recreation of the company. And of course, with Nelson Peltz,

There's no such bargain. And when it was clear that he wasn't going to achieve this two dollars a share, that was the end of Jeff and frankly, the end of the company, because, you know, as John Flannery, who took over from Jeff Immelt, quickly discovered there were hidden time bombs that Jeff had not really addressed, shall we say, that Jeff John Flannery had to address and announce. So, I don't know, the time of the death was probably when Jeff Immelt got fired in June of 2017, I guess. So, that was probably the end of it, even though it took a few more years for the plug to finally get pulled. It was basically in hospice from June 2017 on. William Cohen, he's the author of Power Failure, The Rise and Fall of an American Icon. He's the co-founder of Puck, or founder, excuse me, of Puck as well. Thank you so much for joining us on Motley Fool Money. I appreciate your time and recommend the book.

It's a thorough and engaging history of one of the most powerful icons of American history. Thank you very much for having me. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow.