<font color=red>[2]Landmark FORTUNE 500 article on Gary Wendt and GECAPITAL: a must read,
fortune.com
Market intelligence pours into Capital from throughout GE as part of a
rich reciprocal relationship. For instance, GE Power Systems builds
power plants and therefore knows the utility industry cold. From those
sources, Capital's managers learned firsthand of the utilities' feeble
efforts at customer service--billing, collections, the touchie-feelie stuff
that has nothing to do with the heavy-metal business of power
generation. Preoccupied by utility deregulation, many power
companies are eager to shed ancillary activities like billing. This
information found its way to Capital's Retailer Financial Services
group, which does billing and collections for 75 million store-brand
credit card holders. A new business was born.
GE's intelligence network points out hazards too. The same skinny on
utilities fed through to FGIC, Capital's municipal bond insurance
business. Over the years, utility revenue bonds have been one of the
bread-and-butter sectors of the muni market for insurers. As the name
implies, these bonds are backed not by taxpayers but by the revenues
utilities produce. From GE's internal sources, FGIC head Ann Stern
got an inside take on the disarray in that rapidly deregulating industry.
Based on what Stern found out, she says, "we decided that we didn't
want to be making 30-year guarantees in industries that were going
through such radical change." Startling its peers, Capital pulled away
from insuring utility bonds and for similar reasons, backed away from
insuring health-care bonds as well.
And what does Capital give GE? Valuable customers, for one thing:
Capital provides financing for the customers of GE divisions like
Aircraft, Power Systems, and Automotive, which helps smooth the
way for those divisions to land large contracts. One of the more
notable instances of a possible link came when Continental Airlines
was struggling in bankruptcy in 1993. Loans from GE Capital helped
put Continental back in the air. Next came a big order from
Continental for new planes--most with GE engines. Says consultant
Tichy: "Capital is part of the arsenal for GE's industrial side to beat the
competition."
It's Just Like a Mutual Fund
Competitors have a hard time understanding Capital's unusual
approach to business risk. Put simply, Capital seeks to eliminate--or at
least reduce--all risks that do not carry a big potential payoff (like
insuring utility bonds) and to save its risk-taking for the few that do. It
also minimizes the risks posed by any one venture by owning a broad
mix of businesses. That strategy is not unlike the way savvy investors
manage their portfolios. Says Vince Breitenbach, a fixed-income
analyst at Lehman Brothers: "The way I've come to analyze GE Capital
Services goes back to the basics of finance and portfolio theory."
Think of mutual funds. Investors buy them to diversify their money over
many companies, thus reducing their risks. With 27 businesses, Capital
has enough diversification to offset a slump in one with a surge in
another. Good investors may try to be like Capital, but business
leaders rarely do. Corporate diversification got a bad name in the
1970s and early 1980s, when lumbering conglomerates became
synonymous with mediocrity. The difference between them and Capital
is that the conglomerates grew dull through diversification while Capital
uses it to hone an already sharp edge.
Capital's penchant to protect itself goes well beyond diversification.
Whether it is lending or leasing, it always has plenty of collateral to fall
back on, and it employs a squad of "asset managers" whose job is to
know exactly what the collateral is worth. With that protection it will
eagerly make investments other companies might find too dicey. In the
early 1990s, for example, it was among the largest buyer of problem
loans and properties from the Resolution Trust Corp. That looked like
a risky investment at the time, but not now: Capital has reaped a
mountain of capital gains from the RTC assets it bought.
Where Capital gets timid is with the risks that don't carry a big reward.
Take interest rates. Each of its businesses aligns the maturity of all
credits and debits to make for a "matched book," one that is generally
unaffected by interest-rate swings. Currency risks are hedged away
whenever possible. Where it can't get rid of risks altogether, Capital
shares them through joint ventures. In its private-label credit card
business, it normally makes the sponsoring retailer share any losses.
The major risk in the leasing business is predicting the residual value of
assets under lease. If a company foresees a high residual value on a car
or a plane, it can price the lease cheaply and still make a good profit.
But if the car or plane is worth less than forecast when it comes off
lease, the company can end up losing money. Capital takes several
steps to reduce this risk. In its car-fleet leasing business, it typically
sticks customers with the risk of what the cars will be worth coming off
lease. When Capital accepts the risk, say, with airplanes, it makes
conservative assumptions about what the plane will be worth and
factors that into the price of the lease. It's an effective strategy: Capital
has a pile of gains from its assets under lease (capital gains furnish 15%
to 20% of its earnings every year).
Capital incorporates risk management directly into its culture by
deploying risk managers alongside business leaders at each of the 27
bubbles. These folks check out customers, run probabilities, and
advise business leaders on every move. Banks have risk managers too,
but in many cases the relationship with business managers is distant
because the risk-management process is highly centralized. Capital's
chief risk manager Jim Colica sees no sense in running his business that
way. "Part of the assessment our business leaders make on a new
piece of business is whether or not we'll get paid. That's why we put
risk managers down in trenches with them."
Capital also uses quantitatively triggered danger signals, called smoke
detectors, to alert it to trouble. In each business, the risk manager
identifies the four or five main factors contributing to potential
profitability. Says Colica: "This is not done by a bunch of people sitting
around a table talking. We study the history to understand how we
make money in that product." Once the profit drivers have been
determined, businesses leaders set the smoke detectors to alert them
to any significant change.
It's impossible to wring all the risk out of anything, of course. But
Capital takes extra steps with a proprietary software tool called
Globalnet, which keeps worldwide track of GE's exposure to every
client across all lines of business. The potency of that cross-checking is
hard to appreciate, so imagine American Express doing a similar thing
with you. It would calculate what you had recently charged to your
Amex card, then add on any fees you might owe to Amex's financial
planners, as well as the outstanding balance with American Express
Travel for your last holiday. Before you could spend beyond a preset
credit limit, a team of analysts would review your financial health, your
career path, maybe even the state of your marriage. GE Capital takes
the same sort of financial X-ray, not of people, but of every company
with which it has business.
Finally, Capital establishes a credit ceiling for its customers, typically
$50 million. Any new credit beyond that amount, however small,
requires the signature of Nayden or Wendt. "John Reed [CEO of
Citicorp] isn't signing off on credit reports," says Nayden. "We are." A
credit extension beyond $100 million, no matter who's getting it, goes
to Capital's board, where Welch weighs in. The limits don't hinder
growth, but they do make it more thoughtful and greatly reduce the
odds of a nasty surprise. How then, you might ask, did Capital get hit
with one of the business world's nastiest surprises: the collapse of
Kidder Peabody, a debacle that swept $1.2 billion from Capital's
1994 earnings? The short answer from the people at Capital is that it
was not their fault. Yes, Kidder's assets were on Capital's balance
sheet, and yes, its profits--while they lasted--came into Capital's
coffers. But Capital did not manage Kidder. Strangely, the reason
involved personalities. Michael Carpenter, Kidder's head and a good
friend of Jack Welch, did not get along with Gary Wendt. So Welch
allowed Carpenter to report directly to him. That kept Kidder under
intense pressure to grow, but effectively removed it from Capital's
sophisticated financial controls.
New Frontiers
Despite the Kidder fiasco, Capital has not abandoned Wall Street: At
the end of last year it launched the Capital Markets Group, with a
mandate to address the financing needs of its customers. Shortly
thereafter, it launched a merchant banking business--that's on top of
the service extensions, the moves into insurance, infotech, subprime
lending, you name it. Capital even bought a Mexican bank recently, in
anticipation of an RTC-style privatization of troubled Mexican assets.
Interestingly, the major concern about Capital's future has nothing to
do with measuring risk or goosing growth. Instead it's a people
question. Five years ago, Capital had 30,000 employees; today it has
53,000, ranging from Mexican bankers to Chinese satellite engineers.
Will its creed on growth, risk reduction, and all the rest make sense to
them? Nayden calls that "our biggest cultural challenge."
Nowhere do Capital's money, market intelligence, and obsession to
grow combine better than in Europe. Foreign markets are usually
cheaper than those in the U.S., and their businesses are ripe for
GE-brand improvements. Capital has become a binge buyer of
European companies that are just beginning to impose the efficiencies
GE mandated a decade ago. It purchases a company that fits well with
one of its domestic niche businesses, say truck leasing, and then injects
all of its accumulated expertise to give that business an edge. Says
Christopher Mackenzie, the British national commanding Capital's
European offensive: "Customers say our niche approach is what helps
us win market share."
Big challenges, big plans, big resources--and day by day, a bigger
reputation. But ultimately, what's most interesting about Capital is that
the risks it confronts are so different from those of the businesses it
competes with. Most companies are terrified of a recession. At
Capital, many people hope for one. A recession would bring down
asset values, they say, letting Capital do more of what it does
best--pounce on trouble.
How many other companies dare hold that view?
A High-Powered Prep School
GE Capital isn't just about earnings growth--it's where rising stars learn
how to deal.
It's not quite a Station of the Cross for rising stars, but GE Capital
comes as close as anything in the secular world. AlliedSignal's Larry
Bossidy and NBC's Bob Wright both ran Capital, and Welch himself
learned the sublime art of the deal there. Welch oversaw Capital as
part of the Consumer Products and Services Sector he headed in the
1970s; he remembers it as a "fascinating" point in his career.
NBC's turnaround maestro, Bob Wright,
was Capital's leader from 1984 to 1986.
But what he experienced in that short
time changed his view of how quickly a
business can move if the casting is right.
"Judgment is what they live off at
Capital," says Wright. "It restressed to
me the importance of having quality
people." Wright also learned a few things
about making bold moves. His biggest
was the $1.1 billion purchase of Employers Reinsurance; his most
regrettable--buying Kidder Peabody.
Bossidy, who is now reviving AlliedSignal, spent 21 years at Capital,
ultimately becoming the boss in 1986, and holding that position for four
years. He says his time there gave him a strong sense of which
businesses are good to be in and which are not. "At Capital you see
them all," he says. Bossidy also learned a bundle about generating
growth, "because that's what Capital is all about." His acquiring and
divesting skills have helped AlliedSignal grow steadily.
Now there's Gary Wendt, who worked
closely with Bossidy and then took
control of Capital in 1990. Though he is
not destined to succeed Welch, Wendt
could wind up as the CEO of another
major company. Should Wendt leave--a
possibility he alluded to in his divorce
proceedings--take close note of his
replacement. If it's a middle-aged
heavyweight, like GE's chief financial
officer, Dennis Dammerman, it probably won't mean much. But if a
young Turk gets the job, it could mark the grooming of GE's future
CEO.
Head-To-Head With IBM
With its move into information technology, Capital takes on the
heavyweights.
Few ventures have required as much analysis or strategic rethinking as
Capital's move into the tantalizing--and treacherous--field of infotech.
Though Capital has long had a toe in this business, last year it
immersed itself, acquiring Ameridata, a fast-growing computer service
company, for about $400 million; Europe's Compunet ($275 million);
Australia's Ferntree ($40); and since then, roughly a deal a month.
From next to nothing, GE Capital now generates annual infotech
revenues of $6 billion.
How did it get from there to here? "We have not, until recently, found
a way to play in that industry that dealt with the technological risk on
the one hand or the pricing risk on the other," says executive vice
president Nigel Andrews. "We now really believe we've found the
way." The risks are especially hazardous to companies in the leasing
business because, unlike most leased assets, which tend to lose value
gradually and predictably, computers can be rendered virtually
worthless by unanticipated leaps in technology. Capital recently pulled
out of computer leasing for just this reason.
But Capital believes that a lucrative, lower-risk niche remains. As the
computer market has moved away from mainframes toward networks
driven by on-site servers (basically, souped-up PCs), the local
networks have had to get smarter. For Capital, that's a service
opportunity. Its newest "bubble," Information Technology Solutions,
provides "soup to nuts" computer services, says Jerry Poch, former
Ameridata CEO who runs Capital's IT business--everything from
financing a company's computer purchases to hooking up its local-area
and wide-area networks to off-site monitoring of the entire system.
According to Dataquest, about $300 billion of the $800-billion-a-year
infotech market comes from just the kinds of services that Capital is
offering.
As he does with all of Capital's major ventures, Wendt tested the
waters first, with a small IT solutions business in Canada. On the basis
of that success, Capital became aggressively acquisitive. But the real
trick for its Solutions business will be to find a solution to the tiny
margins in this trade. Right now the new business gets about 85% of its
revenue from selling computers to corporate customers--a middleman
activity with little or no value added, and hardly enough to satisfy
Capital's demand for a 20% or better return on equity. Says Poch:
"Our goal is to increase the service side of the business much faster."
That side is growing 35% to 40% a year, a rate Poch believes will
soon carry IT Solutions over Capital's return hurdle. It's a nice figure,
but not the only one worth pondering. Another is the growing number
of heavyweight competitors in this field. IBM and Hewlett-Packard
also offer systems integration. And they, too, have strong credit ratings,
enabling them to finance computer sales at roughly the same rates as
Capital's. Poch believes Capital's advantage will come from its strong
service orientation and the fact that it is not bound to any manufacturer,
though he will partner with manufacturers on occasion, like IBM. His
goal is to raise revenues from $6 billion this year to $10 billion by the
year 2000. Funny, that's just enough time to become a presence on
Gary Wendt's three-year chart of hits and misses.
An Unhappy Marriage
Gary Wendt is in the midst of a bitter divorce from his
wife. In sworn testimony, he said his relationship with
his boss isn't so good either.
Despite his success at Capital, Gary Wendt said during a deposition
last year in his divorce case that he is neither happy in his job nor
popular with his boss. It's possible that Wendt exaggerated his troubles
at GE to downplay his earnings potential; in addition to alimony, Lorna
Wendt is requesting half the assets accumulated during their 32-year
marriage, including half the value of options and restricted stock
granted to Gary, some of which may not vest for several years. Here,
Wendt is questioned under oath by attorneys for Lorna.
[Have] you [had] any thoughts or plans about leaving GE?
Yes.... I was considered for the job as the head of Prudential
Insurance Co. at one point, but I wasn't given the job....
Did anyone know that, like Lorna? Yes, Welch even knew about
it. He probably would have been happy to get rid of me at that point
was the impression I got. You never know.
But they didn't offer you the job? No, no. Too old, too fat, too
smart....
So no other thoughts or opportunities since then? ... I've had
great difficulties working in this company, and at one time I did talk
about leaving, yes. There was going to come a time when I couldn't
stand it anymore, and I just had to leave. And that's happened within
the last two years....
So whatever that condition was, you've overcome that? No, it
comes and goes. I still think about it....
Well, do you get along with Mr. Welch? Well, yes and no. I have a
great deal of respect for him. He's very difficult on me, I find.
Is that something you would tell him directly? I have. |
