<font color=red]Landmark FORTUNE 500 article on Gary Wendt and GECAPITAL: a must read,
fortune.com
For some reason I missed this in my previous reviews.
Here it is.Enjoy, ( especially shorts such as brother donjuan,
I am sure will appreciate all the subtleties
as well as the not so subtle forces generated by Wendt ).
I opened the article for you in case you have any problems,
( just being my usual helpful self; no need need to get all
worked up shories, vbg ):
November 10, 1997
GE Capital: Jack Welch's Secret Weapon
GE Capital Services powers GE's earnings, drives GE's
stock, and scares the hell out of GE's competitors.
Here's the inside story of how Capital does it.
John Curran
Reporter Associates Bethany McLean, Lixandra Urresta
Plus:
A High-Powered Prep School
Head-to-Head With IBM
An Unhappy Marriag
For most investors, there's just General Electric, arguably the world's
most successful company--a maker of refrigerators, light bulbs, and
more sophisticated industrial equipment. At another level, a small
crowd of professional GE watchers know that CEO Jack Welch owes
a surprising amount of his success to a profit dynamo called GE
Capital Services. What only a handful of people understand--given GE
Capital's reclusive nature--is how important this secret weapon has
become to GE's continued prosperity, and what a model it is for
managers trying to grow in any business.
Capital, as it's known inside GE, is less a
business than an energy source, radiating
growth through a mature--some might say
lackluster--conglomerate. You can see it in
GE's third-quarter results, where Capital
comfortably outgrew its parent. But not until
you break down GE's performance in
recent years are you struck by the glow of
its nuclear core. Nicholas Heymann, an
analyst at Prudential Securities, calculates
that from 1991 to 1996, GE's revenues
would have increased just 4% a year were
it not for Capital, which more than doubled
the growth rate to 9.1%. And its 27
businesses, ranging from credit cards to
computer programming to satellite leasing, now generate 39% of GE's
earnings, up from 29% in 1990. As some analysts see it, Wall Street's
confidence in Capital is the main reason GE stock is rising at a rate that
makes the overall market advance look modest, up 123% in two
years, vs. 63% for the S&P 500.
This is no upstart business posting outsize stats: If Capital were an
independent company, its $32.7 billion in annual revenues would make
it No. 20 on the Fortune 500--ahead of Citicorp. It began life ever so
humbly in the 1930s as a captive finance subsidiary formed to bankroll
GE's washing machines and other household appliances. Through a
chain reaction of acquisitions, startups, and business extensions, it
mutated into something else entirely. Consider:
Capital is the world's biggest equipment lessor, with over 900 airplanes
(more than any airline), 188,000 railcars (more than any railroad),
750,000 cars, 120,000 trucks, and 11 satellites (that comes to about
$2 billion in annual depreciation--quite a deduction). It owns the
third-largest reinsurer in the country, Employers Re, which also ranks
as the third-largest business within GE. Do you have a commercial loan
or a residential mortgage? Capital is not a bank, but it may be handling
both of these. Need an intranet designed for your company? Call
Capital. If you're using a store-sponsored credit card, whether it's from
Home Depot or Harrods, you're paying interest to Capital. Here's a
real mind-bender: Until recently, if you called Kodak to get financing
on one of its copiers, the guy who answered the phone would be a
Capital employee.
Think you're surrounded? You are. And Capital's reinforcements just
keep coming. In the past two years it has moved aggressively into
computer services and life insurance, and invested billions of dollars
overseas. In Europe alone it has made 76 acquisitions over the past
three years, enveloping a region from which it expects to earn $1
billion by the year 2000 (it currently earns half that).
Capital's success represents much more than the achievements of its
CEO, who is not Jack Welch. Under the direction of Gary Wendt, 55,
Capital is emerging as a new growth paradigm for companies trying to
prosper in a world where price increases are a fading memory.
European businesses see Capital as a model for restructuring, and even
parent GE is borrowing some of its strategies. Of course, the
companies watching most closely are the nation's banks. Because the
easy availability of money from securities markets has eroded the
profitability of traditional commercial lending, banks are desperately
seeking new ways to grow. Capital provides an example--not to
mention a possible bonus: enabling the banks to shed their poor-boy
P/E multiples.
Rapid growth in a financial company is never without risk. But Capital
is no Westinghouse Credit, another captive finance company that set
out on the fast track but wound up a wreck in 1992, after billions of
dollars in loan losses. There's another difference between GE and
Westinghouse: GE's stock has risen 400% since 1990, while
Westinghouse sells for 30% below its 1990 high. Capital has taken
some hits in recent years--the fall of Kidder Peabody and the
bankruptcy of Montgomery Ward, to name two. But nothing has ever
jeopardized the feat Wendt is proudest of: Capital's 18% average
annual profit growth of the past five years. Wendt even shows off a
chart revealing that while half his businesses missed their three-year
growth targets in 1996, Capital still beat its overall three-year $750
million target by $1.1 billion, bringing total 1996 profits to $2.8 billion.
Capital powers its growth with a combination of management and
financial skills that would become the business bible if they were ever
publicly codified. The model is complex, but what makes it succeed is
not: a cultlike obsession with growth, groundbreaking ways to control
risk, and market intelligence the CIA would kill for. Of course, it helps
to be the offspring of America's most successful parent, with all the
attendant privileges, including a triple-A credit rating.
But it's not the low borrowing rates that come with a golden credit
rating that give Capital an advantage in today's flush capital markets.
Instead, Wendt cites the more crucial but less tangible benefits of
Capital's links to GE: "The most important part of the GE value to us is
its management structure. Jack Welch is not only a heroic form of
CEO, there's also a long history of building management practices
here." That's not standard Welch worship: These two men don't get
along very well, and Wendt has talked openly of quitting (see "An
Unhappy Marriage"). Even so, he readily acknowledges the benefits
Welch has brought to every corner of GE: a low-cost culture and the
free flow of information among GE's divisions, which gives Capital
access to the best practices of some of the world's best industrial
businesses.
No one is better at capitalizing on this boundaryless environment than
Wendt. Welch calls him "a brilliant entrepreneur" who can take a
morsel of ingenuity from anywhere in GE and turn it into a mound of
money. Wendt also happens to be one of the shrewdest people at the
company, with an eye for spotting trends and an ability to move fast.
He's a "planned opportunist," says Noel Tichy, a management
consultant who co-authored a book on GE and who profiles Wendt in
a new book on leadership. Yet compared with his predecessors at
Capital--a sainted crew including AlliedSignal's Larry Bossidy, NBC's
Bob Wright, and even Jack Welch in an oversight capacity--Wendt is
the odd fellow, a quirky man who tends to become so preoccupied
that he forgets he's in the presence of others. He may absent-mindedly
chew up a Styrofoam coffee cup during a meeting or take the
discussion off in a strange direction or just abruptly walk out.
Wendt could be excused for blaming some of his personal foibles on
the stress of his home life. (To be fair, his very estranged wife feels she
has a lot to blame him for, too.) Lorna and Gary Wendt are in the
midst of a megamoney divorce battle, one that embarrassed Jack
Welch's company in the Wall Street Journal and that has become a
landmark court case. A friend attributes the blowup of Wendt's
personal life to a flaw that's not uncommon among high-powered
executives: applying office skills--he's a relentless negotiator--to
personal affairs, like his divorce. In the understated words of Wendt's
friend, this strategy "backfired." And now Lorna Wendt doesn't just
want a hefty alimony; she is demanding precisely half of what the court
thinks her husband is worth.
Life was a lot simpler in 1967, when Wendt graduated from Harvard
Business School. Back then, he kissed off the corporate world to sell
undeveloped land parcels for a Texas auto dealer. "He promised to
make me a millionaire ... and give me a brand-new Cadillac if I took
the job," says Wendt. He got the car, but the million disappeared when
the auto dealer went bust. Even today, after more than two decades at
GE, Wendt is still in many ways an outsider. Says a former GE
executive: "Wendt is the only top executive at a GE function who won't
be kissing Jack's ass."
Instead he does something far more seductive: delivers consistent
high-powered growth. Moreover, he has convinced Wall Street that
Capital can keep growing, no matter which way the economy swings.
Says analyst Heymann, a former GE auditor: "The old idea was that
you shouldn't pay a premium multiple for GE stock because nearly
40% of earnings comes from financial services, a low P/E business.
But the market is learning that Capital is different from cyclical
financial-service firms, that its better-than-15% growth rate is
practically guaranteed." With GE shares selling at a P/E of 28, virtually
the entire financial-services discount is gone.
That P/E represents the payoff from a vision Jack Welch has been
pursuing for years. Out of one eye, he sees good ol' GE, full of
slower-growing moneymakers like plastics, lighting, and aircraft
engines. Together they throw off most of what's needed to pay
dividends, buy back shares, and fetch that triple-A credit rating. Out of
the other eye, Welch sees GE Capital: opportunistic, entrepreneurial,
fast growing. Management theory has long talked of how a company's
"rising star" growth business can be nourished by its slower-growing
"cash cow." But never has the theory been implemented so
dynamically, or with such impressive results, as at GE. And never has it
been applied to such a diverse entity as Capital, which is more like a
constellation than a single star. So successful is this relationship that
Capital has become something of a cash cow itself--it recently raised
the percentage of profits it pays to GE from 35% to 40%.
To some Capital employees, Welch's vision may seem like a
hallucination, particularly the fever line showing Capital's profit targets,
which Wendt raises yet again--this year it's close to $3.3 billion. "You
know how it goes," says Wendt. "Jack gives me targets, I raise them
15%, and the people I talk to raise them to 25%."
How it Works
The short answer to how Capital meets such aggressive goals is this: It
constantly defies its size. Wendt runs a $33 billion empire as a string of
niche businesses. He operates with a lean headquarters staff in a
nondescript building in Stamford, Conn., 20 miles from GE's executive
offices in Fairfield. His first team consists of Capital's president, Denis
Nayden; three executive vice presidents; plus a financial manager and a
chief risk manager (the equivalent of a safety chief at a nuclear plant).
Though some of the 27 business leaders operate out of Stamford, none
work at headquarters. "I don't want them with me," says Wendt. "I
want them with their customers." The business leaders stay close to
their markets and concentrate only on what they know. When a new
opportunity arises, Capital launches a new business, which grows to
become a "bubble" once earnings reach $25 million. Thus, retailer
financial services, which provides revolving credit for 75 million
cardholders, begets a bubble, consumer financial services, a
stand-alone venture offering GE's own cards.
This narrow focus enables Capital's components to operate with a
clear idea of profit and loss. That may sound basic, but countless
companies can't create true income statements for their different lines
of business. Banks, in particular, rely on accounting fuzziness, say, by
making commercial loans at artificially low rates (a hidden loss) in
order to lure customers to whom they can then sell other services.
Says Scott Winslow, who recently coordinated a confidential study for
the Banking Board, an industry strategy group: "Most banks continue
to manage their enterprises as one large business with a number of
sub-businesses, whereas GE Capital actually operates as a series of
separate, independent subsidiaries. That way, you don't end up with a
lot of the cross-subsidization that you get in a lot of bank holding
companies."
From Stamford, the small management crew adds its potent ingredients
to Capital's mix: funding (at GE's low borrowing rates) and frequent
performance reviews (at GE's high intensity). There's something else,
too, that's harder to measure: a careful blend of personalities and
talents. Wendt provides broad direction and stays atop Capital's
dealmaking. Nayden, tough, intense, and generally not well liked (he's
sometimes referred to as "Wendt's pit bull"), is highly effective at
focusing the staff on the Welch/Wendt vision, especially that steep line
at the center. Welch sees Wendt and Nayden as a "wonderful
combination" of visionary and taskmaster. Nayden agrees: "Gary is
more strategic; I'm good at execution."
All five of Capital's top people are longtime GE employees. Wendt
and Nayden have spent their entire GE careers at Capital (22 years for
Wendt, 20 for Nayden); EVPs Michael Neal, Nigel Andrews, and
Edward Stewart come from GE's industrial side (Neal and Andrews
ran businesses, Stewart was a financial analyst). This unusual
combination of dealmaking skill and operations expertise is one of the
keys to Capital's success. In other words, Capital not only buys, sells,
and lends to companies but also, unlike love 'em and leave 'em Wall
Street, excels at running them. Says Welch: "It is what differentiates
GE Capital Services from a pure financial house."
Capital's ability to actually manage a business often saves it from
writing off a bad loan or swallowing a leasing loss. When loans to Tiger
International, parent of North American Railcar Corp., went sour in
1983, Capital stepped in and became a railcar leasing company, now a
profitable business. When some of its passenger planes came off lease
into a soft market, Capital converted the planes to cargo carriers,
threw in some seed capital, and launched Polar Air, an independent
cargo line. And get this: After loans to the Houston Astrodome
consortium went bad in the 1980s, the banks involved took big
write-offs. Capital said, "Play ball!" It co-ran the Astros for nearly two
years rather than write down its loans. The Astros kept losing, but
Capital ultimately made a good return, in part by introducing
crowd-pleasing promotions. Today banks like First Union and Mellon
Bank are moving aggressively into leasing railcars and aircraft. The
question is whether the banks will be able to improvise when trouble
strikes.
A Growth Obsession
The culture at Capital isn't just entrepreneurial, it's aggressively so.
"You don't work there unless you're very self-confident," says an
executive recruiter. "They can smell weakness and indecision." The
growth anxiety is pervasive. "They're all afraid of not making their
numbers," says a consultant who works with Capital. That includes
CFO Jim Parke, who oversees more than $1.5 trillion of commercial
paper issuance each year, not to mention $100 billion of derivative
"hedging" contracts. What worries him most? "Growth," he says
simply.
Within the niches, the nudges to grow faster are endless. Says Wendt:
"I tell people it's their responsibility to be looking for the next
opportunity. Where is their customer moving? What are their needs?"
That's what's known as the "loose" half of a loose-tight development
process. It yields an endless stream of ideas at Wendt's weekly
Monday meeting, where the environment is nurturing and forgiving. The
gentle handling of egos and ideas lasts only as long as there's no money
on the table. If an idea has the potential to generate $50 million in
profits within five years, then funding becomes a possibility, and the
"tight" phase begins. Wendt, Nayden, and their inner circle unleash a
merciless interrogation about expected margins, potential customers,
regulatory issues, prospects for competitive advantage. Most ideas die
under that barrage. But the few that survive have access to Capital's
deep pockets and the vast resources of GE.
Capital's growth comes in many forms, but nothing equals the
bottom-line boost of a big acquisition. Says Michael Neal: "I spend
probably half my time looking at deals, as do people like me, as do the
business leaders." Over the past three years Capital has spent $11.8
billion on dozens of acquisitions. But it sized up hundreds more,
keeping the top team forever on the move. Stephen Berger, now a
general partner at Odyssey Partners, a New York investment firm,
was an executive vice president at Capital for 2 1/2 years. "The reason
I left," he says, "is that I never saw my kids."
Going forward, acquisitions will contribute less to Capital's growth
because the price of assets around the globe has risen too far too fast.
That may not slow some companies, but it's anathema to Capital.
"They don't put money on the table except to get a very high return,"
says a banker who has worked with the company. Last year, when a
major financial company put some of its businesses up for sale, Capital
was interested in one. Yet even using the most generous assumptions
about cost savings and other efficiencies, Capital's analysts couldn't
justify much more than a $200 million bid. It lost out to another bidder
who reportedly paid $350 million.
Fewer takeovers will make it harder for Capital to reach its ambitious
growth targets, but Wendt does not seem too worried. He is
repositioning his money machine toward internal growth driven by
value-added services. Acquisitions took advantage of GE's low cost of
funds, but service growth, which doesn't require much investment,
offers something better: higher returns. In the leasing business, for
example, all those trains, planes, and automobiles generate countless
repair jobs. By becoming the fixer-upper for its clients, Capital can
save them time and money, and possibly charge more for doing it. And
by keeping the equipment in tiptop shape, Capital can lease it out for
longer, raising profits. The company will now maintain and refurbish its
Penske trucks so they are available 24 hours a day, seven days a
week.
In Capital's lending businesses, service is the new calling card as well.
Capital will not only finance state-of-the-art semiconductor equipment
for a high-tech company, it will buy back the equipment after a few
years, refurbish it, and find a lower-tech user for it, say some
manufacturer that wants to stamp out chips for musical birthday cards.
Yet another boost to growth should come from a quality-improvement
drive now under way throughout GE. Called Six Sigma, it is based on
a customer-driven grading system originally developed at Motorola.
Capital, the first financial-services company to try Six Sigma, will use it
to raise customer satisfaction through such improvements as reduced
response time.
Knowledge Equals Money
Advance intelligence on a new market isn't an advantage for Capital,
it's a requirement. That's why most of its growth occurs incrementally
and why acquisitions tend to be in industries where Capital already has
a stake. "I call it the steppingstone strategy," says David Bechhofer of
Bain & Co. "You rarely see them take big leaps."
The company's foray into subprime lending--making auto loans to
people who are poor credit risks--demonstrates its style. The
subprime business has been rocked by the bankruptcy of Jayhawk
Acceptance and the default of Mercury Finance. With delinquencies
on the rise, the risks have become too great for many banks. As the
banks exit, Capital is entering. It has already made one small
acquisition and is looking for more. What that response belies is six
years of planning. Capital got its first exposure to the subprime market
in 1991, by arranging financing for the big players in the industry. By
last year, Capital's team felt it knew enough to begin building a small
($600 million) portfolio of its own loans. Now, with the industry in
turmoil, it is actively looking to buy.
Similar plotting preceded Capital's move into insurance. Over the past
18 months, it has spent billions taking advantage of the rapid
consolidation sweeping this field. It bought three life companies in
1996, at a cost of $3.2 billion, including $1.8 billion for First Colony of
Lynchburg, Va., a leader in term life insurance. Here, too, Capital
made an intelligence sweep before striking. It got firsthand knowledge
of insurance from an annuity business purchased from Weyerhauser in
1993, as well as from a slew of smaller acquisitions since then. Beyond
that, Capital joined forces with the most aggressive acquirer in the
industry, Conseco, back in 1993. First it made a small investment in a
limited partnership that Conseco had set up to buy companies; a bit
later, Conseco says, Capital became one of its lenders. Through these
deals and its smaller acquisitions, Capital drew itself ever closer to the
dynamics of the business. |
