Front page of New York Times Business Section today....
October 2, 1998
Market Place: Hints of Change at GE Capital
By REED ABELSON
Has GE Capital, the mammoth financial-services operation, become too much of a good thing for its parent, General Electric Co.? Its relentless growth over the years has made it a key source of profit for GE and one of the reasons that the company is famous for making its numbers. But with the tumult abroad and at home causing investors to shy away from financial-service concerns, GE could be looking for ways to divert attention from this golden goose.
Speculation is rampant that General Electric will soon announce sweeping changes at the subsidiary. Gary Wendt, GE Capital's chief executive and the man largely responsible for its success, is widely expected to leave. In addition to naming new leadership to replace him, General Electric is said to be close to a reorganization of GE Capital that would make it easier to manage and a less visible force on the parent company's bottom line.
General Electric does not comment on "rumors and speculation," according to Anthony Zehnder, a spokesman.
With about $40 billion in revenue last year, GE Capital is now composed of 28 businesses ranging from credit cards to truck leasing to insurance. Without doubt, though, GE Capital is a hefty contributor to General Electric's overall profit, about 40 percent of net earnings in 1997.
The talk, among analysts and others who closely watch GE Capital, is that the subsidiary will undergo some sort of shake-up in which it will be split into separate businesses. The expectation is that three distinct units will be created, splitting off the insurance business and dividing the others, perhaps along commercial and consumer lines.
Some of the businesses, like equipment leasing, may also be folded back into divisions within General Electric. GE Capital Railcar Services, for example, a leasing business, could be combined with transportation-system businesses.
The reorganization may make sense on a lot of levels. Given the current disdain for financial-service concerns, out of investors' fear of emerging markets, an economic slowdown and derivatives that go bump in earnings, GE may want to de-emphasize that aspect of its business.
Although its stock has already suffered -- it is off 22 percent from the July high -- investors are still awarding it a hefty price-earnings multiple just above 28, more than twice that of many insurance companies or money-center banks. It closed Thursday at $75.5625. Microsoft recently surpassed GE as the United States' largest company by market value.
To be sure, the company's smoother-than-silk earnings record accounts for some of that premium. "GE has this pristine growth rate, year after year," much of which is due to the cushion afforded a financial-services subsidiary, said David Tice, a Dallas money manager who tends to cast a skeptical eye on companies. While he concedes that the managers at GE are nothing if not smart, "there is more risk within GE than most people give it credit for," he said.
And in an ugly market environment, some critics have been much crueler, calling GE Capital "a hedge fund in drag," as Kathryn Welling reported last month in Barron's -- which dredges up images of billion-dollar losses.
While analysts like Jeffrey Sprague at Salomon Smith Barney have argued that GE Capital does nothing so speculative and is not really vulnerable to disasters in emerging markets, General Electric may want the business to have lower visibility, though a company executive wrote a letter to Barron's defending GE Capital.
The benefit from all this reshuffling could be that investors and analysts poring over General Electric's financial statements will be less struck by GE Capital's prominence. There would be more contributors to earnings, and some of the existing business lines could have the benefit of some of GE Capital's profits.
GE may also be hoping that a little reorganization could squeeze more income out of GE Capital, at a time when the parent company can use all the help it can get to keep delivering ever-higher profits.
There is also Wendt. Despite his well-publicized role in making GE Capital a roaring success, he is said to have a poor relationship with John Welch Jr., the 62-year-old chairman and chief executive of General Electric.
Even though Wendt's confession, during his ugly divorce proceedings, that he and Welch were not the best of friends, has helped fuel this talk, people who know both men say they do not get along very well. Welch may also be looking for a successor, and many believe that Wendt is not it. Wendt did not return phone calls seeking comment.
One possibility is that Wendt will move to a high position at a rival financial-services company like Chase Manhattan. Chase declined to comment. Wendt, who recently remarried, could also choose a life of leisure and simply retire. He has said publicly that he has no plans to leave GE Capital, which is based in Stamford, Conn.
But the real intrigue is about who would succeed Wendt. While Denis Nayden, GE Capital's current president, may seem like a natural, he could end up with only a piece of the action if GE Capital is carved up. Names that are being bandied about as other executives who might rise in the reshuffling are Michael Neal and Michael Frazier, both of whom are currently GE Capital executives.
In order to bring GE Capital a little closer to home, which may also be Welch's goal, the talk is that General Electric will have the executives report to the company's current chief financial officer, Dennis Dammerman. He could also be named as an interim head of the whole group.
As the man responsible for the numbers at General Electric, Dammerman is said to be in Welch's favor. "He has tremendous respect on the Street," said an executive recruiter, who spoke on the condition that he not be named.
Rumors always abound at General Electric, but many people believe that change really is afoot, given investor sentiment and the need to replace Wendt if he leaves. "We are definitely going through a changing of the guard," an analyst said.
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