By Rachel Layne
March 2 (Bloomberg) -- General Electric Co. Chief Executive Officer Jeffrey Immelt took blame for eroded investor trust and promised to “work hard to restore” faith as he shrinks the finance unit to better fit with GE’s main businesses.
“Let’s face it: Our company’s reputation was tarnished because we weren’t the ‘safe and reliable’ growth company that is our aspiration,” Immelt, 53, said in his yearly letter to shareholders dated Feb. 6 and being released today with the annual report. “I accept responsibility for this. But, I think the environment presents an opportunity of a lifetime.”
A “brutal” global economy means GE and capitalism itself will have to be “reset,” Immelt said. GE shares plunged 56 percent in 2008 and the Fairfield, Connecticut-based company last week cut its annual dividend for the first time since 1938 to conserve cash. Immelt is shrinking GE Capital to provide just 30 percent of total profit this year, down from about half in 2007, to ease investors’ concerns and try to stem the freefall.
“We intend to reset this business to be smaller, less volatile and more connected to the GE core,” Immelt wrote of GE Capital. As for the economy, “we are going through more than a cycle. The global economy, and capitalism, will be ‘reset’ in several important ways. The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner.”
Billionaire Warren Buffett, whose Berkshire Hathaway Inc. invested $3 billion in GE preferred shares in October, said in a letter to his own shareholders dated Feb. 28 that the U.S. economy will be “in shambles” this year before recovering.
Staying at GE
Last year was “a tough year, and we expect 2009 to be even tougher,” Immelt wrote.
The CEO, while accepting responsibility, made it clear he intends to see GE through the crisis. Today, as GE shares dropped to the lowest price since May 1993, he bought 50,000 shares in a show of confidence.
“The current crisis offers the challenge of our lifetime,” Immelt said. “I’ve told our leaders at GE that if they are frightened by this concept, they shouldn’t be here. But if they’re energized, and desire to play a part in transforming the company for the future, then this is going to be a thrilling time to be a part of GE.”
GE dropped 11 percent, falling 91 cents to $7.60 at 4:15 p.m. in New York Stock Exchange trading.
While the finance arm earned $8.6 billion last year, the company’s forecast for $5 billion in finance profit this year is now above most analysts’ estimates. Moody’s Investors Service said Feb. 27, after the dividend cut, that it will keep GE on review for a possible debt downgrade from Aaa, as it calls the highest possible level. Standard & Poor’s Corp. also kept GE’s top-notch AAA and “negative” outlook unchanged.
Shedding Businesses
Immelt was already shedding finance businesses before the economic slump deepened, including all of the $150 billion in insurance assets earlier in the decade and the U.S. subprime mortgage unit in 2007. GE Capital is still too bulked up on commercial real estate and U.K. mortgages, Immelt wrote.
GE, the world’s biggest maker of jet engines, locomotives, power-plant turbines and medical imaging equipment, needs “unflinching commitment” to sustain leading positions, he wrote. The company will again pump $10 billion in to develop technology this year, including $2 billion of capital investment at the parent level.
The U.S. as a whole can’t afford to abandon its ability to invent new products, he said. The company gets 53 percent of sales overseas. “Our trade deficit is a sign of real weakness and we must reduce our debt to the world,” he wrote.
Manufacturing Role
Immelt said he’ll push to expand GE’s lead in sales of jet engines, power turbines, locomotives and medical-imaging equipment, bolstered by service contracts that carry higher margins than equipment sales alone. Service revenue will rise 10 percent to about $40 billion in 2009, he said.
The U.S. can’t rely only on an economy built on financial services and cede its role as a manufacturer, Immelt said. “I believe a popular, 30-year notion that the U.S. can evolve from being a technology and manufacturing leader into a service leader is just wrong,” he wrote.
GE ended the year with $48 billion in cash on its balance sheet. It raised $15 billion in October, including $3 billion in preferred stock sold to Warren Buffett’s Berkshire Hathaway Inc., on top of measures such as suspending a share buyback.
The non-finance divisions generate about $16 billion in cash annually, and GE intends to reduce its working capital expenses by $5 billion in the next two years. That will give GE “plenty to invest” in growth, support a dividend, or bolster the balance sheet, he said.
Capital Needs
“But our top priority for capital allocation at the present time must be safety,” Immelt wrote. “To that end, we will continue to run the company with the disciplines of a ‘triple-A’ including adequate capital, low leverage, solid earnings and conservative funding.”
GE on Feb. 27 cut its quarterly dividend to 10 cents a share from 31 cents, a move it said will save about $9 billion annually. The 2009 savings will be about $4.5 billion because it had already committed to the higher payout for the first half.
The company’s debt ratings could be reduced as many as three levels without triggering covenants that force a shift of resources to bolster the finance unit. While Immelt says GE can function normally with less than a top debt rating, a downgrade nonetheless may increase borrowing costs and further hurt profit at GE Capital.
Total profit fell about 19 percent last year to $18.1 billion, still the third highest in GE’s history. While profit is forecast to fall at GE Capital this year, the unit continues to lend and remains a “great source of liquidity to companies, consumers and projects,” Immelt wrote.
Lending Plans
GE Capital plans to lend about $180 billion in new loans in 2009 after writing $48 billion in the fourth quarter, he said. Lending will continue to mid-market companies and support to “many customers” in infrastructure areas such as aviation, health care, transportation and energy, Immelt wrote.
“We intend to stay anchored in what we know, own and manage,” Immelt said. “We underwrite all loans and leases to our standards and typically, as senior lenders we are secured in collateral. In addition, we are prepared to hold these assets through the cycle.”
For Related News and Information: GE earnings stories: GE US
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