Pearlstein: General Electric

Washington Post business columnist Steven Pearlstein was online Wednesday, May 21, at 11 a.m. ET to discuss General Electric's lagging stock performance, the sale of its appliance business and whether or not the company should be broken up.

A transcript follows.

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

Pearlstein was honored with the Pulitzer Prize for commentary for his columns about mounting problems in the financial markets. His award was one of six Pulitzer Prizes won by The Washington Post this year.

Read Pearlstein's latest columns.

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Madison, Wis.: Thanks so much for your article and for taking questions. Your last two sentences said it all, "General Electric didn't become a great company just by buying and selling assets -- it did it by creating innovative products and continually finding better ways to produce them. It won't remain a great company if it allows stock flippers and Wall Street analysts to distract it from its mission."

Isn't that one of the big problems facing our nation's economy? It seems that all publicly-traded companies are tying themselves up in knots in a feverish attempt to generate short term "shareholder value," with little concern for the productivity, quality, and fiscal stability that made the companies' stock worth trading in the first place. What will end this crazy cycle?

Steven Pearlstein: It's a big problem. The source of it is Wall Street, which doesn't really understand about company building and doesn't want to understand it because it doesn't generate much in the way of fees and profits. So they are constantly trying to come up with ways to distract managers under the guise of creating shareholder value. The other problem is executive compensation, which is now too tied to short- and mediuim-term changes in share prices. The U.S. has always been the leader in shareholder capitalism, and it is a strength of our economy, compared to European and Japanese companies, which are much more run for the benefit of employees and executives. But we've come to a rather distorted and cramped version of what creating value for shareholders means. We need some big institutional investors to step forward and try to create a new shareholding culture, outside of Wall Street, that says they will put their money ONLY in companies that are involved in long-term value creation.

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Ashland, Mo.: Does the GE experience illustrate that too many people in the markets have quit being investors and are now only speculators? Every thing is too short-term with bad results for those who think value and long-term, which drives them out of the market, which increases the short-term mentality, which continues the spiral?

Steven Pearlstein: Yes. And that's particularly disturbing because GE was always one of those companies that could attract and hold long-term investors. In my opinion, Immelt should just say those are the types of investors they are looking for and will build the company around. And as part of that, he should stop giving earnings guidance, stop worrying about hitting quarterly numbers and establish other rigorous benchmarks by which he will run the company. He also should stop spending so much money on stock buybacks and increase the dividend, because the stock buyback is very hard for investors to see in action and is too dependent on the rationality of the market, which turns out not to be so rational.

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A. Baldwin, 30 Rock: I attribute GE's slumping performance to the fact that it did not name me as President.

What says you?

Steven Pearlstein: Why do I feel I'm suddenly in the middle of a reality series?

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Rockville, Md.: Steven,

It seems many companies are shifting from the original manufacturing and/or services business models to the models based on the buying and selling of assets in order to show "proper" (from Wall Street point of view) earnings and profit numbers. Do you think this trend will continue and, if it will, what the results for the overall economy would be?

Thank you for taking my question!

Steven Pearlstein: There's too much of it, yes. And one of the things that encourages it is that companies, including GE by the way, don't really keep a public accounting of what they buy companies for, how much they invest in them, and what they sell them for, so that everyone, including shareholders, can see how unprofitable all this asset shifting has become. They do record impairment charges and writeoffs of goodwill, but they never get specific enough even for the analysts to figure out many times whether a deal made sense of not.

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Was that a buy recommendation?: I realize that you are very bearish at this time on the U.S. economy, but that was a fairly positive column on GE this morning. Does that mean, given a long-term horizon, you would actually be a buyer of GE at this point in time? I suppose if nothing else, the roughly 4% dividend is relatively safe, even if the share price doesn't go anywhere for awhile.

Steven Pearlstein: I don't give stock recommendations, but if I did, you might read that in between the lines.

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Capitol Hill -- the neighborhood: Steven,

You state that GE's strategy is correct and that they need to get out of the earnings management trap. But what would you suggest they do to accomplish that? Should they go private, for example? (Although it is hard to see a company of that size going private).

And given this is a systemic problem, not isolated to GE, what larger changes would you advocate?

Steven Pearlstein: First, stop giving guidance on quarterly earnings and stop sending targets to divisions each quarter on what their numbers need to be in order to be able to give this guidance. Warren Buffett and Google don't do it (nor does the Washington Post). They seem to survive okay.

That doesn't mean you don't do rigorous analysis. I'd like to see companies make public the internal calculations they do about long-term trends in the annual return on invested capital for each division or line of business, for example. And you could use that metric as part of a compensation program. For a company like GE, that would be an important thing for a shareholder to know in assessing how management is doing in managing the portfolio of businesses. And it would be a lot more meaningful for long-term investors than quarterly changes in earnings per share after adjustment for stock buybacks.

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Jacksonville,Fla.: Comment: GE obviously did not make first quarter 2008 numbers because of the inability to close a major financial transaction owing to the unexpected turmoil in the credit markets (thank you, Bear Stearns). It has been apparent to many investors that part of the reliable growth has come from financial acumen which may be legal but may overstate the underlying growth of the company. The market now realizes this and has lowered the valuation of GE to reflect the new reality. Your observation on the above...

Steven Pearlstein: Perhaps that is one reason GE stock is trading at such a low multiple, because of investor skepticism about the quality of its accounting. Other investors have complained to me about balance sheet writeoffs that, for some reason, are never reflected in the earnings statement. So I think you may be on to something. Welch was too cute by half in this regard and I think Immelt would do well to develop a more Buffett-like reputation on reporting to shareholders.

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Selmer, Tenn.: If GE is broken up, how will this affect the pensions of employees already retired?

Steven Pearlstein: Probably not at all.

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Laurel: Never having had an occasion to purchase an aircraft engine or railroad locomotive, I suppose I had a somewhat naive view of what GE's core business is. But it makes sense that you can't sustain a $300 billion company selling people like me a new refrigerator and dishwasher once a decade.

But does this particular choice reflect that fact, or at least belief, that the American consumer has become the weakest sector of the economy? We have come together with a long-term trend of increasing wealth concentration and income disparity; the medium-term trend of home equity withdrawal has reversed, plus the dollar is very weak; and short-term we appear to be in a mini-recession and consumer confidence is at a multi-decade low.

GE appliances are probably the first thing uneasy consumers cross off their shopping lists, but the company has dealt with CYCLICAL downturns before. Is the decision to get out of this business entirely an indication that the American consumer market has become the worst-performing part of the economy, because, frankly, GE doesn't expect us to have any money for several years?

Steven Pearlstein: Its really not a cyclical thing. White goods has recently become a global business while GE has remained largely focused on the US market and has not tried to compete globally against regional champions. It can't really produce cheaper commodity products that companies can in Eastern Europe or China. And since its brand isn't well known outside the US., it would take a lot of time and money to create that and be able to charge a premium for upscale, non-commodity, higher-margin appliances. So it has decided that this is really becoming a low-margin, low-tech business that doesn't fit its profile and will sell it. To some degree, this merely rationalizes an earlier decision not to try to take the brand global, which may have been a mistake or may not have been. But having let that opportunity pass it by, it is now probably not a bad decision.

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Fairfax, Va.: If GE goes the way of other large American corporations, even though much of its business is now overseas, doesn't this portend a much worse future for American middle class hopes and dreams? If you'll remember, someone hoping to show that by taking America's birth rate and sliding forward 47 years, assuming that was the age of most disposable income, that all the stock market rises and falls of major magnitude would be easily predicted. While wrong on some of those, there is clearly a downturn predicted in that and our previous comptroller regularly warned of the TRILLIONS of dollars in debt we already are in and getting worse by the minute. What is the solution no one wants to deal with?????

Steven Pearlstein: GE is doing fine, but it is no longer an American company in the way we used to think of that, as most big multinationals are not. And its ability to thrive in a global economy is a good metaphor for whether the U.S. economy can thrive. So far it, and we, are succeeding, although as you point out, we have some serious work to do in making sure that the benefits of globalization are appropriately distributed through the economy. And part of that means taxing the winners more to pay for important public services for everyone.

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Hampton Cove, Ala.: There is a big anti-GE campaign because of the liberal bias of NBC News and MSNBC, its pro-Obama/anti-Hillary and anti-McCain agenda. Do you think consumers are rejecting GE politicization and its dealings with Iran?

Steven Pearlstein: Don't think those things matter much. Sorry.

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Woodbridge, Va.: What do you think would be the impact of reforming the capital gains tax and holding period on a sliding scale that significantly rewarded investors while taxing speculators. I am thinking of something like: less than 1 year = 35%, 1-2 years = 30%, 2-3 years =25%, 3-4 = 20%, 4-5 = 15%, 5+ = 10% and index cap gains base to reflect inflation.

Steven Pearlstein: Part of me dislikes that kind of complexity and attempt at micromanaging economic behavior. And part of me thinks that we need to do something like that to cut down on the speculative activity. For sure, if you are going to do something like that, however, you need to make it some form of transaction tax, so it applies to the large number of non-profit traders, such as pension funds and college endowments that don't pay a capital gains tax.

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McLean, Va.: I agree that GE is a great company, and it has been blessed with great leadership. In particular, I'm consistently impressed with GE Capital, which runs its business in a way that strikes the right balance between hard-nosed and fair.

But I can't say I'd ever invest in GE, simply because there are too many moving parts. For example, I love their wind business (bought on the cheap from a failing Enron). But how am I supposed to know whether the success of that branch will outweigh another sector that's slow? I don't invest in investment banks because there's too much about their business that they refuse to tell me. GE will disclose everything, but it's simply unknowable how all the moving parts will work together. You say the diversification is a point in its favor. I see your point, but things could go wrong in a number of sectors at the same time -- and I don't know how an investor is supposed to be able to foresee that. If I invest only in companies that do only one or two things, then I can stay on top of what they do and how their industries should perform. With GE, there aren't enough hours in the day to try and do that.

Steven Pearlstein: This is a dilemma many investors have, and it is why the conglomerate model is out of favor with analysts and many investors. They like pure plays.

That said, some investors might like to invest in a company that sacrifices some of the potential for runaway growth in one area for the steady, reliability of a mixed portfolio that doesn't have the risk of big declines. That's always been the type of investor GE has aimed for, and I suspect it is a sizeable market. It also makes the argument that many of its businesses are logical outgrowths of previous businesses, so that the parts aren't as disparate as they appear. GE Financial, for example, is an outgrowth of the fact that they gain sales advantage by financing the purchase of airplane engines and locomotives, just as they one financed the purchase by consumers of stoves and refrigerators. So it is not a patternless collection of assets, such as Berkshire Hathaway, and does rely at least in part on some technology and market synergies.

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D.C.: Business Week did a very interesting post mortem on Jack Welch's term at GE after he left. Basically he wasn't a very strong performer and left the company with a diminished product pipeline because of cuts in R&D. The company's growth was lackluster compared to other companies as a whole once you took away the financial services arm, which, itself, had underperformed its sector. It seems like the chickens have come home to roost. Do you think Welch really left the company in good shape for the future?

Steven Pearlstein: I agree that Welch had "milked" or "harvested" the industrial sectors of the business in his final years to maintain his double digit earnings growth pledge while relying overly on GE finance. So Immelt has had to spend his first decade fixing things up a bit and updating the portfolio. If Welch had decided to become a global player in high-end home appliances, for example, and made selective acquisitions and invested in product, marketing and R&D, it is possible GE could have succeeded in that business and earned good returns from it. But it is a judgment call as to whether that would have worked, and certainly they know a whole lot more about that than I do.

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Arlington, Va.: I invest (long-term) in GE because of their activities in water, wind, trains and nukes. The problem with GE as an investor is that they are in so many areas you really are relying on good management to ditch the businesses with no future and grow those that have one. They were a bit behind the curve on the financial sector.

Steven Pearlstein: They got addicted to profits from their very well-run GE Finance. And sitting there watching everyone else make gobs of money from mortgage finance, they figured they needed to get into that as well. It seemed like it was easy entry and easy money, which should have been the tipoff right there: if it was that easy, then other people would do it, too, and ruin the game. And that is exactly what happened.

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Fairfax Va.: Sorry, it took me 20 minutes to find the URL.

General Electric's phaseout of appliances.

Absolutely astounding that in the U.S. there seems to be no interest whatever in the continuity and competitiveness of our former industrial and manufacturing strengths, whereas all four German automakers enjoyed record profits in the U.S. in 2006, Germany and Sweden have the No. 1 and 2 truckmakers, Finland is riding high in its traditional metallurgical industries.

What is going on? Has GE no consciousness whatever of anything but bottom line?

Steven Pearlstein: Well, there is no problem thinnking about the bottom line, long-term. That's the point of the exercise. But the Scandinavian companies that still succeed in manufacturing are a good reminder that even high-cost countries can have a vibrant manufacturing sector. There are plenty of American success stories in manufacturing, too, including some at General Electric. but it does require long-term investment and patience, which are not things valued by Wall Street analysts. In fact, if you tell a Wall Street analyst that you are going to invest heavily in some line of business for the long-term, they reflexively take points off because it negatively impacts short-term earnings per share.

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Bowie: Maybe this is minor, but isn't this part of the reason our universities produce few scientists?

Instead of a teenager thinking "someday, I'll design a more energy-efficient oven," it makes it look like "Making stuff just gets you permanently laid off one day. The only way I'll make it is to flip some billion-dollar company, collect my fees, and retire for life."

Steven Pearlstein: Yes, I think that is a big factor. We don't have an engineering-centered business culture because too few smart kids want to go into science and engineering. Why? Hard to say. Bad teaching. It's too hard. Certainly those are factors. But another is that we so highly reward things like investment banking, consulting, the law and entertainment. So our economy is moving in that direction.

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New York, N.Y.: Hi Steve,

I've got an unrelated question about GE. What do you make of the rumblings of GE doing business in Iran through its European subsidiaries? Is there truth to this and does this present, at the very least, a public relations problem?

Steven Pearlstein: They have done some business in Iran, but to characterize them as arming the Iranian military and security services and allowing the Iranians to kill American soliders in Iraq -- that is a nasty libel.

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Arlington, Va.: In December 1999 I bought $5000 worth of GE stock and reinvested all dividends. My stock is now worth about $4000. With such results, how can GE be called a blue chip stock and how can it be called "a safe and reliable growth company?" I would have done better with my money under the mattress!

Steven Pearlstein: Yes, that's true, and it is why Wall Street is so down on GE right now. Three things to say about that. One, they made some mistakes, as I've said here today, in terms of overpaying for things, not investing in things, etc. Two, they are partly a financial services company and enjoyed the profits from that when times were good and are now suffering from that now that times are bad in finance. Three, the market probably is undervaluing the company for silly reasons, like missing an earnings target.

Basically, you bought GE stock at its all-time high, at the height of the market bubble in the late 90s. And while some stocks did rally during the 2003 - 2006 time frame, GE did not. Some of this was outside its control: 9/11 hit the airline industry hard, which didn't do much for airplane engine sales, for example, and low fuel prices didn't help the railroad cargo companies that buy trains. And some of it was the result of poor decisions made earlier by Welch.

But for you, its not been a good investment. The question you have to ask yourself now is whether you think you can get a better return by taking the loss (which after taxes might not be the full $1000) and invest it in some other company that is more certain to go up from here. Obviously, from my comments this morning, I'm not sure you'd be selling at the right time. GE has made a lot of investments in infrastructure, transportation and energy-related products that seem likely to hit big in the coming decade.

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"Has GE no consciousness whatever of anything but bottom line?": I'd propose: no, not really. They must consider what's legal and what's ethical. Beyond that, the bottom line is virtually their only concern.

If you want GE to safeguard American "competitiveness," you can buy all the shares and sink with the ship. I'll move on to investing in another company that does mind its bottom line.

Social activism is fine, but don't expect corporations to practice it. It's not in their nature.

Steven Pearlstein: Okay, then.

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Washington D.C.: As for the appliance business, what's likely to become of it? Will GE (or "GE by Samsung" or "GE by Bosch" or "GE by Haier") still sell and service its appliances? If you have GE appliances, are you out of luck? If you're looking for a new stove/refrigerator/whatever, should you avoid GE?

Steven Pearlstein: They'll sell it to an Asian manufacturer, probably, and license the GE name for some limited period of time, as IBM did when it sold its personal computer division to Lenovo.

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Steven Pearlstein: That's all the time we have for today, folks.

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