William D. Cohan is a founding partner of digital news business Puck and the author of Power Failure: The Rise and Fall of an American Icon.
Cohan recently joined Motley Fool producer Ricky Mulvey to discuss:
- The mythology behind General Electric's genesis.
- How corporations struggle mightily with CEO succession.
- Jack Welch and the religion of earnings consistency.
- Why he believes a combination between Warner Bros Discovery and NBC Universal is "inevitable."
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This video was recorded on Jan. 22, 2023
William Cohan: I think it becomes psychological almost. Either they don't want to choose somebody as their successor who will outperform them and show them up. Certainly was the case, it seemed like that was the case with Bob Iger. I think on some subliminal basis, it might have been the case with Jack Welch as well.
Chris Hill: I'm Chris Hill, and that's William Cohan, a Founding Partner of the digital news company Puck, an author of the recently released book, Power Failure, The Rise and Fall of an American Icon. Ricky Mulvey caught up with Cohan to talk about The Origins of General Electric and what caused the fall of one of America's most powerful companies. Key differences between former CEOs, Jack Welch and Jeff Immelt, and why Cohan believes a merger between Warner Brother Discovery, and Comcast is inevitable.
Ricky Mulvey: General Electric is this myth-making machine. That was one of the key things have picked up from your book. It was born on a myth of Thomas Edison's involvement, and possibly it may be dying, even on myths such as John Flannery is Alastair. When you were researching General Electric and in doing these interviews, I know you worked there for a couple of years. Was there any ideas that you held to be true that turned out to be myth that surprised you in the process?
William Cohan: No, absolutely. Right from the outset, in fact, it was always drummed into not only employees' heads, but of course, everybody in America's had that Thomas Edison was the founder of GE. If you go to the research center outside of Albany, you walk into this incredibly big place and the lobby is filled with Thomas Edison memorabilia, but in fact, he had very little to do with the founding of the company. He was against the founding of the company and the merger that created the company, and he very quickly sold the stock that he had that resulted from the merger, and he was never an executive of the company. The first executive was this guy, Charles Coffin, who was quite a remarkable businessman and a leader of the company. That's just one example.
Ricky Mulvey: This company then becomes one of the largest in American history or it becomes the largest by-market cap at the time in the 20th century, and one of its major problems that a lot of companies faces is finding a CEO. Your book highlights the pageantry involved in General Electric's succession process. Jack Welch had to participate in a letter writing contest. It was this reality shows style elimination thing where the CEO at the time, Reg Jones, is keeping all the contenders very close. He ends up rejecting that. In looking for his CEO maybe to his detriment in Jeff Immelt, but he still makes Jeff Immelt give a sales pitch to the board. Whether it's General Electric or recently at Disney, you have very smart people who know these jobs very well, and yet they seem to have so much trouble finding successors for the CEO seat. Why do you think these smart people who know that job well, struggled mightily with that process?
William Cohan: I think it becomes psychological almost. Either they don't want to choose somebody as their successor who will outperform them and show them up. As certainly was the case. It seemed like that was the case with Bob Iger. I think on some subliminal basis, it might have been the case with Jack Welch as well. Choosing somebody who at some level they thought would do a good job and certainly endorsed when they first announced the choice, but maybe on some level knew that they would not do a particularly good job and would not somehow supersede their own performance as CEO. Beyond that, people are people, it's hard to know how someone is actually going to perform in the job once they have it. People are very good politicians sometimes and very good at sucking up to get what they want, and then when they actually get the job, they may never have been qualified for it.
Ricky Mulvey: I appreciate the complex picture you've given to Welch. I think a lot of his legacy has been turned to headlines of this is good or bad when really it's a complex person who did some terrible things. He was abrasive, he was a womanizer. He also helps develop CEOs and created one of the most valuable companies in American history. He also encouraged disagreement, dissenting opinions among the people who worked for him. Why did so many of the people you spoke with, you think actually enjoy working with Neutron Jack?
William Cohan: That's an important point. To a person, all of the people who I spoke with who were Senior GE executives really appraised Jack and the opportunity that they had to work for him, and his willingness to get the most out of them, to believe in them, and to support them, and to welcome dissenting opinions, being a fun guy to be around, and to really giving them huge opportunities that they wouldn't have had elsewhere. Now, obviously, I didn't talk to the people who felt tormented by him or they were much harder to find and they were not in the company after he got rid of them.
But even just taking one example of Dave Cody who Jack fired when he was head of the Major Appliance business at GE, which was probably the most poorly performing business, and who went on to become the CEO, the very successful CEO of Honeywell. In fact, at one point, Honeywell's market cap was higher than GE's. Even Dave Cody who was fired by Jack and didn't understand why praised him to the hilt. He did engender an incredible amount of loyalty, at least among the survivors and the ones who had talked to me. Clearly, the people who he insulted or made fun of or was fired early on, probably don't have a whole lot of love for him.
Ricky Mulvey: Yeah. Well, one of the greatest legacies was his ability to consistently hit earnings estimates that Wall Street analysts would say you're going to hit x sales x earnings and he hit it to a penny with great consistency, GE capital was one of the levers that he was able to pull in order to do that bit of a two-part question. Setting the table, what would it have met if General Electric in the Jack Welch era missed earnings by just a penny? We came in one penny short of earnings because, in my mind, it almost would have given the company those numbers a little bit more legitimacy. To say no, you guys were off by a penny, and yet it was so important to Welch at the time and many CEOs to consistently hit earnings estimates if only by that single cent.
William Cohan: Yeah. Part of what Jack was able to do is create a cult of Jack among Wall Street research analysts. Most of whom had followed the company for a long time. Knew well the industrial side of the business, but not the GE capital for financial side of the business. They came to rely on Jack's promise of the earnings numbers that he would project to make every quarter. Along the way, as you point out, I think it was like 80 straight quarters. Jack hit those numbers to the penny or a penny over, never under, and that's how GE, which had a AAA credit rating, was the most valuable company in the world for a period of time and the most respected never missed earnings, and Jack just felt like this was his religion in effect. If he told the analysts what he was going to do, he was intent on doing it. He tells the story in his own book, which I asked him about, and repeat the story in my book. After he had bought Kidder Peabody, which turned out to be a disastrous acquisition, and Kidder did something in one quarter that was going to make Jack miss his numbers.
He actually went to the other division heads and said, can you generate, can you give me something so that I can make sure that we make these earnings and they all coughed up some profit number or some contribution to the gap that was created by Kidder Peabody to make it possible for Jack and GE to make the number that quarter, which was prima facie evidence of earnings manipulation. Of course, he was trying to convince me the whole time that he never did that, and yet he's admitting it in his own book that he pressured everybody to come up with what he needed. Really just as I say, this was his religion, making those numbers every quarter and it was very effective when Jack took over the company. It was worth 12 billion in August of 2000, nine months or 11 months or so before he left. The company was worth 650 billion. That's quite a increase in value and that's basically the job of the CEO is to do that thing.
Ricky Mulvey: To set the table a little bit, Kidder, Peabody was a Wall Street investment bank that when he joined GE, there's a severe culture clash between the General Electric Capital folks and the Kidder, Peabody investment banking folks. Both Immelt and Welch used GE Capital to my understanding, I could be totally wrong, is a candy store to hit a lot of earnings numbers. In Immelt's case he gave himself maybe loftier expectations, this two dollars earnings per share mantra and Welch was just consistently hitting those earnings numbers. How did both of them use GE Capital, that candy store to hit earnings numbers and do you think Welch was better at the manipulation or was Immelt unlucky?
William Cohan: Jack, before he became CEO, one of his final tests was to take over the running of GE Capital. Jack did not have a finance background. He was an engineer and he ran the plastics division and made the plastics division at GE incredibly commercial and incredibly profitable. But he took to GE Capital like a duck to water. He really got off on this ability to arbitrage, GE's AAA credit rating, which allowed GE Capital to borrow very cheaply in the commercial paper markets and then lend out to customers and clients rather extensively. When I was there, I was financing leveraged buyers and we would get complaints all the time from customers that we were charging more than Wall Street charged and other banks. We were so pricey but in fact, I think really what we were doing is actually charging appropriately for the risks we were taking.
But Jack really got that into a well-oiled machine. I also spent a year working for the Chief Credit Officer at GE Capital. I got to see all the businesses at GE Capital and how they generated incredible amount of earnings and really how clever that they were under Gary Wendt to become an earnings machine. Over time, GE Capital became the most important business at GE, which most people didn't recognize or realize 40 percent of the earnings under Immelt, it was 50 percent of the earnings. Now by the time Jack turned it over to Jeff Immelt, GE Capital was generating between 40 and 50 percent of GE's earnings and it was a well-oiled machine. First under Gary Wendt and then under Dennis Nadan. But Jeff Immelt was in part unlucky because he, of course, he started as a CEO.
His first day in the office was September 10th. 2001 and the next day, of course, was September 11th and he was in Seattle and of course the world changed, GE made the engines on those jets, had reinsured the buildings down at the World Financial Center. Owned NBC, which went without advertising for at least a week after 9/11, costing the company hundreds of millions of dollars in revenue and of course, there was the scandals involving big companies like Enron and WorldCom that resulted in the Sarbanes-Oxley Act being passed, which was much more stringent and required CEOs to sign off on financial statements. But nevertheless, throughout that, GE Capital continued to perform and I just think that Jeff didn't I understand GE Capital as well as Jack did and didn't understand the risks as well and didn't have the same team in place that Jack did, and come the 2008 financial crisis, people didn't really realize that at the time because everyone was focused on what was going on on Wall Street, which was of course a meltdown, but GE Capital also melted down.
But unlike the Wall Street banks, wasn't regulated by the Fed or wasn't regulated really in the same way by the SEC. Basically, Jeff Immelt had to go hand in hand to Hank Paulson, the Treasury Secretary, and Sheila Bear, the head of the FDIC to get included in the various lines of credit that were being made available to banks so that GE Capital wouldn't be at a disadvantage to the other banks. Essentially, he just did not like the price that he had to pay for that protection and keeping GE Capital out of bankruptcy, which would have happened.
When GE Capital became a SIFI, a systemically important financial institution, Jeff Immelt hated that even more and eventually made the decision to sell GE Capital, which getting back to your two dollars a share proclamation that he kept making, that they were going to do in 2018. By then he had sold off GE Capital and bought back using the proceeds, had bought back 35 billion or so worth of GE stock at a high price and could never make that two dollars a share number, even though he kept promising it over and over again and people told him that they weren't going to make it, but he insisted that they were and essentially that's what cost him his job.
Ricky Mulvey: Talking about Jeff Immelt for a little bit because you have fantastic anecdote in the story where he has the security guard named Ed Galanek and it essentially forces the guided climb Mount Kilimanjaro with them. I think this is illustrative of the way he ran GE, of essentially not listening to others even in very serious circumstances, and essentially only listening to opinions that affirmed his own. Ed Galanek was, you describe him like tough east coaster who had no business climbing a mountain and even says to melt quote, and I'm going to paraphrase, I think it's really unfair to kill me just to have a court gesture go up a mountain. This is to say, you spent time with Jeff Immelt? Did you get a chance to ask him about his side of the story on this or were you understandably focused on other things?
William Cohan: I was focused on many, many other things, but of course, I asked him about the trip up Kilimanjaro, and he didn't want to talk about it. That was one thing for some reason he didn't want to talk about. Maybe because he knew or maybe he didn't know what Ed Galanek that could told me and by the way, speaking to Ed Galanek was total serendipity because it turns out that after Ed Galanek was working directly for Jeff as Head of security, when I met him, he was working at the security door at CNBC in Times Square.
When I would go and be on CNBC, Ed Galanek, would be the guy to let me in the door and he eventually figured out that I was the guy writing this book about GE. He just kept pulling me aside and couldn't wait to tell me all these various stories that he was on the record for in the book, including the story of Kilimanjaro, which I just think is the most revealing, as you said, story about Jeff and forcing poor Ed Galanek at coed. Jeff had trained because this was his daughters graduation from college wish. He said, I've been preoccupied with GE. Probably haven't been the best father. You graduated from college, what do you want to do? I'll do anything you want, I'll go anywhere you want.
She said, I want to climb Mount Kilimanjaro. She had trained and our friend that came with them and train and Jeff had trained such as you can to climb a mountain, but Ed Galanek could not trained and did not want to go and Jeff forced them to go. Literally, I think it almost killed Ed Galanek. He was very good-natured about it when he told me about it. He thought it was like a lark even though it was very dangerous for him and he never even made it to the top because he had to turn back. I just couldn't believe that Jeff had forced this and of course, Jeff didn't want to talk about that because he knew what he had done was over the bounds.
Ricky Mulvey: One of Immelt's most famous deals was selling NBC Universal, and Immelt described it as a luxury that it could no longer afford. I don't know if i necessarily agree with that. But one of the things going on is NBC Universal is being prepared to be sold, was that they would make these random cuts to programming and content. We need to get X or what was it like? $100 million of expenses off before the end of the year and then we're going to reposition this production schedule to fit in better with our expense management. Now you might be seeing a similar situation at Warner Brother Discovery, where the company is slashing and burning content. You have some of the similar players of David Zaslav running Warner Brother Discovery. Is your studying of the history of NBC Universal influenced your viewpoint that perhaps Warner Brother Discovery may be prepared for getting sold or combined into another company.
William Cohan: Well, I've been writing it up puck regularly about my sense that NBC Universal, which is now owned by Comcast and Warner Brother Discovery, which is of course run by David Zaslav in a public company that they need each other and they're both undersized compared to Disney and the threats posed to their business model by Amazon and Apple, which obviously are much larger, capitalized companies, much bigger. I've been advocating for the last six months or so the inevitable combination between NBC Universal and Warner Brother Discovery, of course, the people at those companies poo poo it at the moment because of course they have to, because of the rules that allowed Warner Brothers discovered it be formed in the first place under the Reverse Morris Trust rules and under those rules, there can't be a change of ownership or a change of structure for two years.
That would put it at April 20-24. However, there's no question that they they need each other and I suspect at some point soon those discussions will begin if they haven't started already, even though there won't be any announcement for some time. It takes a long time to figure out the structure of that kind of complicated combination and as well as any regulatory approval would take a very long time too. I suspect that it'll happen. David Zaslav is really a pioneer in cable business and has I think, done a good job leading discovery.
He probably got snickered a little bit by the AT&T folks who loaded up Warner Brother Discovery with $55 billion of debt, which was the price of admission for David Zaslav to get control of the Old Time Warner and then now he's got to live with that burden. I think that's why he's cutting and burning, slashing and burning as best you can to make sure that the EBITDA for Warner Brother Discovery is what he's telling the street it is. The good news is that after a pretty bad 2022 or the stock fell something like 60 percent. It's off to the races so far this year, it was up like 18 percent last time I checked. But I think the combination of the two is pretty much inevitable even though I may be among only a handful of people who believe that at the moment.
Ricky Mulvey: Corporations don't necessarily have to merge. They can exist and live and die on their own. What makes it inevitable?
William Cohan: Well, what I think makes it inevitable is just the competitive landscape and the ambitions of the people involved. Brian Roberts has always been ambitious for Comcast to make it as big as it is, 200 billion-dollar market value company. But I think he clearly got NBC Universal at a bargain price from GE. Jeff in-mold sold it without an auction. Soon after the financial crisis in 2009. At one point pre-pandemic, that business was probably worth about 100 billion. The pandemic has been rough on linear TV and those numbers are down. I'm sure Brian Roberts is smart enough to know that NBC Universal is no longer a size where it can compete effectively against Disney or Apple or Amazon and the streaming business is costing him a lot of money.
Also, Warner Brother Discovery is subsidized and has a lot of great assets. But too much debt is we were telling me about struggling on the EBITDA line and it's got its own costs related to the streaming business. Combining the two would make for a major league competitor to Disney and Apple and Amazon and would help spread out that debt over more assets and more cash flow. It might mean that of course, Comcast has to control 51 percent of it because I think Brian Roberts would want to have at least ownership control as he did during the first phase of the NBC Universal deal. But I think there was a deal that could get done that would allow David Zaslav to run the combined company, which is, I think his goal. I think is a way to make it all worthwhile and make a major league competitor to Disney.
Ricky Mulvey: Appreciate your perspective on that. As we get toward the end of the conversation, going to turn it back to General Electric. You've described your book is a corporate autopsy. Do you have a time of death? There's plenty of finger-pointing reasons and those can be found in the pages, but do you have a time of death for your corporate op tops, you've General Electric?
William Cohan: I think that there were a number of important moments where the death spiral began. Among them. The decision to sell NBCU in 2009 without an auction for a total of around $30 billion to Comcast that was number 1. Number 2 was the decision to buy Alstom and wildly overpay for it when actually, Jeff probably could have gotten out of the deal and chose not to and chose to close the deal. That was number two. Number three was the decision to sell GE Capital and making announcement that you are doing that so buyers new, that you had to sell it and probably got his pocket picked by some smart buyers like Blackstone and Wells Fargo.
Number four was bringing in Nelson Peltz to try and partners to as a hedge fund, an activist hedge fund adjusts idea was going to ratify his brilliant recreation of the company and of course, with Nelson Peltz, there's no such bargain. When it was clear that he wasn't going to achieve this two dollars a share that was the end of Jeff and frankly the end of the company because, as John Flannery who took over from Jeff Immelt quickly discovered there were hidden time bombs that Jeff had not really addressed shall we say, that John Flannery had to address and announce. The time the time of death was probably when Jeff Immelt got fired in June of 2017, I guess. That was probably the end of it even though it took a few more years for the plug to finally get pulled. It's basically in hospice from June 2017 on.
Ricky Mulvey: William Cohan, who's the author of Power Failure: The Rise and Fall of an American Icon. Founder of Puck as well. Thank you so much for joining us on Motley Fool Money. I appreciate your time and I recommend the book. It's a thorough and engaging history of one of the most powerful icons of American history.
William Cohan: Thank you very much for having me.
Chris Hill: As always, people on the program may have interest in the stocks they talk about and the Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
