FOOL ON THE HILL
GE and Jack Welch's Legacy

Great management is usually only identifiable after the fact. However, Jack Welch, the outgoing CEO of General Electric, has produced a crop of big-league management draftees that rivals the production of even the best college basketball coach. In a few years, we'll know if Jack Welch's greatest success was what he did for GE or what he did to improve the management ranks of American business.

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By Brian Graney (TMF Panic)
December 11, 2000

What exactly is "great management"? Most investors will agree that management skill is an important determining factor in long-run investing results. But management strength is one of the great intangibles in investing, and as such, it is also one of the trickiest concepts for individual investors to deal with. That's because great management is usually only identifiable after the fact.

The revival of Quaker Oats (NYSE: OAT) is a case in point. The company's failed purchase of premium iced tea maker Snapple is widely known, to the point that it is now considered a textbook case of business mismanagement. The company overpaid in 1994 by acquiring Snapple for $1.7 billion, only to realize years of losses and declining sales for the brand. Three years after the purchase, Snapple was sold to Triarc Companies (NYSE: TRY) for a mere $300 million.

What tends to be omitted in the standard recounting of the Snapple fiasco, however, is the story's epilogue. Quaker brought in a new CEO in late 1997 when it was still suffering from its Snapple hangover, an ex-Marine and Kraft executive named Bob Morrison. Morrison proceeded to divest a lot of the dead wood at Quaker, and then turned his sights on the company's most profitable businesses, including its valuable Gatorade sports drink franchise. Thanks to a major focus on cost containment, operating margins jumped to 17.5% in the most recent quarter from 10.2% at the end of 1997 and earnings growth returned. Quaker's stock also rallied, moving up from $47 11/16 on the day Morrison was appointed in 1997 to $88 5/8 on Dec. 1, the trading day before PepsiCo (NYSE: PEP) announced a buyout valuing Quaker at $97.46 per share.

Has Quaker had great management over the past few years? You bet. Morrison deserves to be lauded for his efforts in getting the company back on track and creating value for shareholders, as does the rest of his management team (he didn't do it all by himself, after all). But how are individual investors supposed to identify the Bob Morrisons of the business world, particularly before they crank up the wealth creation music? If only there were a way to foresee great management, rather than rely on hindsight as the sole arbiter of a manager's true worth.

Investors are about to find out if great management can really be predicted or not, thanks to one of the best-known and celebrated managers of the past century, General Electric's (NYSE: GE) Jack Welch. During his 19-year tenure at the Connecticut-based conglomerate, Welch has turned GE into a megalith of profitability and corporate performance. We don't need to rehash GE's many successes under Welch or expound on his managerial talents here. Both have been discussed at length in scads of essays and magazine articles over the years and have inspired at least a half-dozen books, with an autobiography on the way.

Jack Welch's reputation as a great manager has already been sealed thanks in large part to the 25% compound annual advance of GE's share price since he's been in charge. However, his true legacy will ultimately be determined by the future performance of the crop of top-tier managers he has mentored and unleashed on the stock-holding public. Heading the list is Jeffrey Immelt, who was recently tapped as Welch's successor upon his retirement at the end of next year. While comparisons to his predecessor won't be fair -- GE's market capitalization in 1981 was about 1/40th of what it is today -- Immelt will be under a great deal of pressure to perform and fill Welch's large shoes.

However, Immelt won't be the only GE-trained manager with his feet held to the shareholder return fire. What is truly amazing about GE under Jack Welch is the number of high-level executives it has churned out, much like the way a top college football or basketball program sends several players onto pro teams year after year. Last week, the two runners-up to Immelt in the Jack Welch succession race became the latest in a long line of GE draftees into the business big leagues. Robert Nardelli, the former president and CEO of GE Power Systems, was named president and CEO of home improvement retailer Home Depot (NYSE: HD). And James McNerney, the former head of GE Aircraft Engines, left to become chairman and CEO of diversified manufacturing and technology company 3M (NYSE: MMM).

Here's a current list of other former GE executives and officers in similar high places:

David Cote -- president and COO of TRW (NYSE: TRW)
Paolo Fresca -- chairman of Fiat SpA (NYSE: FIA)
Kaj Ahlman -- vice chairman of E.W. Blanch (NYSE: EWB)
Tom Rogers -- chairman and CEO of Primedia (NYSE: PRM)
John Trani -- chairman and CEO of Stanley Works (NYSE: SWK)
Nigel Andrews -- managing director of Internet Capital Group (Nasdaq: ICGE)
Gary Wendt -- chairman and CEO of Conseco (NYSE: CNC)
Bruce Albertson -- president and CEO of Iomega (NYSE: IOM)
Stephen Bennett -- president and CEO of Intuit (Nasdaq: INTU)
Warren Jenson -- CFO of Amazon.com (Nasdaq: AMZN)
Thomas Tiller -- president and CEO of Polaris Industries (NYSE: PII)
Dennis Williams -- chairman, president, and CEO of IDEX Corp. (NYSE: IEX)
Robert Collins -- chairman of Scott Technologies (Nasdaq: SCTT)

A couple of notes about this list: First, it only includes those executives who have moved on to occupy the highest operating management positions at publicly traded companies. Second, all of the executives listed above were at GE as recently as 1997. There are many other high-ranking business leaders with GE pedigrees out there; those listed above merely represent the past few graduating classes.

So, will Jack Welch eventually go down in history as the Bobby Knight or Dean Smith of the business world, churning out dozens of future management superstars during his tenure? Only time will tell. But as he told Business Week in a 1998 article, probably nothing would give him more pleasure:

"This place runs by its great people.... The biggest accomplishment I've had is to find great people. An army of them. They are all better than most CEOs. They are big hitters, and they seem to thrive here."

Before too long, investors will find out if these former GE stars can thrive elsewhere and become the great managers of the coming decades.