You can’t miss Dan Porter’s cufflinks. The large, glistening orbs weigh down his wrists. They’re definitely not understated; some might call them ostentatious. Set into the pale face of each is a dollar sign and the number three that sparkle when they catch the light. Yes, they’re diamonds, confirms Porter, head of business development at GE Capital Europe.
The cufflinks were presented to each of the General Electric Capital Services (GE Capital) business heads just before Christmas last year by chairman and chief executive Gary Wendt. They mark the fact that in 1997, GE Capital’s net income broke the $3 billion barrier for the first time. Porter also has a set of $2 billion cufflinks at home, which, he assures us, are much less tasteful than these. Good taste is not what GE Capital is about.
This, after all, is the company that calls its 28 business areas “bubbles” without a hint of irony (at GE Capital bubbles never burst). Ask employees about the company’s culture and you get a range of saccharine soundbites. From “We are all very focused on growth as a way of life” to “There’s nothing that you do during your day where GE hasn’t in some way touched your life”. The frightening thing is they look as if they mean it. As an ex-employee observes, it can sound “a bit like the Moonies”.
And yet there is no denying that the all-consuming GE Capital culture works. Last year its businesses accounted for 39.6% of General Electric’s consolidated net income, up from 28.1% in 1990. Credit Suisse First Boston expects that to increase to 41% in 1998. In Europe growth has been nothing short of spectacular. Net income was $705 million in 1997 from an asset base of $32.7 billion, both figures up more than 30% on the previous year. In 1992 assets were just $4.2 billion, and income $46 million.
Worldwide, assets of $255 billion put GE Capital on a par with such companies as JP Morgan (assets of $262 billion at the end of 1997). But it is in net earnings that GE Capital wipes the floor with most commercial banks. Last year it earned $3.26 billion, compared with Morgan’s $1.46 billion and Deutsche Bank’s $550 million.
GE Capital’s own managers’ explanation for this astonishing ability to out-earn the world’s top banks is that they don’t think or manage like bankers at all. “As a financial enterprise inside GE, we have gained tremendously from the culture of an industrial company,” says Porter. “If you look at most financial services businesses, they are run as capital-investment businesses. Whereas we extend our businesses’ reach to where we also provide value-added, as operating businesses, beyond financial services.”
There may be more to this than mere business school-speak. For example, like many large commercial banks GE Capital runs aircraft-leasing operations. Onto these it has bolted related acquisitions: flight-training and flight-simulator companies. The strategy is to provide another service to the same airline customers, so gaining a stream of earnings from non-financial operations. Similarly, its truck-leasing business in Europe has extended operations to provide truck and trailer rental and logistics management. Plenty of banks do auto leasing, none would take that extra step into logistics management.
Culture of self confidence
But for all the culture of self-confidence that hallmarks GE Capital executives, the growth and direction of the company for the first time seems uncertain. Wendt, the tough and visionary executive who drove GE Capital’s astonishing growth over a dozen years of hectic deal-making, resigned in December at the age of 56, in what insiders say was a culmination of his conflicts with GE chairman Jack Welch. “It’s impossible to exaggerate the importance of Gary’s influence and contribution to GE Capital,” says one executive. “He’s a very big personality.” Others recall how Wendt drove the firm’s expansion in Europe, for example launching its acquisition drive in eastern Europe after taking an exhausting bus tour through the region, when others inside GE doubted the region’s potential.
As an acquisition outfit, GE Capital is cast in the mould of Gary Wendt: tough and uncompromising, a slippery adversary across a negotiating table. Not all targets are flattered by its attentions. “GE Capital has a reputation for being aggressive in the way it does business,” says Craig McKinney, CEO of Woodchester, a Dublin-based auto-leasing firm that GE Capital bought in 1997. “In terms of the various parties we were negotiating with in the summer of 1997, there was a general sense among our own people that Woodchester as an entity would be split up and dispersed among various GE Capital businesses.”
In the event, it was GE Capital’s other auto-finance businesses that were folded into Woodchester, creating a centre for its European operations. McKinney, who started the company 21 years ago with his brother, was retained as chief executive, along with the company’s entire management.
As an outsider only recently brought into the GE Capital fold, McKinney retains a sense of perspective that is sometimes lacking in his more evangelical GE Capital colleagues. He suggests that the Woodchester acquisition could reveal how GE Capital intends to develop its European businesses. “There is a need for operational consolidation,” he says. “There is no point in being a collection of businesses unless at some point they are joined into a cohesive group.” Some analysts wonder whether consolidation, rather than growth via acquisition, may become a higher priority under the new leadership at GE Capital. On the other hand there is a fair bit of continuity in GE Capital’s management the chairman, Dennis Dammerman, 53, was chief financial officer of GE for 14 years and the new chief executive of GE Capital, Denis Nayden, is another long-standing GE Capital executive who first joined the group in 1977 and had been its chief operating officer since 1994, under Wendt.
McKinney also suggests that it is not only operations that need more cohesion in Europe. “Another element is that there is a situation where a lot of senior management is based in the US. Here [at Woodchester] was the opportunity for a European-based management team.” It is a telling observation. Despite the fact that it has now grown to a quite formidable size, GE Capital in Europe still operates as a fragmented series of businesses, each subservient to a US business group head.
Although it had been present in Europe since the late 1980s, GE Capital’s European business began to take off in 1994, with the recruitment of Christopher Mackenzie from investment bank Schroders. When Mackenzie arrived he found just one other person working on acquisitions in London. But he benefited from support at the highest level in GE Capital. “In 1994 Gary Wendt started to become personally engaged in the whole European initiative,” he recalls. “He realized the huge opportunities that were here and suddenly the resources were made available to get things done and the decision-making process was radically shortened.” Wendt led negotiations himself on many of the larger acquisitions.
The key role played by Wendt in the rapid growth of European business underlines the fact that despite its increasingly international outlook, GE Capital is still run out of its head office in Stanford, Connecticut. All investment decisions have to be cleared through the monthly meeting in Stanford, with each of the business heads in Europe and worldwide reporting not to a regional head but to the heads of business in the US.
Power debate
Porter denies that this lack of independence for the European operation lay behind Mackenzie’s decision to quit the firm in May last year in order to join private-equity partnership Claydon, Dubilier & Rice (CDR). “He would have liked more autonomy, sure. So do I. So does everyone,” he says. “He got promoted to the global development job. That involved a lot of travel and less hands-on work. Chris is more of a deal guy.” Mackenzie bears out this account. “I’m not a headquarters guy,” he says. “While I was very flattered to be offered the global development job I really wanted to live and work in Europe and build a business for CDR.”
Other insiders suggest that Wendt’s business model for GE Capital, with powerful US business heads dictating not just investment decisions, but even day-to-day management decisions had not adapted to the huge growth of the business outside America. One says: “It was all right when the overseas operations were peanuts and the US business heads could manage them almost in their spare time. But the reality of GE Capital in Europe had eclipsed that. Gary’s vision for the business had grown stale. The local leaders need more power. And if that now starts to happen, it will be very good news.”
The issue of how power should be split between global business heads and local geographic leaders is a long-standing debate for financial services and industrial companies alike. GE in its industrial businesses tends to place emphasis on global business heads mostly being in the US. The head of GE Plastics in Europe reports to the head of plastics in America, so GE Capital seems to conform to this company-wide model. But analysts suggest that GE devolves more authority to local business heads in some of its industrial operations, via so-called pole leaders, senior managers for Asia and Europe as well as the US. That did not happen inside GE Capital.
However the fact that Welch left Wendt in charge of GE Capital for a dozen years suggests that, whatever their personality conflicts, Welch had few problems with the way Wendt ran the business. Welch and Wendt were two big personalities in the same organization and that may have been the root of their coolness to each other. It made life difficult for some GE executives down through the organization, even inside GE Capital. “You were either a Jack man or a Gary man,” says one, “and if you were a Jack man, Gary did not like that.”
Though Wendt ran a business that contributes the biggest chunk of GE’s earnings, he was not deemed a front-runner to succeed Welch. Welch may have been concerned to prevent their rivalry from spilling over after Welch, 63, retires in 2000. The widespread prediction was that Wendt would have a serious difficulty with reporting to whoever does take over from Welch. It was an issue that needed to be addressed.
The appointment of two career GE men to run GE Capital suggests that there will be more continuity than upheaval. “Whenever there’s new leadership there may be change. Different people ask different questions. But we’re not braced for any dramatic shift in strategy,” says Porter. Time will tell.
Meanwhile other issues loom for GE Capital in Europe, including how it can continue to operate on such a scale in financial services without becoming a direct competitor to the established banks. Comparisons with the performance of banks like JP Morgan and Deutsche Bank are ones that GE Capital openly invites, including them in its own marketing material. But it balks at the suggestion that it runs a conventional banking business, despite the fact that it owns banking licences throughout Europe.
Going round the outside
“If you look at traditional commercial banking, the core businesses are exactly what we don’t do,” says Andrew Beaton, head of the equity capital group at GE Capital Europe. “We do the things that are round the outside [of traditional commercial banking], that are much smaller, free-standing businesses.” The 28 business “bubbles” of GE Capital are split into five broad groups: equipment management, speciality insurance, specialized financing, mid-market financing and consumer services. Although some of the businesses clearly fall outside the scope of mainstream banking, especially those in the equipment management group, others don’t. There is, for example, a structured-finance group that offers financial engineering and capital-raising to a wide range of industrial clients. A capital markets services group was set up in Europe last year to arrange financing for GE Capital businesses and their clients.
The assertion that GE Capital has no interest in mainstream banking services seems especially dubious when one looks at its expansion into central and eastern Europe. There it has bought into two straightforward commercial banks: Budapest Bank in Hungary, and Agrobanka in the Czech Republic. Its intention may be to develop these as centres for consumer financial services, but it has also stressed that it will not withdraw from corporate markets in which either bank may have traditional strengths. “The banking platform gives us the opportunity to understand customer needs within these markets,” argues Jenne Britell, president of GE Capital central and eastern Europe. “It enables us to secure both customer sectors, the consumer and the commercial customer.” It also offers an opportunity for GE Capital to dip its toe into more mainstream banking activities in a low-risk, low-profile manner. Britell claims that, in terms of organization, GE Capital has “all the things necessary to understand the banking environment. The challenge is to take these things into that environment and ask: Are there differences that we need to be aware of, or is it really the same?”
The experience of running Budapest Bank’s commercial banking business in Hungary has not been altogether satisfactory, as Porter concedes. “Eastern Europe has been hard work,” he says. “We’ve taken less than stellar returns to get a foothold.” And of the commercial banking business that may come with future acquisitions, Porter says: “I think of that as overhead.” Yet in central and eastern Europe, Britell remains convinced that if called upon GE Capital can succeed in running a mainstream banking business. “It comes down to the fact that today’s most effective banks are centres of financial services,” she argues. Some analysts, at least, are willing to believe her: “When you compare what they’ve done [in the businesses they’ve entered] the numbers point out that they’re doing it better than others,” says one. “I’m willing to give them the benefit of the doubt that they’ll be a better bank than anyone else.”
In stark contrast to Britell, her counterpart in western Europe, Andrew Haste, the head of the global consumer finance group, is at pains to distance his business from more traditional banking markets, despite a product range that has grown from its initial focus on retail finance (it began in 1990 with the acquisition of UK clothing retailer Burton’s finance company) to include personal loans, investment products and insurance. “I don’t think we’ve come into more competition with traditional retail banks,” says Haste. “After all, they’re exiting businesses we’re in because they don’t see them as core. We still see ourselves as a consumer finance company.”
This determination not to be labelled as a banking operation has, perhaps, a purpose beyond simply wanting to be put in the right industry bracket. GE Capital has grown into a formidable European financial services company without being seen as a competitor by mainstream commercial and retail banks. Its size alone now dictates that it will be treading on more toes in traditional banking markets, but GE Capital continues to promote its non-banking, non-threatening image. After all, it is an image that may enable it to gain important footholds in new markets. Porter is especially interested in southern Europe (he suggests this might be a hangover from his previous job as head of business development in Latin America), and his team is looking at possible joint ventures in Italy, Greece, Portugal and Spain. “In southern Europe there are mid-size financial institutions looking at the euro and consolidation, that also now have Latin American worries,” he muses. “They’re thinking about partnership and GE Capital offers a complementary business.”
Although there may inevitably be more crossover between GE Capital’s niche banking businesses and the core businesses of commercial and retail banks, there are some things that GE Capital will never do. Securities is one. Banks the world over may be counting the losses from the emerging markets’ meltdown for many months to come, but GE Capital is counting the opportunities. “In terms of over-exposure to markets, we haven’t got any. In every market we’re fully hedged,” says Porter. “So from our perspective there has been no material impact. Where there has been a big impact is on the situation that we’re hoping to invest in.”
Part of the reason why GE Capital is so well insulated from the securities market turmoil is that it already had its fingers burnt, and learnt its lesson. In 1989 it took a majority stake in Kidder Peabody, the securities brokerage that became embroiled in a fraudulent trading scandal centred on government-bond trader Joe Jett. It cost GE Capital $1.5 billion in losses in 1994 alone, and the remnants of the business were sold to PaineWebber. “Trust me, Jack Welch will never do that again,” says an analyst who covers GE. “Culturally it didn’t fit. It was clear from day one but they thought that they could make it fit. Their other businesses are not like [the securities business] at all. It is a cultural issue more than anything.”
One area of investment banking where GE Capital will remain a force for years to come is M&A. According to some, its portfolio approach to acquisition buying undervalued businesses, restructuring, and reaping significant rewards is the model on which Nomura and others based their successful principal finance operations. Says Porter: “We may or may not have invented it [principal finance], but we’ve stuck with it, and now we’re much bigger than most.” What GE Capital has that no-one in the realm of principal finance does is access to low-cost financing through a triple-A rated treasury, General Electric Capital Corporation, which funds all its 28 businesses. “The thing to bear in mind is that GE Capital is not an investment bank,” says Mackenzie. “Its success relies much less on individual leaders’ day-to-day contribution. At GE Capital other things, such as their unique operating focus and the strength of the balance sheet, are brought into play.”
Porter runs a team of more than 30 M&A specialists out of GE Capital’s London headquarters, which he refers to as “our in-house investment banking group”. In the view of one senior investment banker, the quality of Porter’s team is not in doubt: “Any one of the people there could get a senior position in the best investment banks,” he suggests.
And yet they don’t. In a business renowned for its fickleness, the loyalty of GE Capital’s staff is remarkable. “No one leaves the group without going to another GE or GE Capital business,” claims Porter. Mackenzie, who built and ran the business development team until May this year, is a little more sanguine. “We didn’t lose anyone we wanted to keep,” he recalls. He goes on to offer an explanation why so many of GE Capital’s M&A team resist the lure of investment banking. “If you compare it to the political infighting or the complacency that you can get at some investment banks, then it is a very different world,” he suggests.
Porter’s team drives the acquisition process that remains GE Capital’s lifeblood. Since 1990 it has acquired over 100 companies in Europe, 50 of those since the end of 1996. “We can step into a situation and uniquely structure a deal that nobody else can do,” says Porter. “Many of the deals we’re involved in never get to auction. Some never have investment bankers involved at all. Perhaps we’ll pay less up front, but we provide a bigger opportunity for the management. We’re acquiring for net income growth.”
Japan calling
Yet Porter is cautious now about the outlook for acquisitions in Europe in 1999. The effects of the late summer financial crisis suggest that prices should be falling. But sellers are still holding out for high valuations and several financial-services businesses have been put up for sale and then withdrawn. Porter says: “We are a disciplined buyer and our view of the future is a little less optimistic than in the past. We may slow down.” Rather than outright acquisitions, GE Capital may do more joint ventures and alliances in Europe next year. It remains to be seen how this may affect operating performance. Porter says: “We’ll get income growth organically from within businesses we own, we’ll get the effect of income growth from recent acquisitions, and we’ll do new acquisitions. The proportion will tilt more towards organic growth than new deals.”
So where next for GE Capital? Tracking the movements of the senior management is often a good indication of their next regional target. “I think you will see them capitalizing on a huge window of opportunity in Japan,” says Mackenzie. “Jack Welch is very supportive. In south-east Asia the extent of the opportunities is perhaps limited. But Latin America is very interesting, and senior GE officers are often down there.” The company’s European expansion was built on the back of a recession that made financial services companies relatively cheap and easy to come by. That situation now looks set to be repeated in Asia and perhaps Latin America. GE Capital has already bought a portfolio of $1.1 billion worth of car hire purchase loans from Thailand’s 56 liquidated finance companies, as well as purchasing Philippine Asia Life Assurance Corporation and forming a joint-venture life-assurance company with Toho Mutual Life in Japan.
“I think that what they’ve done in the US they’re now halfway through in Europe and just beginning in Asia,” says a New York-based analyst. “The cycle recreates itself. There’s always going to be an area where somebody else has messed up.” In today’s market that area looks pretty large.
