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Peltz-Immelt showdown heats up as GE rushes to bolster profits

Peltz-Immelt showdown heats up as GE rushes to bolster profits

Some analysts interpret as CEO's last chance
Peltz-Immelt showdown heats up as GE rushes to bolster profits
Jeffrey Immelt, chairman and chief executive of General Electric, in June 2014.
Photographer: Johann Rousselot/The New York Times

Jeffrey Immelt has been rumored to be out as General Electric Co.'s chief executive officer more times than anyone can count. But now activist shareholder Nelson Peltz is ratcheting up the pressure in a do-or-die showdown.

After talks with Peltz's Trian Fund Management, GE promised Wednesday to meet stringent cost-cutting targets this year and tie executive bonuses to those goals and profits -- a deal that some analysts interpreted as Immelt's last chance to retain a job that he's held for 15 years.

"This year it's got to happen," said Nick Heymann, an analyst at William Blair & Co. "If you don't make the targets this year, I don't think we'll be having this discussion again in 2018. There will be a new guy running the show."

A GE spokeswoman declined to comment beyond the company statement announcing the targets.

Trian took a GE stake now worth about $2 billion in 2015 as the company sold off consumer and financial businesses to refocus on industrial products such as jet engines, gas turbines and oilfield equipment. Wall Street reacted enthusiastically at first and Immelt was hailed for his strategic vision. As recently as late last year, Peltz said he wasn't concerned with near-term results and expressed full confidence in Immelt's leadership.

But GE's stock rally fizzled last year, leaving Trian and other investors with returns that trailed the S&P 500 Index. Over the past month, the fund said it "intensified'' its talks with the company, leading to Wednesday's announcement. GE is now at an inflection point, and a failure to deliver better results would lead to a push for more substantive changes at the company, according to people familiar with the matter.

After the talks with Trian, GE agreed to cut costs this year by $1 billion to $23.9 billion, and another $1 billion in 2018. It also linked bonuses to a target of $17.2 billion in operating profits in its industrial units this year.

GE will boost 2017 cash bonuses 20 percent from what would otherwise be payable to managers if the company achieves both the profit and cost targets. If only one of the goals is met, bonuses will be unchanged. The payouts would be reduced by 20 percent if both objectives are missed.

The benchmarks aim to ensure that GE meets or exceeds its goal of $2 a share in profits in 2018, a figure that shareholders including Trian consider sacrosanct, according to one of the people. That will be a challenge. The Boston-based company is likely to post adjusted earnings of only $1.90 a share next year, according to the average of analysts' estimates compiled by Bloomberg.

"We will continue to hold management accountable to its commitments," Trian said in a statement. "Over the past month, Trian has intensified its dialogue with senior management regarding new initiatives to help ensure that GE can meet its financial commitments."

When Trian announced in October 2015 that it owned a major stake in GE, it said the stock, including dividends, could rise to as much as $45 by the end of 2017. Trian at the time cited the company's "bold transformation" to a mostly industrial business.

But since then, GE shares have gained only 16 percent to close Wednesday at $29.53 while the S&P 500 Index has climbed 20 percent.

The deal on Wednesday helps GE by quashing concern over possible rifts between Trian and the company's leadership, said Deane Dray, an analyst at RBC Capital Markets. The larger cost cuts create an easier path to reach $2 per share in 2018 than commitments to a quicker sales pace, Dray said in a note to clients.

Delivering $2 billion of cost cuts to the bottom line is more meaningful than earlier savings pledges, because it will require deeper reductions to offset inflation and other typical increases, the people said.

Still, it's unusual for a company to single out a year within a three-year plan to link bonus pay, analyst Heymann said. It shows how investors want to avoid another performance like last year when GE missed targets for cash flow, sales and operating earnings, he said.

Immelt's compensation fell 35 percent last year to $21.3 million. "GE certainly did not earn any prizes for execution overall," Scott Davis, an analyst at Barclays, said in a report March 20.

Facing unpredictable industrial markets, GE may need a boost from a corporate tax cut that President Donald Trump has pledged to push through Congress to meet its 2018 per-share earnings target, Heymann said. If GE falls short of the goal, the blame will land squarely on Immelt.

"There's heat in the kitchen," Heymann said. "The heat isn't going away."

With assistance from Richard Clough

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