This [acquisition of Honeywell] is the most exciting deal for GE since RCA . . . the success of the RCA deal—which was probably one of the most successful deals in corporate history—will bode well for this one. . . . We’re merging two real high-tech companies. With real earnings. Doing real things.
—Jack Welch, October 2000
Call it a surprise move.
Call it the tactic that turns an above-average company into a superstar.
Call it the bold ploy that you spring while others sit stunned, unable to counter your adventurous gambit.
Surprise, boldness, and even shock—these are the features of the quantum leap.
Going for the quantum leap is what Welch had in mind when he launched the two largest acquisitions in GE’s history: RCA in 1985 and Honeywell in 2000. And although GE was ultimately frustrated in its bid for Honeywell, the gambit can hold interesting lessons.
Welch’s goal, in both cases, was not simply to make the company bigger. His goal was to build up GE’s highest growth businesses and thereby grow earnings. Acquiring businesses that could add to GE’s earnings became a hallmark of the new Welchdriven culture.
THE FIRST QUANTUM LEAP
Welch first cast a covetous eye on RCA, the Radio Corporation of America, in the mid-1980s.
Like GE, RCA was one of America’s most famous corporate names. RCA had interests in defense electronics, consumer electronics, and satellites. But the jewel in RCA’s crown was the National Broadcasting Company (NBC), which it had created in 1926.
Until Welch made his move, the three major television networks had seemed untouchable. Most people assumed that their owners would never part with these highly profitable “trophy” properties.
Not Welch. Sometime in 1984, Welch began pondering a GERCA merger. General Electric in 1984 had sales of $27.9 billion, and RCA had just over $10 billion. Together, they would constitute a new corporate powerhouse that would rank seventh on the Fortune 500.
Welch was convinced that the merger would augment GE’s drive into the service and technology fields and reduce its dependence on slow-growth manufacturing businesses.
The deal, announced December 12, 1985, was Jack Welch’s boldest move to that point. GE and RCA agreed that General Electric would buy the communications giant for $6.28 billion, or $66.50 a share—the largest nonoil merger ever. Since Wall Street analysts valued RCA at $90 per share, GE appeared to have gotten a very good deal, indeed.
“This is going to be one dynamite company,” Welch said happily. “We will have the technological capabilities, financial resources, and global scope to be able to compete successfully with anyone, anywhere, in every market we serve . . .”
Welch particularly enjoyed the spark he found among NBC entertainment executives. “They’re our type of people. They know how to be number one.” As a result of Welch’s audacity, General Electric was now a very different company.
THE SECOND QUANTUM LEAP
Even as he was preparing to retire in the fall of 2000, Welch came upon an opportunity to make another quantum leap. Honeywell International, Welch’s new target, was a manufacturer of aerospace systems, power and transportation products, specialty chemicals, home security systems, and building controls.
Honeywell seemed like a great fit with GE. Both companies made power-generation systems, plastics, and chemicals. GE aircraft engines were a major force in the commercial aircraft field; Honeywell was strong in avionics and business jet engines.
If the Honeywell deal went through, it would add $24 billion to GE’s annual revenues of $112 billion. GE’s profits—already on the order of $11 billion a year—would grow by another $2.5 billion.
On October 23, 2000, GE and Honeywell announced that GE would purchase Honeywell for $48.4 billion in stock and assumed debt. GE would acquire another 120,000 employees, giving the expanded General Electric a payroll of 460,000. “I want an apology from everybody that ever called me Neutron Jack,” Welch said pointedly. “We have more people today than we did when I started.”
But Welch was not pleased when some wondered out loud why GE had chosen to buy a so-called “Old Economy company.”
My answer is: What the hell do you think Honeywell is? . . . We’re merging two real high-tech companies. With real earnings. Doing real things. And using e-business tools. So get that straight.
Buying Honeywell made sense, Welch argued, because there was a 90 percent overlap between the two companies.
And yet with virtually every single activity there is no product overlap. So the feels are the same in 90 percent of the businesses and yet everything is complementary. That’s not a speech for the antitrust people. That’s fact . . .
Welch had reason to be concerned about antitrust actions. Merging the two corporate giants was sure to attract intense governmental scrutiny. And at first, things went well. In May 2001, the U.S. Department of Justice approved the transaction. (Canada and nearly a dozen other jurisdictions followed suit.) But 2 months later, the European Commission demanded concessions that Welch couldn’t accept. “What the Commission is seeking cuts the heart out of the strategic rationale of our deal,” Welch wrote in a letter to Honeywell CEO Michael R. Bonsignore.
The deal was dead.
THE “HIDDEN” QUANTUM LEAP
While the Honeywell deal was still alive, Welch announced his intention to delay his retirement from GE to ensure that the merger went smoothly. Critics suggested that he had contrived the Honeywell deal just to stay on longer at GE. Ridiculous, he responded:
This is not a story of the old fool who can’t leave his seat . . . Don’t write that story. That story is stupid. In the paper, I called it “B” with a bunch of dashes . . . Why not take advantage of the experience I’ve got with RCA and over a thousand other acquisitions?
In this response, Welch points to what might be considered GE’s hidden “quantum leap”: the patient acquisition over 20 years of numerous companies, all designed to propel GE toward higher sales and earnings.
Under Welch, GE was constantly on the lookout for small companies that could be quickly integrated into the company’s units and which would immediately add to earnings. In 1999 alone, for example, GE closed 125 of these deals. The $48 billion, or $55 a share, Welch offered for Honeywell was half as much as all the deals GE had done under his watch combined.
The result? A company that in 2000 operated in more than 100 countries and earned revenues of $130 billion.
WELCH RULES
- Go for the quantum leap, even if it goes against company culture. When Welch acquired RCA, he rewrote GE’s rule book.
- Think outside the box. Both the RCA and Honeywell deals were audacious moves. One panned out; the other didn’t.
- Keep hunting for the little opportunities. The big, bold moves need to be part of a patient, systematic approach to mergers and acquisitions.