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Losses force GE to cut off Wards

For many observers, the surprise is not that GE finally pulled the plug on Wards, but that it took so long to do so.

General Electric Co. finally ran out of patience with Montgomery Ward & Co.

After years of trying to turn around the troubled Chicago retailer, GE pulled the plug on Wards during the holiday season, the busiest time of the year for retailers. Wards filed for Chapter 11 bankruptcy protection Thursday and will close its 250 stores in the next few months. The decision will throw 28,000 Wards employees out of work.

The Wards bankruptcy is an embarrassing failure for GE, a company that prides itself on resurrecting troubled companies.

"They have quite a track record of turning around problem situations," said Bill Fiala, an analyst at Edward Jones in St. Louis. "While their batting average is pretty good, Montgomery Ward was one that they swung and missed."

It's unusual, in fact, for GE to tolerate losses like those generated by Wards for as long at it did. This may be one of the few cases, analysts said, in which GE threw good money after bad.

Since Wards' 1997 bankruptcy filing, GE has invested about $1-billion in the struggling retailer, including $100-million in July to pay down debt and millions more for an ambitious store-renovation program that was still under way this fall.

It would have been more typical for GE to cut its losses sooner. GE is a global conglomerate widely hailed for the careful management of its wide-ranging portfolio of businesses, from light bulbs and home appliances to medical equipment and aircraft engines. Under the leadership of chairman and chief executive Jack Welch, GE has not been afraid to make unpopular moves such as letting go tens of thousands of employees or ditching underperforming businesses.

"I was surprised that they hung in there as long as they did" with Wards, said Thomas O'Boyle, author of At Any Cost, Jack Welch, General Electric, and the Pursuit of Profit. "I think they couldn't bear to admit what an unmitigated failure it had been."

GE's cutthroat culture has propelled it to become the world's most valuable company. During Welch's 20-year tenure, GE's market value has increased from just $12-billion to about $480-billion. That performance, the Wards debacle notwithstanding, has turned Welch into one of the most celebrated CEOs this century.

GE's success is so linked to the 65-year-old Welch that his pending retirement is met with much hand-wringing on Wall Street. GE ended the world's most closely watched corporate succession race last month by naming Jeffrey Immelt, head of its medical-systems business, as Welch's heir. Welch will stay on the job as long as the end of 2001 to see through GE's $45-billion acquisition of Honeywell Corp.

Welch set the what-have-you-done-for-me-lately-culture as soon as he became CEO in 1981. His charge to employees was that GE should be No. 1 or No. 2 in every business. This led to a massive restructuring in which one of out of four workers was laid off. The bloodletting earned Welch the nickname "Neutron Jack."

The same ruthless attitude was evident a few years later when Welch dumped GE's consumer-electronics business in 1987, about 18 months after buying RCA's television-manufacturing operation.

"It's profit or perish,"O'Boyle said. "You either produce or you're gone."

Welch's laserlike focus on short-term results, critics say, has led employees to cut corners, possibly contributing to some of the defense-contracting scandals that have plagued GE or the humiliating Kidder Peabody & Co. bond-trading scandal in 1994 that generated bogus profits.

GE first became involved with Wards in 1988, when the company's financial-services unit, GE Capital, led a $3.8-billion buyout of the retailer.

During the next three years, Wards looked like a big success, as former chairman Bernard Brennan revamped stores and boosted sales. But by 1996, sales were declining and profits plunged. The next year, GE Capital put Wards into bankruptcy and took full control of the retailer after it emerged from bankruptcy in 1999.

GE Capital continued to plow hundreds of millions of dollars into Wards to renovate stores, stock better merchandise and jazz up its advertising. But the retailer could not staunch the bleeding. In fiscal 1998, the last year the company publicly reported its results, Wards lost $971-million, while its sales fell 20 percent to $3.63-billion from $4.53-billion the year before.

GE Capital did not disclose how large a write-off it would take for the Wards bankruptcy.

"With our companywide strength and the previously disclosed one-time gain from the Paine Webber transaction, today's filing by Montgomery Ward of a voluntary petition for Chapter 11 protection will have no material effect on GE Capital Services' ability to met our anticipated earnings," the company said in a statement.