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http://www.businessweek.com/@@NRsBW2YQR2sRvgAA/premium/00_13/b3674109.ht
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NEWS: ANALYSIS & COMMENTARY
What's an Old-Line CEO to Do?
Net-crazed investors sneer, no matter how sturdy the performance
Imagine you're the chief executive of an Old Economy company. You've
posted 12 straight years of increased earnings, capped by a 15% rise in
1999. You've engineered a transforming deal that helped double your
managed assets, to $50.4 billion. Yet investors are fleeing, driving
your company's stock price down 35% in the past year. ''It's
frustrating,'' grouses Albert R. Gamper Jr., who is in exactly that
predicament. ''In the good old-fashioned American system, if you
delivered consistent earnings, you were suppose to get recognition from
the stock market,'' says Gamper, the CEO of financial-services company
CIT Group Inc. ''Yet I look at my Telerate screen and I see our stock in
the red, going down every day. That is a real distraction.''
A modern-day corporate sob story? You bet, and one that has resonance
with increasing numbers of CEOs whose Old Economy stocks are laboring in
what has become a stealth bear market. Even the Dow Jones' 320-point
gain on Mar. 15--its biggest rally in 17 months--did little to narrow
the disparity. The unprecedented flight of capital into high-tech and
Internet companies is placing enormous investor pressure on old-line
CEOs. They're spinning off divisions, buying back stock, and following
the lead of General Electric Co. (GE) Chairman John F. Welch Jr. in
attempting to make the Internet central to their business models. IBM
(IBM) Chairman Louis V. Gerst-ner Jr. believes the pressure has become
so intense that ''many CEOs have an air of desperation about them''
(page 40).
Yet these moves are virtually to no avail. It's almost as if the stock
market, in its infatuation with Net stocks, suffers from
attention-deficit disorder. While Old Economy titans Coca-Cola (KO) and
Bank of America (BAC) have each lost more than $50 billion in market
value since May 1 of last year, tech superstars Cisco (CSCO) soared by
$293.3 billion and Oracle (ORCL) by $198.1 billion. The top 10
gainers--all tech luminaries--saw their market caps gain a phenomenal
$1.5 trillion in that time. The top 10 losers--old corporate
favorites--lost an equally unbelievable $284.3 billion.
''High-technology and dot-com companies are getting much bigger sums of
money much sooner in their economic life cycles than any other companies
in history,'' says Darrell K. Rigby, a partner at consultants Bain & Co.
''Investors are looking for big gains, not solid returns.''
The angst over the value split is being felt by a generation of chief
executives raised to deliver ''shareholder value'' to investors. Many
are turning in the financial results that ordinarily would lift their
stock price, not to mention the value of their stock options. Instead,
they have found themselves yesterday's news, ignored by investors
seeking extraordinary returns. That's made for plenty of unhappy CEOs
among Corporate America's oldest and best-known brand names. ''They're
envious because they want the valuations the technology companies have,
angry because they're working hard and not getting a lot of credit, and
fearful because they can now be cheaply bought by some of the dot-coms
in their industries,'' says James A. Champy, chairman of Perot Systems
Corp.'s consulting practice.
Many Old Economy execs are straining to understand--and fit into--a
world in which the market capitalization of software maker Oracle Corp.
now exceeds the combined value of the Big Three carmakers, and that of
Yahoo! Inc. (YHOO) eclipses that of Procter & Gamble Co. (PG) Is the
consumer-goods powerhouse, which lost 31% of its market value after a
Mar. 7 earnings warning, really worth $36 billion less because its
annual profits will be 5% short of earlier forecasts? Perhaps not, but
the loss marks the split between the hot and the cold, a drop ''symbolic
of the growing divergence between Old and New economies,'' says Edward
E. Yardeni, chief global economist for Deutsche Bank Securities Inc.
The stock market's bifurcation may have further consequences. Many
stable, mainline companies with underwater stock options already have
found themselves vulnerable to talent raids by New Economy outfits.
Instead of options, boards are being forced to offer more cash and
restricted stock--both of which affect the bottom line. Execs also are
starting to demand that now worthless options be repriced to give them
some value, but if directors comply, they could face a shareholder
revolt.
More important, though, lower valuations could make the companies
vulnerable to takeovers. ''If these New Economy companies nibble around
the edges, they could make some great acquisitions with their
high-valued stocks,'' says Lawrence M. Schloss, chairman of Donaldson,
Lufkin & Jenrette Inc.'s merchant-bank unit. He notes that Amazon.com
Inc. (AMZN) could use its stock to buy, rather than build, warehouses.
Or it could buy an air-freight company to deliver its products to
customers. In the aftermath of the proposed America Online-Time Warner
(AOL) merger, such a deal isn't farfetched. Amazon's $22.4 billion
market value dwarfs that of FedEx Corp. (FDX), whose market cap fell
more than $7 billion in the past year, to $9.3 billion. Never mind that
Amazon has yet to post a profit, or that its $1.6 billion in sales is
less than 10% of FedEx's revenues.
The value split could also usher in an era of leveraged buyouts not seen
since the 1980s. ''Buyout firms are knocking on the doors of companies
again,'' says Schloss. ''CEOs are getting tired of being undervalued
even though they're putting up good numbers. Their boards are frustrated
as well.''
Making matters worse, even when old-line companies seem to ''get it,''
they often fail to gain much recognition from the Street. Consider
Eastman Chemical Co., the former spin-off of film giant Kodak (EK). Last
year, Eastman became the first chemical maker to introduce e-commerce
sales in the U.S. and Canada and will rack up more than $100 million in
online revenues this year. It has forged strategic partnerships with
seven Internet startups. Yet its shares are down 25% over the past year.
''Most of the chemical analysts who follow us don't get it, and none of
them has seen a real impact on the bottom line from our e-commerce
ventures,'' says CEO Earnest W. Deavenport Jr. His advice? ''You have to
be diligent in telling your story, and you have to believe that long
term, the stock market is rational.''
At CIT Group, Gamper agrees. ''You have to recognize that there are some
fundamental changes taking place in how business is being conducted. You
can't miss that opportunity. And the upside is terrific.'' But if you're
old-line, will anyone notice?
By John A. Byrne, with Debra Sparks, in New York
-----
Ebb Tide for 'Old Economy' Companies...
The 10 Biggest Market Value Losers*
BILLIONS LOST
COCA-COLA $52.3
BANK OF AMERICA 51.1
PROCTER & GAMBLE 48.6
FORD MOTOR 27.9
GILLETTE 24.2
XEROX 23.8
UNILEVER 17.1
ALLSTATE 14.9
McDONALD'S 14.2
EMERSON ELECTRIC 10.2
TOTAL MARKET LOSS $284.3
..a Tsunami for 'New Economy' Companies
The Ten Biggest Market Value Winners*
BILLIONS GAINED
CISCO $293.3
ORACLE 198.1
INTEL 192.5
NOKIA 161.2
LM ERICSSON 126.9
SUN MICROSYSTEMS 123.6
NORTEL NETWORKS 120.8
MICROSOFT 106.5
TEXAS INSTRUMENTS 106.3
EMC 78.2
TOTAL MARKET GAIN $1,507.4
*Between May 1, 1999 and Mar. 9, 2000
DATA: DARRELL K. RIGBY, BAIN & CO.
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