Are You Tough Enough?
Donlon, J. P., Chief Executive (U.S.)
The search for scale, like the search for the holy grail, is a neverending quest.Just when we thought that merger combinations couldn't be any bigger, along comes a deal like AOU takeover of Time Warner. How big is big enough? Apparently not nearly as big as you would think. The fascination has its corollary in the stock market whereby the leadership in the market becomes increasingly narrow as the fashionable dot-com shares rise faster and faster. "As these favored Internet stocks rise spectacularly by factors of 10 and 15, their weighting in the overall index becomes larger," observes American Enterprise Institute economist John Makin. "What that support conceals," he remarks, "is an ever weakening performance by a broader and broader sector of unfavored' stocks."
The number of shares at new 52-week lows on the NYSE rose to 1,200 near the end of last year. With investors eager to add to their holdings of tech companies, what's happening to less fashionable shares? Those who attempt to put a value on stocks based on earnings and future returns haven't quite given up, but many have given up this criteria to feed the insatiable desire not to lose out on the tech momentum. Serious distortions result in serious corrections. This will no doubt sort itself out when the Fed raises interest rates, but what happens to value stocks in the meantime? And what happens to the cost of capital for the traditional value company?
This is a dilemma shared by many CEOs today, but few more so than Michael Bonsignore, the subject of this issue's cover feature. With the merger of AlliedSignal and Honeywell, Bonsignore must convince investors that the traditional industrial technology company he leads can deliver on its growth targets. As Prudential Securities' Nicholas Heymann points out, the most critical issue likely to affect all such companies going forward is their ability to achieve first or earlymover advantage in converting their traditional product-based historically cost accounting business model to an e-business model. …