When Oversold Claims Meet Reality, the Truth Will Out
Hype makes the world go round--in business as in every other sphere of human endeavor (if not more so). This year has had its share of over-hyped claims come crashing down to reality, starting with that most fundamental of fundamentals, the stock market.
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The So-Called Bear: Were this article being written for our Labor Day edition, we might say that the year’s most over-hyped story was the so-called bull market. Stock prices were slammed so decisively by the midsummer downturn that the major market indexes were showing losses for the year.
Pundits seeking greater meaning in the event were not far behind the swoon. Some even saw divine retribution in the relentless selling, which drove the Dow Jones industrial average down nearly 20%. Judging from the self-satisfied tone of much of the summer’s market commentary, it was as though average Americans were trapped inside a great morality play, requiring punishment for their hubris in betting their kids’ college funds, retirement nest eggs and home down payments on anything as sophisticated as the stock market.
That was then. Now, as the year draws to a close, the bear is back in hibernation. The Nasdaq composite index of small and medium-sized stocks is nosing up against its all-time record. Just a handful of reminders remain of a few scant months ago, when “experts” were drawing facile comparisons between 1998 and 1929. Some are even (again) forecasting Dow 10,000 before the end of 1999.
None of this means, of course, that the bear won’t rear its head again even before the winter is out--just that hasty judgments about the long-term direction of stock prices today, as always, incorporate a large measure of folderol. Bull and bear markets, like streaks at roulette, are visible only in a rear-view mirror.
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CEO Coexistence: The amazing thing is not that when two huge companies merge, one of the two top guys has to go. It’s that anyone believes that peaceful coexistence is possible.
Yet merging chief executives still try to pretend they love each other like lifelong golfing buddies. This year’s most remarkable (and shortest-lived) displays of good fellowship were the work of NationsBank and BankAmerica, which announced their merger on April 13, and Citibank and Travelers Group, which merged into giant Citigroup in October.
Following the formal announcement by NationsBank and BofA, the two banks’ top executives, Hugh McColl and David Coulter, spent the rest of the day jetting around the country for a series of chummy news conferences. McColl of NationsBank, a craggy ex-Marine, and BofA’s Coulter, a balding fly fisherman, assured all listeners that the two institutions were a perfect financial, business and cultural match. McColl would remain chairman and chief executive of the merged institution until 2000, the pair explained, at which point Coulter (who was said to be already house-hunting in Charlotte, N.C., the NationsBank seat) would take over.
In the meantime, Coulter said, “each one of us knows what our job is.”
But the dream did not last. On Oct. 21, the week after the bank announced a $1.4-billion loss from a flier in hedge-fund investing instigated by the BofA side, Coulter was out of a job. Only then did anyone admit that his ouster was preordained all along.
“The guy [Coulter] was a marked man from the day the merger was announced,” one analyst said.
Similar surprises lay in store for those who expected things to go smoothly at Citigroup, where James Dimon, the heir apparent to Travelers Chairman Sanford Weill, was ousted from the hierarchy of the new company.
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‘Synergy’ at Time Warner: “If you love Time Magazine,” the promos said, “you’ll love ‘NewsStand.’ ” The reference was to a hybrid news program that purportedly melded the news-gathering talents of Time magazine and Cable News Network, two flagship properties of Time Warner Inc., into a whole that was immeasurably greater than the sum of its parts.
The pitch was a version of the eternal quest for “synergy” by conglomerates from Disney to Viacom. Rarely, however, has it gone so awry.
“NewsStand’s” inaugural program aired on CNN on June 7, simultaneously with the publication of a written version in that week’s Time. Selected for maximum impact, the program made an arresting charge: that during the Vietnam War the U.S. dropped nerve gas on a clutch of American military defectors in Laos.
As an independent investigation later showed, the charge was not supported by the program’s research. The eventual toll included the jobs of three of the program’s producers, who resigned; the reputation of CNN correspondent Peter Arnett, who hosted the program and allowed his byline to appear on the Time magazine article without having participated significantly in the preparation of either incarnation; and the credibility of CNN and, especially, Time, whose editors apparently allowed the errant piece into their magazine without subjecting it to their own fact-checking.
The bottom line: One more proof that “synergy,” far from being the easy yoking of one product or organization to another, is really a mysterious alchemy that few have mastered.
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Efficiency Hype: Almost anywhere you look, the rationale for a corporate mega-merger is the creation of operational efficiencies that will end up serving you, the customer, better.
This year the claims behind two such deals ran smack into reality. The first was the $5.4-billion merger of Union Pacific and Southern Pacific railroads in 1996, which company spokesmen said would generate “improved routes and service, greater efficiencies and lower costs.”
Instead, the merger created nationwide gridlock, lengthy delays at such crucial rail centers as the ports of Long Beach and Los Angeles, and hundreds of millions of dollars in losses for the merged company. The problems peaked at the L.A. port this year, when freight coming off ships to be transferred to UP cars was delayed for up to three days, and the railroad even advised some shippers to use competing carriers if possible. The logjams did not ease until this fall.
An even worse mess was the aftermath of Boeing’s $15-billion acquisition of McDonnell Douglas, which was completed last year as the chief executives of the merged enterprise proclaimed the establishment of “the first and only preeminent aerospace company in the history of aviation.”
Since then Boeing has suffered its first annual loss in 50 years and its stock has been cut nearly in half. Distracted by the complexities of merging the world’s No. 1 and No. 3 aerospace companies, Boeing management permitted production snafus to get out of hand and moved to resolve them just as orders started to dry up amid the Asian economic crisis.
By year’s end, the chaos was continuing. Boeing announced that it had canceled plans to move some of its 737 jet production to the old McDonnell Douglas plant in Long Beach--after spending millions of dollars to refurbish and equip the Southern California facility for the job.
