Bye-bye, Pentium. Hello, Viagra. Was it only a year ago that Intel Corp. (INTC), maker of the Pentium chip, was the world's second-most-valuable company, with a market capitalization of $417 billion? Today, Intel is worth only $181 billion and ranks No. 13 globally. But while Intel was on the way down, Pfizer Inc. (PFE) was zooming up. Pfizer, the manufacturer of Viagra, boosted its market cap from $172 billion to $271 billion after acquiring rival Warner-Lambert Co. last summer, rising from global No. 20 to No. 4.
Call it the New Old World Order. After months of relentless battering in the markets, it's no surprise that many technology and telecommunications companies retain only a fraction of their former value. But this dramatic reversal of fortune has been accentuated by a wave of mergers and acquisitions--mainly in Old Economy industries from banking to pharmaceuticals to petroleum--that is creating a new group of global behemoths. The leaders of these companies are doing more than just shopping. They're also slashing costs and rethinking strategy to produce more value for shareholders.
That's one of the key trends to emerge from this year's Global 1000 survey. Using data from Morgan Stanley Capital International Inc. in Geneva, BusinessWeek ranks companies in 21 countries by market capitalization. For the second year, General Electric Co. (GE) ranks No. 1. But further down the list, things have changed. Gone from the Top 10 are Intel, network-equipment maker Cisco Systems (CSCO), mobile phone giant Nokia (NOK), Britain's telecom operator Vodafone Group (VOD), and Japan's NTT DoCoMo (NTDMY). Moving up to take their place: merger babies Pfizer, AOL Time Warner (AOL), and Citigroup (C). Propelled by high oil prices, Royal Dutch/Shell (RD) and BP Amoco (BP) also made the Top 10.
Will these newcomers have more staying power than the tech and telecom stars they displaced? These are uncertain times for everybody, as shown on June 22 when a profit warning from pharmaceutical giant Merck (MRK)--which rose to global No. 16 from No. 19 last year--sent the Dow skidding 111 points. Still, tech stocks don't seem ready to bounce back to the top of the list anytime soon. Steven Wieting, senior economist at Salomon Smith Barney, expects technology earnings per share to drop 45% this year, with continued declines in the first quarter of 2002. After the gyrations of the past year, Old Economy stocks look like a mighty safe haven. Investors also can take comfort in knowing that even though merger and acquisition activity has slowed down of late, there's plenty of value to be reaped from companies that have already completed such deals.
Consider Dutch-British food and consumer-goods giant Unilever (UL), which moved from 114th to 79th place in the rankings this year. After shelling out nearly $26 billion over the past year to acquire BestFoods, Ben & Jerry's Homemade, and Slim-Fast Foods, Chairman Niall FitzGerald is overseeing a major restructuring, shedding dozens of plants and underperforming products while promoting fast-growing brands such as Ben & Jerry's. If all works as planned, FitzGerald says, "it creates buckets of value." Unilever needs such streamlining to compete in the fast-consolidating global food industry. Philip Morris Cos. (MO) acquired Nabisco Holdings at the end of last year, boosting its market cap ranking from 84th to 26th.
SIGNS OF LIFE. The banking industry is getting a facelift, too. Once-stodgy European banks are shopping for cross-border acquisitions. Take Britain's HSBC Holdings PLC (HBC). It jumped from 46th to 24th place after acquiring Credit Commercial de France last year, on the heels of its 1999 acquisition of Republic Bank of the U.S. HSBC's shares are up almost 15% in the past twelve months, to $61. On the other side of the Atlantic, Citigroup CEO Sanford I. Weill is in the midst of an overseas acquisition spree that helped Citigroup rise from 11th to 5th this year. Its shares are up 20% since last summer, to $54.
There are even signs of life in Japan's sickly banking sector. Last year, Sumitomo Bank Ltd. merged with two other Japanese banks to create Sumitomo Mitsui Banking Corp. That helped Sumitomo leap from 137th to 91st place. But the merger is only part of the story: Sumitomo has consistently outperformed rivals, as President Yoshifumi Nishikawa has closed dozens of branches and reduced the workforce 7% to give Sumitomo the lowest overhead of any major Japanese bank. Already, the cost-cutting has boosted profits by $180 million, to $684 million, last fiscal year. "Management is considered relatively aggressive under Nishikawa," says ING Barings analyst James Fiorello.
The New Economy, of course, has produced a few healthy mergers, too. AOL Time Warner (AOL)--up from No. 29 to No. 7 this year--has outperformed the media industry since January, with its stock up nearly 14%, compared with a 7% drop in the Bloomberg Hollywood Reporter Index of 47 media stocks. That's partly because AOL and Time Warner shares were depressed last year while regulators were reviewing their planned merger. When the deal was O.K.'d in January, investors responded with a flurry of buying.
But Wall Street may also be encouraged by the company's results. In its first-quarter report, AOL Time Warner said pro-forma revenues rose 9%, to $9.1 billion, and operating income, before certain costs, was up 20%, to $2.1 billion. On the day the report was released, investors pushed the stock up 12%. "When you look at digital music, interactive television, broadband services, and home networking, we're at the center of all that," CEO Gerald M. Levin says. "We clearly stand as the blue chip for the millennium."
HIGH HOPES. Another New Economy giant, Microsoft Corp. (MSFT), has emerged relatively unscathed from the tech meltdown, jumping from No. 4 to No. 2 as its shares have climbed 60% this year. The biggest reason is that Microsoft's performance is holding up better than rivals such as Sun Microsystems and Oracle, which had pinned greater expectations on the now-collapsed dot-com boom. Microsoft has a raft of new products in the pipeline, including Windows XP, the Xbox game console, and Stinger, a wireless-device operating system. The company is sitting on a comfy cushion of $30 billion in cash, more than any other nonfinancial company in the U.S.
Elsewhere in the technology sector, few rays of hope are shining through. Lucent Technologies Inc. (LU), long considered a crown jewel of U.S. research capability, took an astonishing dive from 17th to 182nd place, pulled down by management bungling and the sagging economy. Highfliers Intel, Oracle (ORCL), and Cisco Systems (CSCO) suffered gut-wrenching slides, too.
Outside the U.S., some of the scariest numbers are coming from the telecommunications business. European mobile operators alone have pledged to pay $116 billion in license fees for next-generation wireless networks that now seem unlikely to pay for themselves. That helps explain why Europe's biggest mobile operator, Vodafone (VOD), last year's No. 6, skidded to No. 14. Things were even worse for Deutsche Telekom (DT), which plummeted from 16th place to 37th, and for France Telecom (FTE), down from 25th to 63rd. As these giants fell, they dragged down hundreds of suppliers, from handset makers Nokia (NOK) and Ericsson (ERICY) to telecom-equipment makers Alcatel (ALA) and Nortel (NT).
The big U.S. local telephone companies, by contrast, avoided the wireless-license frenzy. Some of them, such as Verizon Communications (VZ), are thriving. Verizon jumped from 56th place to 17th, as investors applauded the company's cost-cutting efforts and its push into long-distance, data, and wireless services to supplement its traditional local business. "We've tried to assemble the assets that will position us for long-term growth," explains co-CEO Ivan G. Seidenberg.
Hong Kong's Hutchison Whampoa Ltd. (HUWHY) also stepped nimbly around the wreckage. It backed out of a wireless license auction in Germany last year, saying the price was too high. And it reaped $20 billion in profits by selling two key holdings--its U.S. operation VoiceStream Wireless Corp. (VSTR) and its shares in British mobile operator Orange--shortly before telecommunications share prices began their steep decline.
And who knows? With long-promised wireless Internet devices finally coming onto the market in the next few months, some ailing technology and telecom companies might even get a second turn on stage. But chances are, from now on investors won't let Old Economy companies languish in the wings. By Carol Matlack in Paris, with bureau reports