Remember when telecoms were just about the scariest investments on the planet? France Télécom (FTE ) NTT DoCoMo (NTT ), Verizon, Lucent, Alcatel (ALA ) -- every telco and telecom-equipment stock in the world just about rolled over and died in the past three years. This amazing experience was recorded faithfully in the Global 1000, the BusinessWeek list of the world's thousand top companies by market capitalization. Telecoms were among the worst performers.
But what the market taketh away, it giveth back as well. Just ask the executives at Nextel Communications Inc. The Reston (Va.) company topped the list of high-jumpers on this year's Global 1000 survey, rising from a subterranean 988 to a much more respectable 244. Nextel is on track for another year of strong earnings growth, after posting its first-ever profit in 2002. It's cashing in on walkie-talkie-enabled mobile phones favored by workers in construction and real estate. Turns out these blue-collar clients are not only extremely loyal but also willing to pay premium prices for dependable service. Now, it's catching on with the rest of us, too. Nextel boasts the highest average revenue per subscriber -- at $71 -- and the lowest churn rate of any major wireless carrier in the U.S. "Our mantra is to be first, to be better, and to be different," says Tim Donahue, Nextel's president and CEO. "We're also extremely disciplined in terms of growth and expenditures."
Nextel is also benefiting from the upward lift in the whole sector. As a group, telecoms, including U.S. companies such as AT&T Wireless Services Inc. and European heavyweights such as Deutsche Telekom (DT ) and France Télécom, were the best performers in the past year, up 3%. Yes, the sector is still trading well below its high point of three years ago. But many of these companies have slimmed down their debt loads and repositioned themselves for growth.
Telecoms weren't the only winners. Other smart companies also managed to wring out gains despite a near-worldwide slump in consumer sentiment in the past 12 months. Using data from Morgan Stanley Capital International Inc. in Geneva, BusinessWeek ranked companies in 23 countries by market capitalization as of May 30. While total market value fell for a third straight year, down 9.6%, to $16.7 trillion, there's some evidence that -- dare we say it? -- the worst is over, despite war, recession, and epidemic.
That's not to say the best is at hand. Global recovery may still be soft: That's why Federal Reserve Chairman Alan Greenspan thought another cut in U.S. interest rates was in order on June 25. But the case for some sort of stabilization is mounting. One encouraging sign is that the pace of the dropoff in the Global 1000's market value slowed to single digits for the first time in two years. Indeed, Wall Street's unexpectedly resilient rally this year is being echoed in markets from Tokyo to Tel Aviv.
One thing was surprisingly unchanged: the dominance of American companies. The greenback's slide against the euro failed to give much of an edge to European multinationals on the dollar-based market cap survey. That sounds counterintuitive: Global 1000 companies whose shares trade in euros automatically get an assist by the 22% gain in the euro against the dollar over the last year. But the downdraft in Continental economies has hurt European companies much more than America's near-recession has damaged U.S. giants. And a weak dollar helps U.S. exporters, which also helps their shares. Besides, some of the American companies are so dominant that even a currency slide can't budge them. Thus American giants such as General Electric (No. 1), Microsoft (No. 2), and Pfizer (No. 4) kept a lock on 8 of the top 10 slots on the survey. British behemoths Royal Dutch/Shell (RD ) Group and BP (BP ) PLC, ranked No. 8 and No. 9, respectively, led the list of non-American companies. Higher oil prices have helped these two and No. 3 Exxon Mobil (XOM ) Corp., but all of the top-ranked companies have leveraged their size to weather the recent global equity storm. GE shares, for instance, are up by about 30% since February this year. True, GE's stock price under Chairman and CEO Jeffrey Immelt is about half of what it hit three years ago during the final golden stretch under former Chairman Jack Welch. But GE has proved a wily survivor. Despite troubles at its plastics division, Chief Financial Officer Keith Sherin expects net income to rise between 3% and 13% this year, thanks to gains in other areas, including strong ad sales at NBC and some big orders for aircraft engines. "We're positioned for an economic rebound, [but] we're not counting on it," he told analysts at a June 20 meeting.
The vitality of the American companies shows up in other ways. One is in mergers and acquisitions: The strongest U.S. companies are among the few on earth rich enough to do big deals. Thus, household-product kingpin Procter & Gamble (PG ) Co., which has a big profit rebound going, launched a takeover for Wella in March, offering a 20% premium over the pre-bid stock price. Although the German hair-care giant's management has yet to formally accept P&G's bid, the surge in Wella's share price sent its market value soaring, making it the list's seventh-biggest gainer.
Also in the M&A file: New York drugmaker Pfizer's merger with Pharmacia. That deal, concluded on April 16, pushed up the combined company's revenue to $48 billion. It's also among the 10 most-profitable companies on the list: Citigroup (C ) and GE lead that ranking.
America's strength showed in the tech sector, too, where the IT blue chips advanced even as overall corporate spending on tech upgrades grew at a diminished pace. Cisco Systems, Dell Computer, IBM, and Oracle all showed great staying power. Analysts say perennial winner Microsoft Corp. saw its server software business grow about 16% in the past year. And it has finally cracked the high-end market. Meanwhile, the Windows and Office PC software monopolies together generated nearly $20 billion in sales in the year ended June 30. The two software products are so profitable that Microsoft is adding about $1 billion a month to its cash position.
Nothing in the telecom sector holds a candle to Microsoft, but at least this critical industry is showing signs of a rebound. The problems seemed epic only a few months ago. Falling prices were endemic despite steady demand for long-distance voice service and high-speed data lines. New wireless data services found few takers. And massive overpayment for acquisitions and spectrum licenses for expensive new services such as 3G hit balance sheets hard.
In Europe, things have finally stabilized for the sector after a cleansing period of credit downgrades, bankruptcies, and CEO firings at BT Group (BTY ), KPN (KPN ), Deutsche Telekom, and France Télécom. Deutsche Telekom is looking more attractive because it has cut debt -- down 11.5% at the end of 2003 from a year earlier -- and also reported a profit in the first quarter, after a $29 billion loss in 2002. "Cost-cutting alone won't create new perspectives," CEO Kai-Uwe Ricke told shareholders recently. But the sentiment among investors and analysts is that the company's most painful period is behind it.
The same can be said of Deutsche Telekom's rivals. During the worst of the crisis, these companies were deeply undervalued; France Télécom was priced at a fraction of its assets and less than the value of its stock in its wireless division, Orange. Now, investors figure the remaining telco giants are in no danger of ever going bust, and they recognize these companies spin off billions of dollars a year in free cash flow. That renewed confidence was reflected at a splashy Orange event on June 24 in London, where new CEO Sol Trujillo -- formerly CEO of US West before its acquisition by Qwest -- announced more ambitious growth targets for Europe's No. 2 wireless operator.
Further afield, the telecom business of Yahoo! (YHOO ) Japan gave it a big boost on the Global 1000 rating, as it leaped from No. 797 to No. 342, making it one of the top three gainers this year. That's no surprise to investors in its stock, which has performed spectacularly. The price stems not only from its mainstay online-auction service, with 11 million subscribers, but also from Yahoo BB, a popular broadband service in Japan.
The company, a joint venture between America's Yahoo and Japanese investment group Softbank, entered the "last mile" market for delivery of music, video, and other services over high-speed networks in August, 2001 -- and hasn't looked back since. Yahoo Japan's broadband business earns it about $190 million a year, or almost 40% of annual sales. Another strong telecom play from Japan is NTT DoCoMo, one of the top 25 companies on this year's Global 1000, and the highest-ranked from Japan. After falling into the red last year, DoCoMo made $1.8 billion in net profit on sales of $40.8 billion for the year ended in March. Profits are expected to recover, to $5.3 billion, this year on sales of $42 billion, forecasts Takashi Hayasaka of HSBC Securities. Restructuring, new and faster phones, and a slow-but-steady expansion of its i-mode Internet mobile phones globally are having an effect. Usage on 3G is still low, but DoCoMo is patient. "With better phones and wider coverage, users are beginning to migrate to 3G," says Kiyoyuki Tsujimura, senior vice-president for corporate strategy.
The telcos are reviving because of their strong cash flow. That's a strategy employed by winners in other industries as well. Britain's buttoned-down HSBC Holdings (HSB ) PLC is the world's No. 2 bank, following recent acquisitions, including Republic National Bank of New York, Safra National Bank, Mexico's GFBital, and, most recently, Household Financial. "In the past 12 months, we have taken advantage of some important new opportunities to grow," says Stephen Green, HSBC Group CEO. The deal spree pushed HSBC up eight notches on the list to No. 14. A conservative financial position, cautious management, and a strong balance sheet helped HSBC during the long bear market. The bank gets more than one-third of its income from fees and commissions and only 6% from the more volatile trading business.
HSBC has generated almost 40% of its profits in Hong Kong. But after its recent string of acquisitions, business in the U.S. accounts for about 30% of its assets and estimated 2003 pretax profit. Now, the bank is turning its attention to newer markets such as mainland China and, yes, even Iraq. Along with rival Citigroup, HSBC is in negotiations for a role in the reconstruction of the Iraqi banking system.
Britain harbors financial highfliers too. Most notable: the Man Group PLC, which zoomed from No. 989 to No. 618 on the list. Man has come a long way from its roots as a sugar broker, set up in 1783. Almost 200 years later, the company parlayed its prowess as a sugar dealer into businesses trading in other agricultural commodities. Now, it's the world's largest publicly traded hedge fund. Man has benefited from the downturn in the global equity markets as wealthy investors increasingly turn to riskier hedge funds in search for yields.
So far, investors have been rewarded for their risk. Man's flagship fund, AHL Diversified PLC, for instance, rose 32% in the 12 months ended Mar. 31, 2003 -- while the FTSE suffered a 29% decline. And since January this year, Man has expanded into the U.S. with a fund-of-funds investment vehicle. Because it deals in hedge funds, it tends to do well in down markets. The AHL fund's track record is 17% to 18% per year over the past 15 years. "We have benefited from the strong rate of growth in the hedge-fund industry," says Harvey McGrath, chairman of the London company.
Japan produced big losers in the financial sector. Two Japanese banks rank among the worst five performers: UFJ Holding and Mizuho Financial. Sumitomo Mitsui and Sumitomo Trust were also big disappointments. Despite their colossal assets, Japanese banks suffer from mounting bad debts, shaky capital bases, and shrinking reserves.
Thus Mizuho, Japan's largest bank and a product of a mega-merger, reported a $20 billion loss in the year ended in March. At the annual meeting last month, President Terunoba Maeda got an earful from angry investors, who have lost 90% of their money since Mizuho stock started trading in late 2000. Hard to believe, but just a decade ago, Japanese banks took 4 of the top 10 slots in the Global 1000. Our list shows how quickly fortunes can change in the global markets.
|Corrections and Clarifications "The Global 1000" (Special Report, July 14) erroneously stated that HSBC Holdings PLC acquired Safra National Bank. What HSBC acquired in December, 1999, was Republic New York Corp. and its sister company, Safra Republic Holdings.|
By Chester Dawson, with Diane Brady in New York, Jay Greene in Seattle, Kerry Capell in London, Andy Reinhardt in Paris, Irene M. Kunii in Tokyo and bureau reports