Slim's New World
Mexican mogul Carlos Slim Helu is clueless when it comes to computers. His children gave him a laptop for Christmas, but he can barely boot it up. You won't catch this captain of industry surfing the Net, either. But for all his technological ineptitude, the 60-year-old billionaire has a clear vision of how computers and the Internet are transforming the way the world does business.
Slim is already at the vanguard of that revolution in Mexico, where he runs the leading Internet service provider and has become a major computer seller. Since taking control of Prodigy Inc. in mid-1997, he has turned it into the No. 3 ISP in the U.S. Now, he's making another high-stakes move into the hypercompetitive American market. On Feb. 1, Grupo Sanborns, one of Slim's subsidiaries, kicked off a tender offer to acquire all the outstanding shares of CompUSA Inc., the largest computer store chain in the U.S., for nearly $800 million. Microsoft Corp. and SBC Communications Inc. are expected to come in as minority investors. "Technology is going to transform people's lives and society everywhere in the world," says Slim. "My main task is to understand what's going on and try to see where we can fit in."
Slim's bid for Dallas-based CompUSA took many by surprise. Although it boasts $6 billion in annual sales, CompUSA has been bleeding red ink for the past 18 months. It has been fighting a losing battle against computer makers Dell Computer Corp. and Gateway Inc., which sell direct to consumers via the phone and the Internet. Furthermore, CompUSA was slow to react to the biggest shift in computer retailing in recent years: the rise of the sub-$1,000 PCs.
Yet Slim, who has built up an empire with annual sales of $16 billion by snapping up distressed companies at discount prices, sees CompUSA as another undervalued asset. He acquired 14.8% of the company's shares last year, and now he wants full control. Together with his son, Grupo Sanborns CEO Carlos Slim Domit, 32, he not only intends to turn CompUSA around but to make the chain the cornerstone of a major U.S. expansion into retail and e-commerce. "CompUSA is just one part of a larger, long-term project," says Slim. Eventually, he wants to sell U.S. customers not only computers, but the technology to run sophisticated systems in their homes, cars, and offices. If he succeeds, Slim & Co. would join the small, elite group of Mexican companies, led by cement maker Cemex and tortilla producer Maseca, that are making it globally.
Not everyone is sure Slim and his lieutenants can pull it off. "They're getting into a very difficult business arena, and we'll have to see if his staff is capable of operating well internationally," says Celso Garrido, a business professor at the Autonomous Metropolitan University in Mexico City. Slim's critics claim that his companies in Mexico have benefited from his close ties to the long-ruling Institutional Revolutionary Party. That's an advantage he certainly won't have in the U.S.
Still, Slim certainly has developed a reputation over the years as a shrewd businessman. The companies he controls have a combined market capitalization of over $60 billion and account for nearly one-half of Mexico's stock index. Assets ranging from mining to insurance are grouped into three holding companies: Grupo Carso, Carso Global Telecom, and Grupo Financiero Inbursa (table). Slim's personal net worth is estimated at $12.5 billion.
In fact, Slim is Latin America's richest man, thanks to his ability to spot lucrative investment opportunities. In the 1990s, when Mexico began privatizing state assets, a Slim-led consortium acquired a controlling stake in the telephone monopoly Telefonos de Mexico (Telmex). Then, it was an inefficient company with a history of shoddy service. Slim plowed more than $16 billion into the carrier to upgrade infrastructure and improve customer service. Today, Telmex is the star performer of the Mexican stock exchange. The carrier earned $3.9 billion in profits on $10.2 billion in sales last year. So the $1.8 billion Slim laid down for the company 10 years ago looks like a good deal, if not a bargain.
Prodigy is another of Slim's turnaround stories. Carso Global Telecom first bought into the White Plains (N.Y.) ISP in 1996 and then picked up a controlling stake in 1998, for a total investment of $222 million. At the time, the pioneer in Internet access had lost its way and was down to only 193,000 subscribers. Slim increased that number by expanding Prodigy's network nationwide and creating a bilingual service for Hispanic users. He also added to Prodigy's business offerings by acquiring Biz on the Net, a company that builds e-commerce sites for small companies. Slim took Prodigy public last year on Nasdaq, raising $1.68 billion. In November, SBC became a minority partner, merging its own Internet subscribers with those of Prodigy to create a 2.2 million customer base.
SHOPPING SPREE. Slim has been rushing to add to his information technology-related assets. He spent $1.5 billion in 1999 for, among other things, a stake in a U.S. fiber-optic network, cellular-phone companies in Puerto Rico and Florida, and part of online-music retailer CDnow. The shopping spree isn't over yet: On Feb. 8, Telmex and SBC announced a joint $150 million investment in Network Access Solutions, a company that provides high-speed Internet access throughout the U.S.
Slim is offering $10.10 a share for CompUSA. That's a 50% premium on the share price the day of the offer yet far below the $38 the stock traded at about two years ago. Quite a collapse--but Sanborns CEO Slim Domit is unfazed: "We feel that CompUSA's potential and great brand recognition position it well for a turnaround."
Maybe. Yet CompUSA's network of 217 superstores is going through its second major restructuring in six years. For the fiscal year ended last June, CompUSA posted a net loss of $53 million on revenues of $6.2 billion. Staff cuts and store closings have not stanched the blood. Losses for the second quarter that ended on Dec. 25 amounted to $2 million on sales of $1.4 billion. And the holiday season is supposed to be the strongest.
CompUSA's e-commerce operation, cozone.com, has been a big drag on performance. The unit's CEO quit in January after a failed effort to reposition the site. Scot Ciccarelli, an analyst at Gerard Klauer Mattison, a New York investment bank, figures that cozone.com's troubles must be a disappointment for Slim. "In CompUSA, one of the things he was looking to get besides a U.S. retail presence was more of an e-commerce presence," says Ciccarelli. "He could be getting a lot less than he thought he was going to get."
It will be up to the Slims to develop a new online strategy. Though the father-and-son team is relatively new to e-commerce, they're convinced that it's crucial to link online sales to the existing retail-brand name and stores--something cozone.com has not done. "You have to organize the company internally to make the right combination between Internet and stores, clicks and bricks," says Slim Domit.
To fix CompUSA, Slim Domit says he will apply the same basic principles that have turned his family's retail empire into the most profitable in Mexico. That means cutting costs, managing inventory better, adjusting product mix, improving customer service, and rethinking store locations. Nothing miraculous--but the Slims have done it well. And at CompUSA they won't be flying solo, thanks to the probable involvement of SBC and Microsoft. Microsoft's motivation for investing in the beleaguered retailer is likely the same one that drove it to lay down $200 million for a stake in consumer-electronics chain Best Buy in December. The software giant is relying heavily on in-store promotions to sign up new customers for its Microsoft Network Internet access service. SBC, meanwhile, will get a new retail outlet for its digital subscriber-line (DSL) modems and other broadband equipment.
Besides these partnerships, the Slims will also rely on synergies with their own companies, just as they do in Mexico. At home, Slim can offer telephone service, Internet access, and computers as a package. Last year, Telmex introduced a special deal that allows customers to purchase desktop computers for a $100 down payment and 24 monthly installments of $50. Buyers also get free Net access. It's been a huge hit. Telmex sold 120,000 PCs in just six months--and is still selling around 800 a day. Meanwhile, Prodigy now has 403,000 subscribers in Mexico, 175% more than a year ago.
Due in large part to the successful Telmex promotion, Microsoft figures that sales of computers in Mexico will jump 32% in the 12-month period ending in June, compared with only 18% for the rest of Latin America. "They're one of the few companies that understands in detail how to tackle the consumer market in Latin America," says Mauricio Santillan, Microsoft's vice-president for the region. That's why last year the Seattle software giant teamed up with Telmex to tap into Latin America's Internet boom via a new $100 million Spanish-language portal. Around 8.5 million Latins are currently online, and that number is expected to reach 24.3 million by 2003, according to International Data Corp.
In the fledgling market for e-commerce in Mexico, Slim has been a leader. Seguros Inbursa began selling auto insurance over the Net in October, while Grupo Sanborns launched its own site in September to complement its network of 305 brick-and-mortar outlets. The Sanborns site, which sells CDs, books, and cosmetics, is now logging 26,000 hits a day--not bad for a country with only 1.3 million active Net users. And although just 0.5% of visitors make a purchase, compared with 2% for sites in the U.S., the average tab runs at a respectable $50.
So far, Slim and his son are keeping any plans to link up CompUSA's and Prodigy's operations close to their vests. But there's sure to be plenty of cross-selling and joint promotions. Slim may offer CompUSA customers free Net service on Prodigy. Or Prodigy's 2.2 million subscribers could receive special discounts on CompUSA computers. Slim & son might consider opening CompUSA stores south of the border, though they say this is not a top priority. Telmex, meanwhile, is likely to exploit CompUSA's leverage with computer suppliers to get its hands on cheap PCs that it can then sell to its Mexican customers. "We didn't offer to buy CompUSA because of the possible synergies with our other areas of business," says Slim Domit. "But of course we will seek out all the potential synergies."
THRIFTY. If the Slims apply their trademark cost-cutting to CompUSA, they could get it back in the black before yearend, says Rolando Calderon, an analyst at Santander Investment in Mexico City. It could take several years, though, for operating margins to rise to the 3%-to-3.5% of rivals such as Best Buy. Still, those that have tracked Slim senior's wheeling and dealing over the years feel he is up to the task. "Slim has never made a major investment that has not made sense and paid off in the long run," says Claudio Brocado, Latin America portfolio manager for Putnam Investments in Boston.
Slim claims he doesn't intend to purge senior management at CompUSA. "Our group doesn't believe in changing top management when we buy a company," he says. But no doubt he will try to inject some of the Slim culture. Despite his vast wealth, Slim is known for his thrift. He owns no private jet, no helicopter, and no lavish vacation homes. His office is a windowless bunker with a waiting room full of institutional Naugahyde furniture. Slim's few indulgences are a giant humidor stocked with Cuban cigars and one of the world's largest private collections of Rodin sculptures.
He still works 14-hour days, even though he has handed day-to-day operations over to his sons: his eldest, Carlos, is chairman of Grupo Carso and Grupo Sanborns; 31-year-old Marco Antonio heads the financial group Inbursa; and 30-year-old Patrick oversees the industrial holdings from his perch as CEO of metals company Nacobre. All share their father's devotion to the bottom line. "We simply try not to waste resources," says Slim Domit.
As Slim and his sons continue to build up the tech side of their family business, Slim is approaching the task with almost missionary zeal. "I want to make sure that Mexico is at the vanguard of this new digital civilization," he says. His goal is to sell computers, phone service, and Internet access to as many Mexicans as possible. And before long, he hopes to be doing much the same in the U.S.
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