Has Corning Won Its High Tech Bet?

After trashing the stock, Wall Street sees a Net play

After taking over as Corning's CEO in April, 1996, Roger G. Ackerman moved swiftly to transform the old-line conglomerate into a high-tech supplier to the New Economy. He signed deals to jettison more than half of Corning's businesses--including its signature cookware--while beefing up the company's role as a supplier of optical fiber and other components for the Information Highway. Soon, Corning could barely keep up with exploding demand for fiber. Nowhere was the market hotter than in Asia, where countries from Malaysia to Singapore to Thailand were scrambling to build sophisticated high-tech infrastructures.

But just after the 1997 Labor Day weekend, Ackerman's honeymoon cruise came to a crashing halt. At an emergency meeting, top Corning execs got the grim news: With Thailand's currency crisis spreading like wildfire to the rest of the region, Asia's telecom projects were grinding to a halt. In some cases, workers dropped their tools and walked off the job. Corning became one of the first U.S. multinationals to feel the full impact of the crisis. "We are a canary in the mine shaft," the CEO told employees and investors. The canary was gasping as fiber prices plunged as much as 50% in some markets.

By early 1998, the pressure on Ackerman to scale back his ambitious transformation of Corning was intense. Operating earnings dropped 44% in the first half of 1998. By September, the stock was down by nearly two-thirds, to 23. Corning ended the year with flat sales of $3.5 billion and earnings from continuing operations down 20%, to $327.5 million. But rather than retreat, Ackerman rallied his troops behind a bold plan that made it clear there was no turning back from a new Corning built around technologies such as fiber optics.

INTERNET GLOW. There's growing evidence that Ackerman's gamble is paying off. Led by a surge in orders for an advanced fiber developed in Corning's labs, earnings will rise about 25% in the first quarter, the company says. Analysts expect an 18% increase for 1999, according to First Call Corp., which surveys aNalysts' forecasts.

The response from Wall Street has been dramatic. The stock has rebounded 150% since its 3 1/2-year low last September, to about 58. Just as Corning was severely punished last fall for its Asia exposure, it is now basking in an Internet glow. Many investors are convinced that it should be classed along with Lucent Technologies and Cisco Systems as a company that is laying the groundwork for the Internet Age. "This is truly a growth stock," says Robert Hoffman, a managing director at Scudder Kemper Investments Inc., a major shareholder. "Someday, people will pay noseblEed multiples for it." Corning now trades at about 33 times expected 1999 earnings--less than half the multiple investors pay for Cisco.

Ackerman, 60, may have seemed an unlikely candidate to overturn tradition at Corning, based in the bucolic upstate New York town that shares its name. A 37-year company veteran and former engineer, Ackerman worked his way up through the ceramics and medical lab-testing units before spending five years as president under his patrician predecessor, James R. Houghton. The Houghton family had run the company almost continuously since 1851. By 1996, though, both men agreed that the complacent conglomerate needed radical surgery to boost growth and revive its stock, which had long underperformed the roaring bull market.

The changes came quickly. First, Ackerman spun off Corning's largest business, the $2.1 billion clinical lab-testing unit, whose performance had sagged under managed-care constraints. Then he turned his sights on the cornerstone of Corning's identity, the $675 million housewares unit. "We had agonized over [selling the cookware business] for at least 10 years," recalls John W. Loose, president of Corning Communications, the company's optical-fiber business. In August, 1997, Ackerman reached a tentative agreement to sell the unit to New York's AEA Investors for $975 million.

Meanwhile, Ackerman began building up other businesses that supplied the almost boundless demand for broadband telecommunications. His goal was to move Corning beyond fiber, by making it a major supplier of photonic components that increase the amount of information a single strand of fiber can carry. He also spotted double-digit growth opportunities in a number of Corning's high-tech niche businesses, from the ultrathin glass used in liquid-crystal displays (LCDs) to the high-purity fused silica that helps etch computer chips.

At first, Ackerman looked like a genius. Both at home and in Asia, the fiber business was on fire. By mid-'97, with demand exploding, everyone from Lucent to the Japanese were piling on capacity, says John N. Kessler, president of KMI Corp., a leading fiber consultant. Corning sank a half-billion dollars into new plant capacity.

With all the new factories coming online, when Southeast Asia crashed, fiber prices "fell like an elevator that had just been cut loose," says Wendell P. Weeks, Corning's executive vice-president for opto-electronics. The last straw came on Dec. 9, when AEA canceled its deal to buy the housewares division. AEA had counted on Asian growth to justify the rich price.

QUALITY EDGE. Yet fiber orders were still growing in the U.S., Japan, and other developed markets. And while Ackerman was forced to meet competitors' offers by slashing prices up to 50%, he also set up a "belly-to-belly" program in which salespeople increased their face time with key customers. Cable-TV companies such as Time Warner Inc. upped their orders after seeing how Corning's quality assurances could eliminate degradations that often creep into 80-channel cable systems. Corning also showed McLeod USA and other phone companies how it could help cut installation costs. "We increased our share in both markets," says Curt Weinstein, product-line manager for fiber.

Even more audacious was Corning's research buildup. To keep Corning on the cutting edge, Ackerman decided he must dramatically increase research spending--from $172 million, or 3.4% of sales, in '95, to $294 million, or 8.4% of sales, in '98. Expenditures rose 18% last year alone. Ackerman pushed ahead with a $300 million doubling of its Sullivan Park research center in the hills outside Corning. The company boosted its staff of scientists and technical-support personnel by 67%, to reach 1,540 this year.

Much of the effort was aimed at the fast-growing photonics segment, but the biggest returns so far have come from development of a new type of fiber. Called large effective-area fiber, or LEAF, the technology dramatically increases the data each fiber strand can transmit as well as the distance data can travel without amplification. Weeks, who at 39 is Corning's fastest rising star, spotted the potential in LEAF. In September, 1997, he deemed it "our No. 1 priority" and assembled a team of some 75 engineers for a crash project code-named "Sundance."

BIG WIN. Working late into the night and on weekends, the team delivered LEAF in six months--a third of the normal development time. Since its introduction last year, LEAF has become solidly profitable, thanks to orders from the likes of Denver-based Level 3 Communications Inc., which chose it for the first phase of its $10 billion telecom network.

But while prized research projects got new hires and thicker budgets, Ackerman slashed other costs. Just four years after Corning had undergone a wrenching restructuring, he ordered "another shave of the bone" last year, trimming 600 salaried workers, or 10%.

Shareholders were not easily convinced that Ackerman was on the right track. Many have urged him to redirect some spending into a stock buyback. Ackerman resisted, fearful that it would weaken Corning's technology buildup. In the meantime, Corning's stock price sank along with its earnings. Even when Ackerman finally managed to unload the housewares business last April to a second buyer, Borden Inc., an affiliate of Kohlberg Kravis Roberts & Co., the $603 million price was a full third below what AEA had agreed to pay.

Late last year, though, the fiber markets began to recover--especially in the U.S., where the Internet-driven demand for bandwidth appears insatiable. Thanks to its aggressive pricing, Corning nudged its share of the world fiber market up slightly in 1998, to 38%, compared with 16% for No. 2 Lucent, according to industry data. Even with major telecom projects in Southeast Asia still stalled, fiber demand continues to rebound. Patrick Fey, an analyst at KMI, says the worldwide fiber market could double by 2003.

Top executives have never been under more pressure to manage for the short term. But Corning demonstrates that sometimes the wisest move is to stay the course. "We didn't panic," Ackerman says. Indeed, when your company goes back far enough to have helped Thomas Edison manufacture light bulbs, the long term takes on an entirely different light.

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