CEOs Get Their Groove Back

Animal spirits are infusing Corporate America once again. After years of playing defense, chief executives are back in the game. Well-stocked with solid profits and cash, CEOS are starting to do deals, invest in technology, and take on more risk. While many executives complain that they are bogged down trying to comply with Sarbanes-Oxley legislation, others are busy building their businesses. 2005 is shaping up to be a year when foresighted CEOs begin to stake out claims on the future. Those who remain in a defensive crouch are in danger of being left behind.

Of course, the burgeoning merger-and-acquisition activity is also a chance to correct past mistakes. The financial supermarkets assembled in the '90s are being rethought. The brokerage, retail-banking, and insurance synergies that motivated Sanford I. Weill's dream for Citigroup (C ), for example, never panned out. Indeed, such synergies often led to conflicts of interest. His successor, Charles Prince, is rewriting Weill's playbook by selling off Travelers Life & Annuity and Citi's international insurance business. Prince is focusing Citi's capital. Likewise, Kenneth I. Chenault, CEO of American Express Co. (AXP ), is spinning off American Express Financial Advisors to allocate capital to businesses with higher returns.

A.G. Lafley, on the other hand, is focusing Procter & Gamble Co (PG ). on innovation. P&G's CEO is creating a new brand paradigm, and his $57 billion purchase of Gillette Co (G ). allows him to expand it on a much larger global scale. By going beyond P&G for the first time for new products, bringing in outside design innovators to develop new ideas, and refurbishing tried-and-tried products, Lafley is teaching all of Corporate America how to profit through high-value added innovation, not just cost reduction.

Then there are the consolidators. At long last, telecom is shedding its excess capacity in a series of huge deals. SBC Communications Inc (SBC ). CEO Edward E. Whitacre is paying $16 billion for the venerable AT&T (T ), making SBC America's largest telecom. This follows purchases of AT&T Wireless and part of Cingular, which SBC jointly owns with BellSouth Corp (BLS ).

The surge in animal spirits must, of course, be tempered. Research shows that many mergers are ill-conceived and leave investors in the lurch. Yet many of the new deals appear to have logic on their side and reflect a fresh burst of energy in the economy.

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