Events Will Play Out in Unexpected Ways
What’s past is prologue, said Shakespeare--if you know what to look for.
Many events in business and the world in 2000 point the way to trends that will endure for years--California’s energy crisis, for example, or investments in movies and water by French company Vivendi.
But signs and portents are not always clear. Often you have to look below the surface of events to gauge the realities. Herewith a selection of business happenings this year and their meaning for next year and beyond.
Politics and value: California was hit by an energy crisis due to power shortages in Western states and a flawed deregulation mechanism. The state’s leading utility companies, Edison International, Pacific Gas & Electric and Sempra Energy, are facing bankruptcy. What will happen?
The trick to interpreting this one is more political than economic. Gov. Gray Davis wants a big reelection victory in 2002 to propel him to the Democratic nomination for president in 2004. So the utilities will not go bankrupt, because to do so would classify California as incompetent in the eyes of businesspeople nationwide.
A settlement will allow utilities a rate increase so that electricity customers absorb half of the utilities’ liability from purchasing power at higher prices. Shareholders will absorb the rest of the burden, in reduced dividends. Deregulation will be adjusted so that utilities purchase most of the power on long-term, stable contracts.
Meanwhile, analyst Douglas Christopher of Crowell Weedon, a Los Angeles brokerage firm, is recommending Edison and Sempra. The “underlying finances of the companies are far better than scare talk about bankruptcy indicates,” Christopher says.
A revolution takes time: Prices of high-tech stocks collapsed as investors concluded that the promise of the Internet did not include profits. Yet the year also saw the proposed merger of America Online and Time Warner, a deal to fulfill the Internet’s promise of interactive entertainment, education, medical diagnosis and other services delivered over broadband networks to consumers. Were AOL and Time Warner mistaken? Is the Internet’s promise overblown?
Not at all. The Internet will transform the economy. But commercial development will take a few more years than investors counted on. “Old-economy” companies are already benefiting. Hershey Foods, for example, encountered glitches with a broadband Internet information system in 1999 and suffered a decline in earnings. But the candy maker persisted, got the kinks out of its system in 2000 and is now reaping productivity benefits and advancing rapidly in sales and income.
Behind the numbers: Vivendi, a French conglomerate with holdings in water and telecommunications, acquired Seagram Co., and its Universal studios and music holdings, for $34 billion. Outsiders, whether bankers from New York or industrialists from Japan, have lost their shirts in the movie business. Is Vivendi the latest easy mark?
Perhaps not. The French firm may recognize that the movie business is really a cash machine if you look at the underlying earnings before interest, taxes, depreciation and amortization, known as EBITDA. Those numbers, which financial professionals live by, show Disney, News Corp. (Fox Studios), Seagram, Time Warner and Viacom (Paramount) rolling in billions of dollars in annual cash flow. And the Internet and digital production are going to transform the making and distribution of movie entertainment in the next five years. Vivendi still must manage its business well, but there’s no doubt it bought into cash and future promise.
Water: Vivendi already had a notable investment in Southern California in its 1999 acquisition of U.S. Filter of Palm Desert, a firm in the business of purifying and distributing water for cities and states. Several developments in 2000 signal coming changes in California water. In June, construction of homes at Newhall Ranch was blocked until the builder could show that the development possesses water resources. This month, the Metropolitan Water District issued regulations that prepare for a new system in 2002 in which cities, public agencies and private companies will be able to trade water supplies. A major California business is being born.
Rich buy better: Two very rich investors illustrated the principle of seeking overlooked value.
Managers of Microsoft founder Bill Gates’ personal investments bought a small, roughly $67-million position in Newport News Shipbuilding, a major contractor to the Navy. The stock wasn’t high-tech nor noteworthy. But Gates’ managers recognized that Navy orders were rising and that Newport News was in good shape. They were right. The stock has more than doubled from the time of Gates’ late-1999 purchase.
Warren Buffett, Gates’ friend and a multi-billionaire, has just agreed to acquire Johns Manville, a building materials supplier, for $2 billion in cash. Buffett made his move after a $3-billion offer by Dallas-based Hicks, Muse & Furst collapsed because the group couldn’t raise financing. Buffett saw value in a 150-year-old business that has survived asbestos-related bankruptcy.
Where’s the payoff? Thomas Hicks of Hicks Muse is the owner of baseball’s Texas Rangers, the guy who agreed recently to pay shortstop Alex Rodriguez $250 million over 10 seasons. The thinking behind such pay is that sports is part of the entertainment business, so stars should command salaries similar to Julia Roberts’ and Jim Carrey’s $20-million-a-picture deals.
But there’s a flaw in such thinking: Roberts’ and Carrey’s movies can bring in hundreds of millions in mere weeks of showing worldwide. Baseball teams can’t do that because they don’t have true global distribution--yet.
Shifting gears: The global good feeling of the DaimlerChrysler merger disappeared in German-American recrimination. Chrysler sales fell and losses mounted. Ford and General Motors also saw lower sales. Yet Honda, Toyota, Nissan and Volkswagen racked up healthy U.S. sales increases. What did the foreign companies do differently?
The successful Japanese car makers and Volkswagen produce fewer separate models than do the U.S. companies but market essentially the same car worldwide. As 2000 drew to a close, General Motors was taking that lesson to heart. GM discontinued the Oldsmobile brand and began a restructuring that will cut the number of models and get costs in line.
The census: The Census Bureau will release the first results of the 2000 decennial census Thursday, showing the resident U.S. population--currently at 276.3 million. But the bureau’s work and importance go far beyond the population figure. Its statistics will guide decisions on investments, school districts, allocation of government benefits and how many members of Congress--and of the Electoral College--each state can have. In 2000 we learned how important that is.
*
James Flanigan can be reached at jim.flanigan@latimes.com.
