Corporate America's Icons Crumbling Under Global Recession
Friday, March 6, 2009
The truisms have been familiar to generations of Americans: As General Motors goes, so goes the nation; Citigroup is too big to fail; General Electric, one of the 12 original companies in the Dow Jones industrial average in 1896, brings good things to life.
But the giants that only recently seemed like the unshakable foundations of the economy are faltering one after another. The girth that once seemed a source of strength now appears to be undermining them.
A share of Citigroup, worth $55.12 less than two years ago, yesterday cost about half of an ATM fee, finishing the day at $1.02 after briefly breaking below the buck-a-share level. The once-mighty financial conglomerate, valued at more than $300 billion in March 2007, was worth just $5.6 billion yesterday.
General Electric, whose mix of financial services, consumer products and industrial goods was once considered a sturdy pillar of the U.S. economy, closed yesterday at its lowest level since 1992, barely a 10th of its peak level. The price of a GE share, $6.66, was less than the cost of single compact fluorescent flood light bulb.
And battered GM shares slid yesterday yet another 15 percent to $1.86, not quite enough to buy a gallon of gasoline, after news that GM auditors warned the company might not remain a going concern without massive additional assistance from the U.S. government. While GM's fate might indeed mirror the nation's for now, the company could perish before an economic recovery arrives.
"The big surprise is that large companies that we thought were well-capitalized with abundant access to credit and that could access the global market, none of that is helping them," said Ed Yardeni, president of Yardeni Research, an investment research firm. "But a lot of these issues that we thought of as positive are turning back to bite them hard."
Analysts point to two key reasons why some of the nation's largest companies have unraveled in the current downturn. One is that they had come to rely on providing financing to their customers, lending money for sales of their own products. When the credit markets ground to a halt in mid-September, it set off chain reaction of pain, hurting consumers and manufacturers alike.
The second is their exposure to global markets. Once regarded as a way to spread risks, the diversification exacerbated a drop in sales as foreign countries grapple with more severe downturns.
"The reality is that size doesn't seem to matter much," Yardeni said.
In retrospect, Yardeni said, the business model was essentially flawed. When companies like GM and GE financed customers, the loans must have been cheaper than what the customers could get elsewhere and must have meant that the risk of lending to them wasn't being reflected in the loan rates.
GE shows how quickly things have changed. On Dec. 12, 2006, GE chief executive Jeffrey Immelt said: "If you think about the world today, there is infinite capital. That wasn't true five years ago, wasn't true 10 years ago, may not be true five years from now." Now GE, like many companies, is being forced to pump cash into its ailing finance arms, while the finance arms cut back on lending, hurting sales.
"Self-financing is inherently a dangerous game," Yardeni said. "You're biased. You want to convince yourself that the borrower is good for it, and you want to make the sale. You're not going to be an objective lender. That may be one of the problems here."
The nation's amazing shrinking corporate giants are also suffering from global exposure, the very thing that was once thought to be an asset. The idea was that the international companies would fare relatively well in a downturn because foreign nations, fueled by their own fast-growing domestic markets, would largely avoid the impact of a U.S. recession. This theory was called decoupling.
But Tobias M. Levkovich, head of equity strategy at Citigroup, said decoupling was a "myth, right up there with the tooth fairy." He said that according to the Asian Development Bank, 79 percent of goods produced in Asia were sold outside of Asia. "So much for decoupling," he said.
The current downturn has upended many assumptions. Companies considered "defensive" -- less vulnerable to recession than "cyclical" companies -- have been hit. Utility stocks that have long been staples in the portfolios of the risk-averse have fallen a third to a half from their 52-week peaks. Kraft Foods -- resilient maker of Kraft cheese, Oscar Mayer lunch meat and Planters nuts -- has lost 40 percent of its value and predicts a drop in sales.
Even oil companies, many of which are among the top U.S. firms, have been dented by the drop in oil and gas prices.
A degree of change in the composition of America's biggest companies has been a feature of the U.S. economy for decades, even without wrenching recessions. "I'm sure the adding-machine companies thought they'd be around forever," Levkovich said. "If you bought Polaroid and held it, you'd regret it. There is always the risk of technological change. Even a drug company gets usurped by other drugs."
All that, he added, "makes it hard to buy a stock and sock it away. My dad will tell you that Pan Am didn't work out that well. Yet it was the company at the time." Pan American Airlines, the leading airline for more than three decades, went bankrupt in 1991.
As hard as the current downturn has been on big companies, some analysts say, small companies are still more vulnerable. Mark Zandi, chief economist of Moody's Economy.com, said that while big companies can turn to the bond market or even the government for financing, all smaller businesses have "is their friendly banker." And if that banker isn't forthcoming, they fail. The number of bankruptcy filings is climbing rapidly, Zandi noted.
"Every business from the smallest to the biggest is bending in this economic storm," Zandi said. "I don't think anyone has any shelter. The big companies are taking it on the chin, but most of them will survive. Many of the smaller companies won't."