Are You Tough Enough?

The search for scale, like the search for the holy grail, is a neverending quest. Just when we thought that merger combinations couldn't be any bigger, along comes a deal like AOL'S takeover of Time Warner. How big is big enough? Apparently not nearly as big as you would think. The fascination has its corollary in the stock market whereby the leadership in the market becomes increasingly narrow as the fashionable dot-com shares rise faster and faster. "As these favored Internet stocks rise spectacularly by factors of 10 and 15, their weighting in the overall index becomes larger," observes American Enterprise Institute economist John Makin. "What that support conceals," he remarks, "is an ever weakening performance by a broader and broader sector of 'unfavored' stocks."

The number of shares at new 52-week lows on the NYSE rose to 1,200 near the end of last year. With investors eager to add to their holdings of tech companies, what's happening to less fashionable shares? Those who attempt to put a value on stocks based on earnings and future returns haven't quite given up, but many have given up this criteria to feed the insatiable desire not to lose our on the tech momentum. Serious distortions result in serious corrections. This will no doubt sort itself out when the Fed raises interest rates, but what happens to value stocks in the meantime? And what happens to the cost of capital for the traditional value company?

This is a dilemma shared by many CEOs today, but few more so than Michael Bonsignore, the subject of this issue's cover feature. With the merger of AlliedSignal and Honeywell, Bonsignore must convince investors that the traditional industrial technology company he leads can deliver on its growth targets. As Prudential Securities' Nicholas Heymann points out, the most critical issue likely to affect all such companies going forward is their ability to achieve first or early-mover advantage in converting their traditional product-based historically cost accounting business model to an e-business model. Heymann reckons only GE is likely to be a first or early converter, but that Honeywell might become a second-converter right behind GE (with which it does nor directly compete.) Being an early converter might close the valuation perception gap that presently plays havoc with the stock market. A tech-sector bubble rising atop a U.S. equity market that is already 50 percent above normal value given present earning s and interest rates, is a recipe for destabilization. Whether CEOs such as Bonsignore can close the valuation gap will be closely watched.

There is another issue concerning CEOs managing companies in transition--are they tough enough? In explaining how the newly merged company is perceived by Wall Street, some Honeywell folk seem a tad defensive. Analysts apparently wanted to know whether Bonsignore would be sufficiently ruthless in meeting the numbers. In an era when managers such as "chainsaw" Al Dunlap have been (at least initially) praised for cost cutting and restructuring, one school of thought holds that CEOs need to take their managerial cues from the likes of Attila the Hun or Genghis Khan. One gets the impression that if one's CEO is a reasonable, humane person who shows interest in people and maybe a little compassion, he should be dismissed as a washout. (Yessir, our CEO is more of a bastard than your CEO, so there!)

Two years ago The Wall Street Journal asked whether Craig Weatherup was too nice for Pepsi-Cola's own good. The CEO of Pepsico's global beverage arm was widely regarded as a benevolent boss. He enjoyed spending time with his family and encouraged others to do the same. No, he didn't feel he had to be a tyrant to best Coke in the cola wars. "It staggers me," he told the Journal, "that for whatever reason being nice is seen as being inconsistent with being tough." He could have added, where are all the really brutal bosses now? Look around, I don't see too many chainsaw-types still standing.

J.P. DONLON