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Those Pesky Earnings.

In the past two years, venerable corporations with real products, real revenues and real profits have repeatedly seen their stock prices massacred, either because they failed to meet quarterly earnings projections or because they were thought to operate in mature industries where spectacular growth was no longer possible. Simultaneously, tiny dot-cams with virtually no revenues, barely a handful of employees, and no earnings whatsoever have repeatedly shocked Wall Street with their gravity-defying valuations.

The lesson to be drawn from this is obvious: If large companies ever again wish to see their stock trade at high multiples, they must do everything in their power to get rid of their earnings. In the current environment, earnings have become an absolute curse, and revenues aren't much better. Here's why: As soon as a firm has earnings, investors subconsciously begin constructing a mental diagram of the market in which the company operates, calculating the potential size of that universe. Sometimes, the image they arrive at is small, sometimes it is large, sometimes it is enormous, but it is never infinite. Conversely, if a company has no earnings, investors can endlessly rhapsodize about how gigantic those earnings will be in the future. Because of this planet-wide deviation from traditional stock valuation models, corporations now find themselves trapped in a milieu where healthy but less than Croesian earnings not only confuse but in many cases infuriate investors.

In making these assertions, I am not being a curmudgeon, a whiner or a spoilsport. I am simply reminding readers that in AOL's merger with Time Warner it was the company with lots of products, lots of employees, and a long tradition of healthy earnings that got taken over by a company with earnings that have long been viewed as a complete joke. Clearly, Time Warner was hamstrung by the fact that it had regular but not breathtaking earnings, as opposed to AOL's ludicrous, and therefore irrelevant, earnings.

Indeed, more than one critic has suggested that the folks who run Time Warner were eager to be bought by a company whose stock price is totally our of line with its earnings because it was the only way to jack up their own stock price and make some money. Whether or nor this is true, it is undeniable that Time Warner's pedestrian earnings anchored the conglomerate to reality--the worst place to be these days.

Only a fool would suggest that AOL's acquisition of Time Warner is the last takeover of this type that we will see. In the fullness of time, perhaps Yahoo will swallow up IBM or some Internet portal company that does not yet exist will devour GE. This is why established corporations that do nor want to see themselves eaten alive by a company with 43 employees, none over the age of 23, must take bold steps to ensure their survival now.

The easiest way to do this is to inflate the stock price so high that a takeover is unthinkable. This can be done by deep-sixing earnings. Right away, GM should start giving its new cars away, and perhaps even paying customers to take them off its hands. How will GM justify such a policy to its existing shareholders? It will point out that by giving its cars away it will eventually drive all its competitors out of business, bringing it to the point where every household in America has two or three GM products. This will allow advertisers to reach every consumer in America by purchasing ad space from GM. Since all current stock valuations are based upon advertising or licensing revenues that lie decades down the road, GM could see its stock price quadruple overnight once it is no longer fettered by earnings.

GM is nor the only colossus that should consider such a policy. By giving away its gasoline, Exxon can assure itself of truly massive traffic at each of its retail establishments. Having lured consumers to the gas station with the promise of free fuel, Exxon can now recoup its apparent losses by getting drivers to sign up for its Internet Service Provider, which will also be free, thus giving customers access to on-line grocery stores, which will charge nothing for the merchandise. Once Exxon has captured hundreds of millions of consumers by giving away gas, Internet connections, and food, it can sit down and figure out how to make any money off these people. But all that lies years and years down the road. The important thing now is for companies to devise new and exciting ways to get rid of their cumbersome earnings, so that investors will stop punishing them for being so.. .well, prosaic.

I am not suggesting that earnings in and of themselves are a bad thing, nor am I forgetting how well they have served this society in the past. Once upon a time, earnings were the brightest bauble this civilization had to offer. But you could say the same thing about Newtonian physics or Keynesian economics or eight-track tapes, for that matter. All of these entities were once terribly important to the growth of this society, but all have now gone the way of the Model T and the hoop skirt. And if it's any consolation to nostalgia buffs, it's unlikely that earnings will ever entirely disappear. Surely, there will always be a few old-fashioned companies that stubbornly refuse to get rid of their earnings, just as there will always be a few law offices that refuse to get rid of their typewriters. But as time goes by, companies with real earnings will increasingly be viewed as anachronistic curiosities that have no place in a society such as this. There may even come a time when running a company that actually h as earnings will be viewed as highly un-American. Luckily, very few of the companies on the Internet will ever have to worry about that.

Joe Queenan is a regular contributor on business issues, corporate culture, and financial follies to Barron's and The Wall Street Journal.
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Author:Queenan, Joe
Publication:Chief Executive (U.S.)
Article Type:Brief Article
Geographic Code:1USA
Date:Mar 1, 2000
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