10/30/95 COMPANIES THAT LIVE ALONE-AND LIKE IT

COMPANIES THAT LIVE ALONE-AND LIKE IT
From Wal-Mart to Cabletron, those who resist the urge to merge can still end up winners
With merger mania raging unabated, today's conventional wisdom is that if you're sitting out this merger boom, you'll be left behind in the ruthless, competitive race to grow bigger and bigger. But look behind the headlines, and you'll find many go-it-alone companies are doing just fine. Corporations that eschew the urge to merge often show that the lonely road can lead to big returns. By sticking to one's knitting and resisting the lure of diversification--even into related lines of business--many companies have been able to best their competitors, from Wal-Mart outperforming Kmart to Coke beating Pepsi. Coca-Cola Co.'s chief financial officer, James E. Chestnut, extols the virtues of selling beverages, period. ``The fact that we've focused on one business brings efficiency to our organization.''
Take top nonacquirer Andrew Corp. in Orland Park, Ill. (table). Andrew, which makes antennas and transmission lines for telecommunications systems, has seen earnings grow 19% a year for the past five years as revenue jumped from $366 million to $558 million, says CEO Floyd L. English. ``We're staying away from a megamerger.... We're better off putting our resources to work internally. All our real growth and development has occurred internally.'' New businesses and products that were generated from within amounted to more than $100 million of the revenue added since 1993, the company says. And while Andrew has made small acquisitions to diversify product offerings, it has achieved strong results without big mergers. ``It's tempting sometimes to grow that way, rather than do it internally, but I think that's shortsighted,'' says Chief Financial Officer Charles R. Nichola.
HARD LESSON. Wal-Mart Stores Inc.'s blockbuster success has been achieved in part through a strategy of only very selective purchasing in its core business. The $1 billion it spent in the past two years for 122 Woolco stores in Canada and about 100 PACE Membership Warehouse stores--which it bought from Kmart Corp.--was justified by the acquisitions' real estate value, not operating expertise, says J.J. Fitzsimmons, Wal-Mart's finance vice-president. Buying assets rather than entire businesses has occasionally been complemented by deals aimed at vertical integration. In 1990, Wal-Mart bought food distributor McLane Co. to give it grocery expertise as it developed its supercenter business. As Fitzsimmons put it, these strategic moves help, but the company is not ``being forced to go to the acquisition market for growth.''
That's a lesson discount-store giant Kmart learned the hard way. With Wal-Mart nipping at its heels in the early 1990s, Kmart gobbled up several specialty store chains. This heavy bet on diversification was quickly doomed, and Kmart was forced to sell off divisions in 1994.
In managed health care, fast-growing U.S. Healthcare Inc. bucked the megamerger trend by replicating its homegrown system in all of its regional markets. In the past 18 months, it has built health maintenance organizations from the ground up in Georgia, Virginia, Rhode Island, and central Pennsylvania. This year 314,000 new members have signed up, helping the company, based in Blue Bell, Pa., combat industrywide competition. ``The only way you can assure the quality and consistency of that model is to build it from scratch your own way,'' says James H. Dickerson Jr., CFO at U.S. Healthcare.
For companies with cash to spend, acquisitions can be irresistible, especially if stockholders are antsy about maximizing returns. Just ask Craig R. Benson, chairman of computer-networking success Cabletron Systems Inc., based in Rochester, N.H. Most of Benson's competitors have been on a buying frenzy, leaving investors wondering why Cabletron, which averages a tidy 28% annual return on equity, isn't following suit. But Benson believes that keeping Cabletron's technology pure gives him an advantage in servicing clients. ``The larger multinationals we sell to want the steering wheel in the same place and the gas pedal on the floor,'' says Benson. ``What you find from cobbled-together companies is the steering wheel changes sides and the gas pedal winds up in the backseat when their next product comes out.'' Cabletron recently traded at $68 a share, just a shade off its 52-week high.
SODA POP WARS. But keeping new ideas constantly percolating isn't easy. At Motorola Inc., based in Schaumburg, Ill., the founding Galvin family has fostered an environment that encourages staff to pursue new ventures. The $22 billion wireless-communications and semiconductor specialist spent $1.8 billion on research and development alone last year. The R&D push continually spawns proprietary technologies, and that greatly reduces the need to go outside the company to fuel its growth. ``Acquiring and merging is not in our history,'' says President Christopher B. Galvin. ``We learn for ourselves and see what we can create.''
When Motorola does work with other companies to move into new areas, it's usually through a lower-risk, lower-cost partnership. Currently, Motorola is paired with DSC Communications Corp., a Plano (Tex.) firm that makes switches for routing calls, in a bid to create the next generation of switches. If the technology works, Motorola gets to participate in a new market. If it fails, the company's losses will be minimal.
Even in an industry as simple as soda pop, internal investment can be the growth ticket. Under Chairman and CEO Roberto C. Goizueta, who took over in 1981, Coca-Cola has made only one significant nonbeverage acquisition: Columbia Pictures, which was sold to Sony Corp. in 1989. Since then, Coke has focused on growth in its core businesses, backed by aggressive investment in new markets and, recently, a sizable stock repurchase program.
That strategy has paid off handsomely for investors, with the stock rising elevenfold in the past decade, a 27% compound annual growth rate. International markets provide 80% of the company's operating earnings, and Coke has invested heavily in Eastern Europe and South America. When the Soviet bloc crumbled, the Atlanta-based bottler immediately earmarked $1.5 billion for investment in that region, including $450 million for eastern Germany. Coke typically invests in local bottlers and concentrate makers. Then it begins to bankroll distribution activities, advertising, retail shelf space, and vending machines. ``We've got all the possible opportunities we can handle in our core business,'' says CFO Chestnut.
More diversified rival PepsiCo Inc. took an early lead in the region, generated by distribution deals in many former communist countries. But by late 1992, Coke had the market-share lead in every East European country, with Pepsi mounting a spirited counterattack. The duo is also battling over Latin America, with Coke far out in front. At a recent bottlers' convention, President Jack L. Stahl boasted that Coke has captured 90% of the domestic industry's volume growth this year.
Some of the companies that made BUSINESS WEEK's list of top nonacquirers, such as Compaq Computer Corp. and Enron Oil & Gas Co., are in businesses that have eschewed mergers in the last few years. Freeport-McMoRan Copper & Gold, which is No.2 on the list, has invested $2.5 billion in internal development since 1989. The energy industry tends to collaborate in partnerships rather than pursue mergers.
With a healthy economy helping to drive the merger trend, today's nonacquirers seem very much out of step. But if the economy slows, more companies may renounce mergers, predicts University of Chicago finance professor Steven Kaplan. ``Expansions like the one we're now in tend to put companies in the spending mode. Recessions tend to put them in the digestive phase,'' he says. That may well force today's merger partners to become tomorrow's masters of internal growth.

How Nonacquirers Do Better

-- Stick to core capabilities
-- Minimize capital risk by investing in existing operations or through joint ventures
-- Reject growth for growth's sake
-- Nurture innovation, which later provides avenues for internal expansion

DATA: BUSINESS WEEK
By Nanette Byrnes in Los Angeles, with Paul C. Judge in Boston, Kevin Kelly in Chicago, David Greising in Atlanta, and bureau reports