|BUSINESSWEEK ONLINE : JUNE 14, 1999 ISSUE|
International: As the World Restructures
Opportunities abound as corporations slim down
When Sony Corp. announced plans in March to cut 17,000 jobs--10% of its workforce--in a sweeping restructuring over the next four years, long-suffering investors finally had something to feel good about. Sony's American depository receipts (ADRs) promptly soared by more than one-third, to $104. Although the ADRs have settled at about $93 since then, shareholders were heartened further when Sony Chairman Norio Ohga observed on May 17 that ''brighter signs'' have emerged in Japan's economy. ''Japan's economy has turned for the better,'' he added. ''What comes next is restructuring.''
This corporate restructuring mantra is echoing around the world. From Latin America to Europe to Asia, companies are mimicking Corporate America by refocusing, downsizing, merging, and spinning off faltering businesses to become globally competitive. ''These companies are restructuring because they've seen how well the U.S. has been doing,'' says Leila Heckman, managing director in Salomon Smith Barney's global equity research department. ''Restructuring is really a tool that's available to them now. It's not a fashion. It's here to stay.''
This means that opportunities abound offshore, even though the U.S., where 56% of the world's equity capital is invested, seems destined to remain the pacesetter. Companies that are laboring to put themselves into competitive trim are likely to be the biggest winners.
Japan may offer the best example of how even hints of corporate reshuffling can excite investors. After a long drought, the Nikkei stock average has climbed 24% in yen terms since last October. The rise has been fueled largely by restructuring announcements from the likes of Sony, Toshiba, and NEC. For many investors, such plans seemed to signal that Japan Inc. was at last shaking off such unaffordable traditions as lifetime employment as it struggles to compete with global players unhampered by such restraints.
Some analysts are convinced, however, that the recent Japanese surge is unsustainable. The economy could shrink slightly in 1999, Japanese economists estimate. What's more, the market runup, driven largely by a big influx of foreign mutual fund dollars, has left some observers anxious. ''The price rise since this spring has been too fast,'' warns Masaaki Abe, chief investment officer at Pictet Asset Management (Japan) Ltd. ''There is going to be a correction.''
TIDY GAINS. Bears on Japan, wary of the country's inflated valuations, might want to wait until the market slips and creates buying opportunities. But less patient investors might want to ferret out companies such as Takeda Chemical Industries Ltd. The drugmaker is shrinking domestic staff while expanding in the U.S. and other growing foreign markets. Takeda expects its profits to grow 14.5% for the year ending in March, 2000. Another pick could be tire-maker Bridgestone, which has maintained high profit margins by staying lean. Such steps should pay off when Japan's economy rebounds. ''The key is to find companies that can implement restructuring plans and keep the profits rather than losing them in lower prices and lower volumes,'' says Dennis Clough, a portfolio manager at Schroder Investment Management in London.
In the short run, other parts of Asia seem even more promising. As countries such as Thailand and South Korea continue to shake off the effects of last year's currency-driven tumult, their growth prospects are improving. Several banks, including Bangkok Bank and Kookmin Bank, interest analysts who believe they will thrive as they recapitalize, reduce debt, and open their doors to foreign ownership. Robert M. McKee, chief economist at London investment firm Independent Strategy, says that these ''potentially wonderful banks'' are poised to ride the regional recovery to tidy gains. Kookmin, for one, is now trading at a modest seven times earnings.
STILL SMARTING. In South Korea, where the surging economy is expected to expand about 3% in 1999 after shrinking in '98, such outfits as Korea Electric Power, Korea Telecom, and Samsung Heavy Industries are seeing renewed demand for their products. Similarly, growth is reviving in Australia, India, Malaysia, Singapore, and other parts of Asia outside Japan. Salomon Smith Barney's Heckman is so optimistic that she advises investors to allocate as much as 19% of their non-U.S. portfolios to the region.
Investors who would rather diversify their Asian holdings across many companies would be better off with regional mutual funds. Among the most successful funds lately are Matthews Korea fund, up 44.9% this year, and Dreyfus Emerging Markets, up 31.5%. Of course, long-term investors are still smarting, especially after last year's emerging-markets meltdown. Even after almost doubling in value last year, Matthews Korea is still down 18% since its 1995 inception. Dreyfus has lost 3.9% since it was launched in 1997.
Another way to play remote markets is through country index funds. If you think the Asia-wide rebound will benefit Australia, for instance--as many analysts do--you might consider buying into the American Stock Exchange's World Equity Benchmark Shares (WEBS) for the country.
Investors in search of true restructuring plays will find a wealth of them in Europe. True, the recent slide of the euro has cost investors a bundle, and lingering joblessness and the prospect of higher interest rates to shore up the currency also cloud the outlook. All the same, companies are teaming up across frontiers to gain Europewide scale. That makes Europe ''one of the last major developed regions in the world that has to go through a large-scale corporate restructuring,'' says Merrill Lynch & Co. equity strategist Bryan Allworthy. In fact, European companies are still 10 years behind the U.S. and Britain in the process of getting into shape. So it's no wonder that European managers are eager to make up for lost time. Conglomerates ranging from Germany's Veba to France's Lagardere Group are spinning off units as they redefine their core missions--and making themselves far more attractive investment prospects. Veba has spun off some 40 businesses since 1993, and may hive off still more of its current 26 or so units, predicts Timothy M. Rankin, an analyst at Franklin Mutual Advisers Inc. in Short Hills, N.J. ''Eventually,'' he adds, ''Veba will shrink down to being a big energy company.'' Similarly, Lagardere is reducing its stakes in aerospace and automobile manufacturing, to focus on lucrative media units such as Hachette.
European banks, too, are consolidating. On average, Continental banks are less profitable than their British peers, with returns on equity of 7% to 12%, compared with 20%-plus across the Channel. But they are keen to buff up those returns, according to John Hatherly, head of research at Britain's M&G Group. Many will do it by joining forces with other financial institutions, perhaps outside their home markets, that complement their business mix or bring in hot new talent. Hatherly's picks for merger candidates include Spain's Argentaria bank and ING Group of the Netherlands.
But restructuring, European-style, will not be a slam dunk. Still married to consensus-building, European business leaders are likely to avoid radical change. So their restructurings may prove less quick and less thorough than the U.S. version. ''Restructuring is going to happen,'' says Merrill Lynch's Allworthy. ''But it will happen over time. That will be a lot longer than a lot of investors thought.'' For that reason, Heckman suggests that investors devote no more than 54% of their non-U.S. portfolios to Europe, even though the region accounts for 62% of the world's non-U.S. market capitalization.
''SEXY STORY.'' There's more to a global portfolio than restructuring plays, of course. Some managers are looking toward Latin America, one of the most surprising gainers in recent months, for growth. Mexico's stock market, heavily influenced by the country's economic ties to the U.S., has risen 57% in peso terms since October, but analysts cite several stocks that may keep gaining. Grupo Televisa, the world's largest Spanish-language media company, for instance, is continuing to sell off assets unrelated to its core TV business. Although Televisa's ADRs have nearly doubled this year, analysts say the best is yet to come. ''It's a very sexy story,'' says Francisco Rivero, head of research at Valores Finamex Casa de Bolsa in Mexico City. Another Mexican candidate: Empresas ICA, the country's biggest construction outfit, which is also cutting costs to compete for big projects outside the country.
For investors who like to bottom-fish, hard-pressed Brazil may offer opportunity. One potential gainer might be Tele Norte Leste, a local phone company serving Rio de Janeiro. Its ADRs are down about 26% since their high last month, partly because of Brazil's big currency devaluation this year. But over time, some analysts say, rising demand for phones is bound to drive up the value of such outfits. Another potential ADR winner: Pao de Acucar, a Brazilian supermarket chain whose aggressive buying of other chains has given it the heft to challenge Carrefour and Wal-Mart Stores at home. The marketer, says Oryx Asset Management money manager Frederico da Costa, is ''a very good long-term play.''
As the rest of the world strives to catch up with the supercompetitive U.S., investment opportunities are likely to grow. And thanks to the Internet, it's getting easier for investors to monitor their favorite holdings in remote locales. In the search for money-making possibilities, international borders are becoming polite fictions.
With Heidi Dawley in London, Elisabeth Malkin in Mexico City, Miki Tanikawa in Tokyo, and Ian Katz in Sao Paulo
BY JOSEPH WEBER
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International: As the World Restructures
TABLE: Who's Following Corporate America's Lead
For the Record: Leila Heckman