February 21, 2000

Carlos Slim: "The Key Is the Internet"

The Mexican mogul talks about his business philosophy -- and his plans to put Mexico in the vanguard of the digital revolution

Carlos Slim Helu, 60, is Latin America's wealthiest businessman, and for good reason: For the past two decades, he has shown an uncanny ability to spot undervalued companies and turn them into lean, profitable machines. Over the years, he has built an industrial, retail, and telecommunications empire with about $16 billion in annual sales.

His best-known company is Telefonos de Mexico (Telmex), the giant Mexican telecom that he bought in partnership with Southwestern Bell Corp. and France Telecom when it was privatized in 1990. In recent years, Telmex American depositary receipts have been one of the most widely traded shares on the New York Stock Exchange. And he also owns Prodigy Inc., the third-largest Internet service provider in the U.S. In addition, he has a financial services group called Grupo Financiero Inbursa, and an industrial-retail conglomerate, Grupo Carso.

Now, he's getting ready to expand his empire in the U.S.: On Feb. 1, his Grupo Sanborns subsidiary kicked off a tender offer to buy CompUSA for nearly $800 million. Although the computer retailer has been plagued by losses for the past year-and-a-half, Slim believes he has spotted a bargain in the giant chain, which has about $6 billion in annual sales. He's offering to pay $10.10 per share, 50% more than the recent trading price but far below the company's price of $38 a share two years ago. He figures it's his chance to expand rapidly into Internet services, telecommunications, and sophisticated consumer electronics.

Slim met on several occasions in early February with Mexico City Bureau Chief Geri Smith to discuss his expanding business empire. Here are edited excerpts of their conversation:

Q: You're known as "the Warren Buffett of Latin America" for your ability to pick good stocks and companies.
Maybe, but I don't think I'm really like him. I think that I am more of an operator of companies than he is. I buy companies for strategic reasons and operate them. Take Telmex. I've always thought we got a very good deal on Telmex, even though people thought we overpaid at the time. [Slim paid $1.7 billion for a controlling share in 1990. Last year, the company had profits of $3.9 billion on sales of $10.2 billion.] We knew the company had real potential.

Q: But you've had some spectacular stock picks in recent years that haven't turned into acquisitions. For example, you bought around 3% of Apple Computer in 1997, just days before Steve Jobs returned to the company to introduce the iMac. You paid $17 a share, and within 12 months the shares soared to $100.
Yes, that was good. When we bought those shares, Apple's market cap was less than half the value of the company's assets, and it was a good company. But we've been selling those shares off, slowly. We don't have very many of them left now.

Q: Over the past year, your companies have gone on a buying spree, mostly internationally. You've bought a cellular-phone company in Puerto Rico, another in Florida. You've bought into fiber-optic networks in the U.S. You've bought customers from other online services. The list goes on and on. Last year you spent more than $1.5 billion, and now you've offered $800 million for CompUSA, the computer retailer. What's up?
We're making a lot of small investments in technology-related companies so that we can take advantage of the possible synergies. Long distance is a commodity. It's not going to exist in a few years. It's going to disappear, and it will be the same thing to make a local call as a long-distance call. So we have to move into other areas.

The key is the Internet. The U.S. is by far the most advanced country in this new digital culture, so we have to be there. The Internet is the heart of this new civilization, and telecommunications are the nervous system, or circulatory system. And stores will still be necessary to sell products and services and to teach people how to operate in this new digital civilization. All retailers are going to get involved, not just CompUSA -- Office Depot, Office Max, Sears, Staples, Best Buy.

Q: For 20 years, people and institutional investors have snapped up shares in your industrial-retail holding, Grupo Carso. They've sometimes payed a 10% to 30% premium over the conglomerate's value, because they believe the company mix, ranging from auto parts to mining to retail, is a good proxy for the Mexican market and because they value your company-picking ability. But now, when CompUSA's sales are added to Carso's, it's going to be mostly a retail group, with the bulk of sales coming from the U.S. Some of your institutional investors are not pleased -- especially because you won't be able to replicate the 15%-to-18% returns your Mexican companies can churn out, and because the perceived risk is higher.
Sure, the U.S. sales will be bigger than Grupo Carso's Mexican sales. But the profits won't be [the same margins]. We'll have higher volume, lower margins. There's nothing wrong with that. Our retail group continues to grow in Mexico, but not at the same rhythm as a few years ago, so we needed to expand this way. The buying power of Americans is much higher than Mexicans', and although retail square footage is more expensive in the U.S., the financial cost of capital is much less.

Q: Your style, when acquiring companies in Mexico, has always been to retain management as much as possible, since they know the business. And you're known for serious cost-cutting and rationalization. Is that what you plan to do if your deal to buy CompUSA goes through?
It's not a question of arriving [at a new company] and putting in a whole new administration, but instead, arriving and "compacting" things as much as possible, reducing management layers. We want as few management layers as possible, so that executives are very close to the operations. We also don't believe in having big corporate infrastructures.

Q: Are you trying to come up with a new "clicks-and-bricks" strategy that will work in the U.S. and Latin America?
I think one of the big errors people are making right now is thinking that old-style businesses will be obsolete, when actually they will be an important part of this new civilization. Some retail groups are introducing e-commerce and think that the "bricks" are no longer useful. But they will continue to be important. We think that there will be an "entrepreneurial reconversion" of many companies that have lived in the industrial era and now are becoming part of this new [digital] civilization.

Take Delphi auto parts, for example, with which our Condumex subsidiary has joint ventures. At one time, Delphi was a completely mechanical company, and now it is becoming a technological company. Autos increasingly will carry more important technological components. In the same way, companies like CompUSA have to be "reconverted" to function better in this new era.

Q: Starting with the 1990 investment in Telmex, you have been doing lots of business deals with SBC Corp. Now, SBC and Microsoft are planning to take minority shares in CompUSA with you. And recently you announced a $150 investment with SBC to buy part of Network Access Solutions, a company that provides high-speed Internet access throughout the U.S. What do these joint ventures mean?
We really think highly of the executives at SBC. And Microsoft is one of the great companies of the 21st century. It is in all of our best interests to work together. In this new wave of technology, you can't do it all yourself, you have to form alliances.

Q: Here you are, going into the U.S., one of the world's most competitive markets, to compete in e-commerce, a cutthroat business. Isn't that a bit presumptuous for a Mexican entrepreneur whose own companies in Mexico have only been engaged in e-commerce for six months?
Our e-commerce ventures are doing well. You need clicks-and-bricks for stores, but you don't need many bricks for financial services. Ever since we founded Banco Inbursa in 1993, we're tried to operate it like a bank of the 21st century -- almost a virtual bank -- with only three branches. Very little expensive infrastructure. We've been doing it for seven years now, and we think the Internet and online transactions are going to be very important.

Q: The two biggest banks in Mexico, Banamex and Bancomer, recently introduced online trading, but your bank only lets clients check their balances and transfer money between accounts. Aren't you and your brokerage going to fall behind the competition?
We think that in Mexico, online trading of shares and financial instruments is not going to be as important as it is in the U.S. On days that there is a banking holiday in the U.S., you hardly see any movement here on the stock exchange. Most of what's traded here in Mexico are controlling shares, where you see little volume. We think the real potential for online business is pure banking transactions. And in insurance, we think there is a lot of potential.

Q: In Mexico, Telmex has more than 10 million telephone subscribers and more than 5 million cellular-phone customers, not to mention paging subscribers. And you are the largest Internet service provider in Mexico. But nearly half of all Mexicans are poor and cannot afford to rent a telephone line, much less buy a computer. What about them?
Telephones and the Internet are going to reach even very poor rural areas. Not everyone has a phone, but we'll reach them with public Internet phones. We sell 250 million telephone cards each year, so even if people don't have their own phone, they'll have access that way. We're putting shared telephones in apartment buildings. We're negotiating with the Education Secretariat to make sure that every school in Mexico has a computer and Internet access. In order for our countries to emerge from backwardness, it's very important that everyone participate in this digital technology culture and the Internet. Spreading that culture is fundamental for our long-term development.

Q: Several companies in the U.S. have made news recently by giving their employees free computers and Internet access. Have you done anything similar?
We started doing something similar for Telmex employees about a year ago. We sold 28,000 computers at a very low, accessible price to employees. Eventually, we want all of the workers in several of our companies to have computers so that they and their families can use them. You can't attend your Internet clients well if you yourself don't know how the system works.

Q: You yourself don't know how to use a computer or surf the Internet.
: My children gave me a laptop for Christmas, but all I know how to do so far is push the "on" button. I also can turn it off. It's like learning chess or golf, it takes a long time to learn some things. The younger generation is much better at using computers.

Q: You are the individual with the highest net worth in Latin America. Are you going to start giving away your fortune like Bill Gates?
I've always said that the better off you are, the more responsibility you have for helping others. Just as I think it's important to run companies well, with a close eye to the bottom line, I think you have to use your entrepreneurial experience to make corporate philanthropy effective. I believe that if a businessman knows how to efficiently manage his business, he should be able to manage a foundation efficiently. It's not a question of giving money away, it's a question of going somewhere and doing something and making sure the basic costs are paid.

Telmex and Grupo Carso each have foundations, with a combined fund of $850 million, which will reach $1 billion this year. Last year, we gave out 17,000 scholarships to college students. We paid bail for 5,000 first-time arrestees accused of minor crimes, so that they wouldn't sit for years in jail waiting for the slow justice system to move. We fund infant nutrition programs. Last year, we helped cover the expenses of 11,000 surgical operations in rural areas.

Q: There's a lot of talk about how the New Economy is taking off in Europe and Asia. But there's little talk about a technology-driven boom starting in Latin America. Is the region being left behind?
Actually, I'm concerned about the U.S. economy. For that economy to enjoy sustained growth, it's necessary to incorporate other countries, such as Latin America, into the modern economy to create consumers. And that's not happening yet. I believe the European Union is going to be able to sustain its growth pattern because it is incorporating countries such as Portugal, Poland, Hungary, and so on. That will make the EU market stronger.

If the U.S. were to help Latin American countries with their development, by helping to finance basic development projects in education, health, and infrastructure, they could incorporate more people into the developed economy and market. For its own economic interest, the U.S. should come up with a kind of modern Marshall Plan, incorporating the World Bank, the Inter-American Development Bank, and private companies. Not that they should give out all the resources, but by getting involved, they can give a push and accelerate the process.

The American government, which is looking for something useful to do with its surplus, should consider it: There's no better investment than promoting [Latin America's] development. They shouldn't do it to be Good Samaritans, but for good business reasons. Imagine all the products they could sell for health, infrastructure, and education. And as they incorporate more people into the consumer culture, it will create more demand for their products.

If the U.S. promotes education [in the region], it will be able to sell more products coming out of the new digital civilization. Equipping all the schools with computers is a long-term project that requires long-term financing. Sure, it's chiefly the responsibility of our local governments, but they need financial backing from international agencies. The World Bank and the IADB, instead of jumping in only when there are financial crises, should back development. How can we develop if we're always stuck in crises?

Q: And the efforts to create a Free Trade Area of the Americas? Will that ever happen?
I believe that globalization and Latin America's economic opening make it just a matter of time. But you have to do what Europe did.... The U.S. already lost its leadership in cellular telephony to Europe, something you would never have imagined three or four years ago. That could happen in other areas, too. The North American Free Trade Agreement should have done what the European Union did, assigning resources to bring all the countries up to the same speed. The Europeans looked at it with a long-term vision. We should have included free labor movement in our trade agreement.

Q: About two years ago, you had serious health problems, and although you seem to have recovered, you turned the chairmanship of Grupo Carso to your eldest son, Carlos. You remain chairman of Telmex, though. Now that you're trying to turn more responsibility over to Carlos and your other two sons, how do you envision your role in the conglomerates you founded two decades ago?
I spend most of my time studying new technologies. My main task is to understand what's going on and try to see where we can fit in. I want to make sure Mexico is at the vanguard of this new digital civilization. And make sure that the countries in Latin America here are also are at the vanguard.

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