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Good Things In Small Packages


Cover Story: THE BUSINESS WEEK 1000

GOOD THINGS IN SMALL PACKAGES

A few years back, cellular phone services had their day as Wall Street's darlings. Next came drugmakers, then biotech startups. Now, it's the turn of all those companies crowding onto the Information Superhighway. The much-hyped Internet and telecommunications industries dominate this year's roster of Little Giants--public companies with small sales but great expectations. Despite having revenues under $150 million, these tiny dynamos boast market values strong enough to have earned them a spot on BUSINESS WEEK's ranking of America's most valuable companies.

Leading the way is aptly named Ascend Communications Inc. The Alameda (Calif.) company, which went public in May, 1994, makes the high-speed digital switching equipment that allows scattered employees to dial into a computer network at the home office. With corporations across America installing networks faster than you can say IPO, Ascend is soaring. For the year ending Feb. 29, its market value rose 665%, to a lofty $5 billion, making it bigger than Rohm & Haas, Quaker Oats, or Amerada Hess.

As if that weren't enough, Ascend also sells the switches that enable Internet access providers to hook up companies and online services to the Net. So no matter which online companies win the war over Internet access, Ascend will sell to them. "They're in all the hot areas," says analyst Terrence L. McCrary of Auerbach Pollak & Richardson Inc. in Stamford, Conn. Analysts expect earnings to rise 50%, to $60 million for 1996, on sales up 113%, to $320 million.

SPEED BUMPS. Then there's this year's phenom, Netscape Communications Corp., maker of the most popular browser for surfing the World Wide Web. Its stock galvanized the market last August and kept rising until February, when Microsoft Corp.'s release of a competing browser sent Netscape shares spiraling downward. Even so, its market value gained 76%, to $4 billion. There's good reason to believe the startup can compete. Thanks to its recently upgraded Navigator browser, big sales to Corporate America, and deals with America Online Inc. and CompuServe Inc., Netscape's share of the wide-open market is increasing. Now, all it has to do is make money: Analysts expect it to turn a $15 million profit--its first--in 1996.

Not too far behind are PanAmSat Corp. and Tele-Communications International Inc. (TINTA), two companies racing to beam television programming around the world. Short on cash for an international push, John C. Malone, CEO of parent Tele-Communications Inc., spun off 17% of TINTA last year. His goal: to bring complete telecom packages--phone service, cable TV, Internet access--to countries where penetration rates for many such services are far lower than in the U.S. "We can get significant revenues from South America today, from the United Kingdom tomorrow, and Japan the day after," says Adam Singer, TINTA's president. Already, its Jupiter joint venture with Sumitomo Corp. has nearly 1 million subscribers in Japan and expects to triple that within the year. Merrill Lynch & Co. analyst Jessica Reif estimates that TINTA's revenues will grow 52%, to $267 million, though losses will double, to $33.7 million.

Another intriguing pair of Little Giants: Thermo Cardiosystems Inc. and Thermolase Corp., both spin-offs from Thermo Electron Corp. The parent's strategy is to encourage employees to develop products and then help them take the new company public while retaining a majority stake. Thermo Cardiosystems, for example, makes a heart-implant device for desperately ill patients who can't get a transplant, while Thermolase has turned a laser designed for military use into a product that removes unwanted hair.

GOOD CLASS. Just what does it mean to be a Little Giant? Quite a bit, it turns out. Take a look at the 19 companies that made up the class of 1986: Only six have dropped off the BUSINESS WEEK 1000 altogether, while six graduated from the Little Giants list. Another seven were bought by larger companies. Among the success stories: Genentech Inc., the San Francisco biotech company, and Medco Containment Services Inc., bought by Merck & Co. in 1993 for $6 billion. That's encouraging news for investors. The real challenge, of course, is figuring out which among this year's list will be tomorrow's busts--and which will be tomorrow's behemoths.BY DAVID LEONHARDT IN NEW YORKReturn to top


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