How Big Industries Did in 1998
By The Associated Press
It was a hard year for many U.S. companies and many of their workers. Consumers in this country were buying goods and paying for services, but overseas business became tenuous, and in some cases non-existent, as economic problems spread from Asia to Russia to Latin America (NYSE:AOL - news).
Manufacturing industries began laying off thousands of workers. Retailers could report good sales only if their prices were right.
One business flourished above all others -- mergers and acquisitions. It was a great year for the dealmakers as huge companies bought other huge companies to make themselves more competitive in an increasingly tough business world.
It was a hard year for organized labor, which saw several high-profile walkouts, most notably the long United (NYSE:UNH - news) Auto Workers strike at General (NYSE:GM - news) Motors. And the high-tech industry saw a possible shift in the balance of power as Microsoft (Nasdaq:MSFT - news) found itself on the defensive.
A look at how some major industries and their workers fared this past year: RETAILING
Stock market volatility and economic uncertainty didn't stop consumers from spending in 1998. They just became more particular about where they did their buying.
Increasingly, people voted for convenience, quality service and affordable prices when deciding where to shop. They favored discount and specialty chains over the big department stores.
''We saw more consumers pressed for time and concerned with value, and that really influenced where they shopped,'' said Tom Agan, a principal at the Atlanta-based retail consulting firm Kurt Salmon Associates.
Discount chains were the undisputed winners. Stores like Wal-Mart and Target thrived as people curbed their spending at other stores. These one-stop superstores stole market share from just about every other sector in retailing, including toys, electronics, groceries, home furnishings and clothes.
Specialty stores were also strong, rebounding from sagging sales in the recent past. Thanks to their well-known brands and superb service, many shoppers chose the smaller chains over the department stores.
Among those that sell clothes, the Gap (NYSE:GPS - news) drew the biggest crowds with its Old Navy, Gap and Banana Republic stores. Youth-oriented chains like Abercrombie (NYSE:ANF - news) & Fitch attracted teen shoppers who want to stay on the forefront of fashions.
Thanks to the great housing market, home furnishings retailers Crate & Barrel, Restoration (Nasdaq:RSTO - news) Hardware and Pottery Barn excelled. Many people fixed up their homes, boosting sales at Lowe's and Home (NYSE:HD - news) Depot.
Consumer electronics retailers like Best Buy and Circuit City enjoyed a solid year, thanks to low prices for computers, DVD players and digital cameras. Internet retailers also did well as more consumers took advantage of the convenience and selection offered online.
But it wasn't a superb year for all retailers. Department stores suffered -- shoppers just weren't thrilled with their merchandise, prices or customer service.
''It's becoming more evident that the department stores are getting squeezed,'' said Steve Paspal, senior retail analyst at Sovereign Asset Management, a subsidiary of John Hancock Funds. HEALTH CARE
Aetna is buying Prudential Health Care. United Healthcare's purchase of Humana (NYSE:HUM - news) fell apart. Britain's Zeneca Pharmaceuticals is acquiring Swedish drug maker Astra (NYSE:A - news). America Home Products, maker of Anvil and Robitussin, failed to merge with both Monsanto and SmithKline Beecham.
Health care companies undertook these deals and would-be deals as they tried to cope with the financial difficulties that plagued every industry sector in 1998.
''Cost containment pressures finally permeated everyone's income statement,'' said Ken Abramowitz, a health analyst with Sanford Bernstein in New York. ''It was a disappointing year for the health service companies.''
Health maintenance organizations saw losses escalate, a result largely of rising drug costs and declining Medicare reimbursement. Kaiser Permanente, the nation's largest HMO with 8.5 million members, lost $126 million in the first nine months of the year. Prudential lost hundreds of millions on its health business before deciding to sell to Aetna in December.
Hospitals and nursing homes did little better as they faced the same reimbursement crunch from Medicare and Medicaid.
Big pharmaceutical companies continued to post record profits, but some warned that 1999 would be different.
Driven by pricy new products and increased demand from consumer advertising, Pfizer, Schering (NYSE:SGP - news)-Plough and Warner (NYSE:WLA - news) Lambert earned big profits. Pfizer can mostly thank its anti-impotence pill Viagra for its successful year. More than 6.2 million prescriptions were written for Viagra since the drug hit the market in early April, making it the most successful product launch ever.
Although Viagra did not need any direct to consumer advertising to generate interest, the new marketing method helped pump up sales for a number of companies including Schering-Plough's allergy pill Claritin.
But Johnson (NYSE:JNJ - news) & Johnson said it had to eliminate 4,000 jobs. Merck said it would not meet 1999 earnings estimates.
Rising costs have led to the disintegration of the physician practice management industry, a Wall Street star until recently. Medpartners, the largest company in the field, quit managing doctors after it could no longer sustain losses. Several smaller companies have followed the same path. BANKING
The news in banking could be summed up in one word: Citigroup. The $70 billion merger of Citicorp (CCI - news) and Travelers (AMEX:TRV - news) Group created a new standard for delivering financial services.
The combination of a big bank and a big insurance company, which together do business with 100 million customers worldwide, shook the financial services industry. Companies of all stripes -- including brokerages and commercial banks -- were forced to operate in Citigroup's new paradigm. The new model offers a wide variety of financial products and services at bulk-rate prices and markets them like soft drinks.
Citigroup could also shake up Washington.
According to Depression-era laws that separate banking from other financial businesses, Citigroup, as a bank holding company, has two years to get rid of Travelers' insurance underwriting business. Federal regulators could allow Citigroup to keep selling insurance for up to three years after that.
But at some point, Congress will have to decide whether to allow banks to take insurance risks, whether brokerages should provide federally-insured retail banking services, and whether banks can own, or be owned by, commercial companies. In short, they must redefine banks.
Congress came very close in the last session to passing banking reform. It's expected to come up again in 1999.
Citigroup was the boldest merger announced in 1998, but it wasn't even the biggest. Deutsche Bank AG agreed to buy Bankers Trust Corp., a deal that would create the world's largest bank, with more than $843 billion in assets.
And while Citigroup stole the headlines, there were other big mergers: NationsBank with Bank of America, Banc (NYSE:ONE - news) One with First (FCN - news) Chicago NBD, and Norwest (NOB - news) with Wells (NYSE:WFC - news) Fargo.
But these were mergers of banks. And while it remains to be seen how successful Citigroup's cross-breeding will be, it forced to a new level a decade-old debate about how financial products are sold.
The General Motors strikes of 1998 were reminiscent of ugly battles decades ago between the United Auto Workers and the world's largest automaker. But when the two sides finally came together to end last summer's 54-day fight, neither side could claim victory.
''The GM strike was probably the biggest labor relations disaster of the last half of the 20th century,'' said Dale Brickner, a retired Michigan State University labor professor.
Other strikes made headlines at Northwest (Nasdaq:NWAC - news) Airlines, U S West and Bell (NYSE:BEL - news) Atlantic. All were the byproduct of deregulation and restructuring in the airline and telecommunications industries and lasted 15 days or less. The walkouts at two GM parts plants were the year's most damaging.
They virtually shut down GM's North American production, costing the corporation about $2 billion even after taking into account production that was recouped later in the year. They idled nearly 200,000 GM employees and thousands of others at GM suppliers.
And for what? GM got no major concessions from the UAW, only a vague promise of temporary labor peace pending national contract talks next summer. The union gained a temporary reprieve for some parts plants that eventually may be sold or closed, and it retained some work rules that GM wanted to trash.
''They ended up restoring the status quo,'' Brickner said. ''All this economic loss was for nothing.''
UAW and GM leaders promised to work more diligently to resolve labor disputes before they reach the boiling point, and by year's end there was evidence the improved communications were paying off. Several local disputes at other GM plants had been resolved.
Brickner said the futility of the GM strikes reflects Big Labor's continuing frustration with the long-term decline in high-paying manufacturing jobs that used to be its foundation. Most of the growth in union jobs today is in the lower-paying service industries, health care and government. MERGERS
The five-year marathon of mergers leading up to 1998 was just a warmup.
This past year saw an explosion of deals that shattered 1997's all-time record within just six months, as financial, oil and telecommunications companies led the rush to create new corporate giants. By mid-December, $1.6 trillion in mergers involving U.S. companies were announced, a 77 percent jump from 1997's total of $906 billion, according to Securities Data Co.
As U.S. companies looked to expand at home and abroad, a number of once-unimaginable marriages arose -- most notably Exxon (NYSE:XON - news)'s $73.7 billion planned purchase of Mobil in the richest takeover in history, and the $32.8 billion merger of Chrysler and Germany's Daimler-Benz.
Other milestones were reached: NationsBank and BankAmerica (NYSE:BAC - news) combined to create the nation's first bank with coast-to-coast branches, while Citicorp and Travelers Group together became the largest U.S. financial services provider -- offering checking accounts, insurance and investment advice under its red umbrella.
In addition, four of the remaining Baby Bells are joining up in pairs -- SBC-Ameritech and Bell Atlantic-GTE -- with hopes of one day providing all-in-one packages of long distance, wireless services and Internet access.
The massive mergers, of course, had their dark side. Big layoffs were a frequent consequence of companies paring their overlapping operations to save money, and consumer groups often expressed fear that regular folks would be squeezed by reduced competition.
Government regulators blocked a few deals on antitrust concerns, such as the union of defense giants Lockheed (NYSE:LMT - news) Martin and Northrop (NYSE:NOC - news) Grumman, and two mergers involving the nation's top four drug wholesalers. But the antitrust watchdogs have let most of the huge deals pass, reasoning that the rapidly expanding global economy is providing more than enough competition. HIGH-TECH
Microsoft's stock roughly doubled in 1998, its profits were up 50 percent and demand surged for its new operating software. But beneath the rosy image, the not-so-gentle giant of computing for the first time was on the defensive in a battle that could slow it down and reshape the industry.
Government lawyers repeatedly scored points in their continuing U.S. antitrust trial, which accuses Microsoft of using its software dominance to squeeze rivals and consumers. The judge chuckled at Bill Gates's memory lapses in his videotaped deposition and curbed Microsoft's lawyers cross-examination of key government witnesses.
The court's seeming sympathy with the allegations increased speculation it might eventually order Microsoft to alter its market behavior, with potentially wide ramifications for how the technology industry develops and sells products.
Another federal judge in a trial in San Jose, Calif., came out against Microsoft, ordering the company to rewrite parts of Windows 98 containing an altered version of the Java programming language that's incompatible with software made by its rivals.
Outside the courtroom, the anti-Microsoft camp redoubled its resolve to chip away at Microsoft's dominance with a spree of deals and initiatives.
America Online, the largest online and Internet service, emerged as a newly formidable competitor to Microsoft with a $4.2 billion deal to buy Netscape.
Oracle and Sun (Nasdaq:SUNW - news) Microsystems launched a fresh assault on Microsoft with a new simplified business computer that doesn't require full operating systems such as those sold by Microsoft.
Even Microsoft's long-time ally, chip maker Intel (Nasdaq:INTC - news), supported initiatives such as advanced video software and the Linux upstart operating system that rival Microsoft products.
More broadly, speculation intensified that several infant technologies such as new Web-surfing gadgets could one day change the method of computing made famous by Microsoft's Windows operating system, which runs up to 90 percent of the world's personal computers.
For its part, Microsoft seized on the developments for ammunition in its antitrust battle, noting that competition is robust and government intervention isn't needed.
Investors seconded that point. The popularity of Internet stocks soared, outpacing the rest of the technology industry. Money-losing companies such as the bookseller Amazon.com (Nasdaq:AMZN - news) gained fresh billions of dollars in investment from Americans giddy about the medium's long-term prospects.
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AP Business Writers Rachel Beck, Phil Galewitz, Patricia Lamiell, Brian Akre, Eric Quinones and David E. Kalish contributed to this report.
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