Despite a booming business cycle and a surging stock market, America's largest companies struggled to
keep their momentum going in 1998, as revenue growth sank into the low single digits and profits
actually dropped for the first time in seven years. Total revenues for the FORTUNE 500 edged up by a
decidedly anemic 4.0%, well below 1997's 8.7% rate. And excluding a one-time gain at No. 2 Ford,
overall profits fell 1.8%.
That doesn't mean 1998 will be remembered as a down period for the FORTUNE 500. Instead it will
probably be considered a watershed, the year when the New Economy fundamentally parted ways with
the old and high-tech consolidated its role as the driving force behind the growth of big business. True,
ranking America's 500 largest companies in order of revenues produces a list dominated by traditional
giants like Mobil, General Motors, and Coca-Cola. But in 1998 such companies spent the year battling
their shrinking top and bottom lines. Meanwhile challengers like Microsoft, Dell Computer, Cisco
Systems, and Sun Microsystems--with their 400-megahertz rates of revenue growth and their
stock-option-rich employees--made it clear that one day the FORTUNE 500 will be theirs.
Tech companies weren't the only New Economy winners that made their presence felt last year. Banks,
brokerages, and other financial powerhouses--boosted by low interest rates, continuing strength on
Wall Street, and a wave of acquisitions--also posted stunning gains in both revenues and profits. So did
long-distance carriers, drugmakers, and mass retailers like Wal-Mart and Home Depot, which were
among the clearest beneficiaries of strong consumer demand.
This tale of two economies is evident not only from the sea of statistics we've gathered for this, the
45th FORTUNE 500, but also from conversations with the leaders of many FORTUNE 500 companies.
While Chevron CEO Ken Derr terms 1998 "lousy" and notes how falling oil prices forced his company
to cut back sharply on expenses, Wal- Mart CEO David Glass says, "I keep telling our people that these
are really the best times we've ever seen. You keep expecting some softness, but this thing just keeps
going." The numbers back it up: While Chevron slipped from No. 19 to No. 38 on our list, Wal-Mart
moved from No. 4 to No. 3.
"Manufacturing and commodities took it on the chin last year because of weakness in Asia and other
global difficulties," observes Morgan Stanley chief economist Stephen Roach. "But information and
service businesses continue to be a source of resilience." For example, while profits in the computer
and data-services industry jumped 17.9%, net income at railroad companies dropped 15.5%. The oil
sector was hit even harder, as profits for petroleum refiners fell a stunning 49%.
The combination of a strong economy and weak profits might seem to be a paradox until you recall
one of the biggest business stories of 1998--the spread of global deflation. Oil and chemical giants may
have been the most obvious victims, but companies in dozens of other industries struggled with the soft
pricing trend last year. Take International Paper, which slipped from No. 58 to No. 70. Or Eastman
Kodak, down from 91 to 121. Despite overall strength, even a few well-known tech companies found
they weren't immune to revenue and profit drops. Sales at Texas Instruments (No. 191) dropped
19.9%, while profits plunged 77.5%.
"There's a lot of downward pressure on prices," notes BankAmerica Chairman Hugh McColl. "Sales
can be up, demand can be up, but it's just hard to raise prices." Deflation didn't just slow revenue
growth--it also put the squeeze on profit margins. For the third year in a row, FORTUNE 500 profit
margins shrank, falling from 4.9% to 4.4%.
For many companies, including McColl's, the answer to this trend has been to seek greater efficiency
via huge investments in technology. "Technology has improved American productivity in general, and
it's certainly improved productivity here," says McColl. He adds that high tech, especially the rise of
the Internet, allows companies to benefit from new economies of scale. So while Wal-Mart may be in a
very different business from BankAmerica's, CEO Glass echoes McColl. "We've used technology to
drive growth, especially on the international front. It works just as well in Asia as in Alabama."
With so many other corporations investing in their products, it's no surprise that many prominent tech
companies jumped up in our list. PC maker Compaq, for example, advanced from No. 42 to No. 28.
Dell leapfrogged from No. 125 to No. 78. And Microsoft moved from No. 137 to No. 109. But despite
the mania for them on Wall Street, Internet phenoms like AOL, Yahoo, and eBay still lack sufficient
sales to crack the 500. (They dominate the traditional 500 by measures that factor in their stock market
value, however; see below.)
Technology and deflation weren't the only major factors affecting this year's rankings. Just as
important was the megamerger, especially in fields like telecommunications and finance. Citigroup,
formed by the merger of Travelers and Citicorp, took its place as No. 7. Bank One absorbed First
Chicago NBD and leaped from No. 113 to No. 44. And don't forget WorldCom, which bought MCI in
a stunning $39 billion deal, enabling it to go from No. 210 to No. 80. Of the 47 new arrivals on this
year's 500, no fewer than 33 of them got there by merger.
Dealmaking also wiped some of the FORTUNE 500's most familiar names off the list. You won't find
Chrysler, for example, because it was gobbled up by Germany's Daimler-Benz. (As a foreign
company, DaimlerChrysler will take its place in our Global 500 list.) Amoco, formerly No. 22, has
also vanished, because of a merger with an overseas rival, British Petroleum.
You can expect blockbuster business combinations to continue to reshape the economic landscape in
1999 and beyond. In late March, for instance, news surfaced that BP Amoco was in merger talks with
No 123, Atlantic Richfield. Meanwhile, if the pending merger of Exxon (No. 4) with Mobil (No. 13)
goes through, it will put the combined company within shouting distance of the FORTUNE 500's top
spot.
Wall Street is certainly convinced that the merger boom will continue, especially if pricing power
remains weak. "In this kind of environment, one of the only ways to grow is to buy your competition,"
says Jeffrey Applegate, chief investment strategist for Lehman Brothers. He adds that telecom in
particular should see a continuing boom in dealmaking, especially with deregulation under way in
Europe. "How many phone companies does the planet need? Certainly not nearly as many as we have."
Mergermania is one reason you can expect the biggest companies in the FORTUNE 500 to keep getting
bigger. Another reason is investor appetite for jumbo-sized companies, a trend that's clear when you
compare the returns of the giants of the FORTUNE 500 with those of their smaller brethren. Within
the top 100, the median company's total return to investors in 1998 equaled 21.5%. By contrast, the
median firm within the remaining 400 companies returned just 6.5%.
Which brings us back to the dual economy. With the Dow at 10,000 and champagne corks popping,
you might think most industries are savoring the bull-market bonanza. In fact, the return to investors
varied widely by industry. While the median telecom company returned 61.5%, for example,
petroleum refiners lost 8.4%. Industrial and farm equipment makers did even worse, losing nearly
15%.
Of course, that could all change during the next 12 months, with smokestack industries regaining a bit
of their old FORTUNE 500 glory. Don't count on it, though. The force is with the New Economy, and
the FORTUNE 500 already reflects it.
REPORTER ASSOCIATES for the 500 Len Costa and Mark Borden
{SIDEBAR}
WHERE THE WILD E.THINGS ARE
Internet companies may have captured investors' imaginations--not to mention their brokerage
accounts--but they have yet to make much of an impression on the FORTUNE 500. Despite the young
industry's surging stock prices, you won't find names like Yahoo, eBay, or Amazon .com anywhere
near this year's list of the 500 largest American companies. Even the granddaddy of Net names, AOL,
missed the cut, although it does make our FORTUNE 1,000 list at No. 535. That's because the
FORTUNE 500 is ranked by revenues, and the Internet is just beginning to generate significant sales, if
not profits.
Of course, many of today's Net investors will tell you that the New Economy has made old-fashioned
notions like sales, profits, and assets just plain obsolete. So far the stock market seems to agree.
That is why, if you want to create a 500 with Internet stocks on it, you need to rerank the FORTUNE
500 using a market-based yardstick. We did it using market capitalization per dollar of sales to produce
the list below. This mirror-image FORTUNE 500 could be called the dream of the clickerati. The top
nine companies are nothing but Net, with eBay, At Home, and Yahoo leading the way. Only four
companies from the real FORTUNE 500 even make the top 15 when you rank by this measure.
With just $47 million in sales last year, eBay is a particularly stunning example of the way Wall Street
values Net companies. For every dollar in revenues eBay took in, investors paid $400. Even Yahoo,
hardly a bargain stock, draws only $174 from investors for each sales dollar. Cisco, by contrast, gets
$20. How do more traditional companies get valued? At bargain-basement prices, to say the least.
Procter & Gamble attracts $3.27 in market value per sales dollar. IBM fetches $2.03. And Texaco gets
just 91 cents.
What makes these relative values seem so absurd is that the companies of the 500 blow the Net stocks
away on such formerly essential matters as, say, real profits. For example, Yahoo made just $26
million in 1998. P&G earned $3.8 billion. IBM cleared $6.3 billion, or 2,637 times eBay's 1998
earnings. Maybe Internet stock prices are wholly irrational. Or maybe they're simply a prediction that
one day--not so far away--the leadership of the FORTUNE 500 is going to pass to the Net.
How to Make an Internet 500
Top 20 companies by market value per dollar of revenues
COMPANY MARKET VALUE REVENUES PROFITS TOTAL
(FORTUNE PER DOLLAR RETURN
1000 rank) OF REVENUES $ Millions $ Millions 1998
1 EBAY $ 400.0 $ 47.4 $ 2.4 435.4%
2 AT HOME $ 255.8 $ 48.0 -$ 144.2 195.5%
3 YAHOO $ 174.2 $ 203.3 $ 25.6 584.3%
4 CMGI $ 97.2 $ 91.5 $ 16.6 604.1%
5 LYCOS $ 81.0 $ 56.1 -$ 96.9 168.6%
6 INFOSEEK $ 63.9 $ 80.9 -$ 109.7 359.3%
7 AMAZON .COM $ 36.7 $ 610.0 -$ 124.5 966.4%
8 AMERICA ONLINE (535) $ 36.7 $ 2,599.5 $ 92.0 585.6%
9 EXCITE $ 35.4 $ 154.1 -$ 37.0 180.4%
10 MICROSOFT (109) $ 28.9 $ 14,484.0 $ 4,490.0 114.6%
11 ETRADE GROUP $ 25.4 $ 245.3 -$ 0.7 103.4%
12 CISCO SYSTEMS (192) $ 19.7 $ 8,458.8 $ 1,350.1 149.7%
13 NETSCAPE $ 17.7 $ 533.9 -$ 39.0 149.2%
14 EMC (386) $ 14.7 $ 3,973.7 $ 793.4 209.8%
15 PFIZER (106) $ 12.4 $ 14,704.0 $ 3,351.0 68.9%
16 ELI LILLY (160) $ 10.5 $ 10,051.3 $ 2,097.9 29.1%
17 SCHERING-PLOUGH (200) $ 10.5 $ 8,077.0 $ 1,756.0 79.6%
18 CHARLES SCHWAB (435) $ 10.4 $ 3,388.1 $ 348.5 101.8%
19 AIRTOUCH COMMUN. (313) $ 10.2 $ 5,181.0 $ 725.0 74.3%
20 NETWORK ASSOCIATES $ 9.7 $ 612.2 -$ 28.4 87.9%
{BOX}
Profits take a breather
FORTUNE 500 totals
1997
IN 1997 REVENUES GREW 8.7% to $ 5,519 billion
PROFITS GREW 7.8% to $ 324 billion
1998
IN 1998 REVENUES GREW 4.0% to $ 5,741 billion
PROFITS FELL 1.8% to $ 318 billion (adjusted)
FORTUNE CHART
{BOX}
SIZE RULES...
Median 1998 total return to investors
Top 100 companies in the FORTUNE 500: 21.5%
Bottom 400 companies: 6.5%
Includes only companies with publicly traded stock.
OLD ECONOMY DROOLS
Median change in profits
Computer and data services 17.9%
Diversified financials 16.9%
Telecommunications 14.3%
Railroads -15.5%
Metals -35.2%
Petroleum refining -49.0%
FORTUNE CHARTS
COLOR PHOTO: PHOTOGRAPHS BY GREG MILLER Robert Flores, a
manufacturing associate at Dell: His company climbed to No. 78. COLOR
PHOTO: PHOTOGRAPHS BY GREG MILLER Marcia Thompson, engineer, at
MCI WorldCom's service center in Kerry, N.C. Like all employees, she gets
stock--which rose 137% in 1998. COLOR PHOTO: PHOTOGRAPHS BY
GREG MILLER Ginny Lockwood, one of 910,000 Wal-Mart workers, is a
greeter in Kingston, N.Y. COLOR PHOTO: PHOTOGRAPHS BY GREG
MILLER Steven Garland, captain of the American Progress, has hauled Mobil's
oil for 21 years. |
