Bottom Fishing

Recession and bear stock market provide an environment for the fittest firms to expand and consolidate at the expense of weaker competitors.

In the biggest sale slump for computers in recent years, Dell Computer is expanding its market share by aggressive price cutting to squeeze its higher-cost competitors. Dell slashed computer prices by 16% in 2001. Sticker prices on some machines have dropped by as much as 47%. As a result, it gained 1.1 percentage market share in the three months ending in September 2001 and has won 36 large corporate accounts, worth $ 270 million, so far in 2002.

Stronger companies can also use hard times to pursue aggressive marketing to strengthen their brands while their weaker competitors slash their advertising budgets. In fact, hard times are the best time to spend on TV advertising since TV air time is much lower than boom times. Sara Lee and Wendy International have been notable in their aggressive advertising spending.

But gaining over one's competitors does not provide any long-term pricing power unless the problem of industry overcapacity is reduced. With share prices at most companies trading at a fraction of their 52-week high, there are plenty of preys for the bargain hunters. For example, the demise of dot-com upstarts has enabled old-economy companies to tame their once ferocious rivals by acquiring them at bargain-basement prices. Tribune Co., though suffering badly from the advertising drop, is investing $100 million in a joint venture with Knight Ridder Inc. to acquire job bulletin board Headhunter.net, which once threatened to deprive old-line newspapers of their lucrative help-wanted classified-ad business.

In the past, industry consolidation through merger and acquisitions has run afoul of antitrust regulation. President Bush's administration is expected to have a more hands-off policy on merger and acquisition.

Old accounting rules have also discouraged acquisitions of weak companies who have accumulated huge goodwill by acquiring other companies at inflated prices. Goodwill represents the difference between an acquired company's asset values and their historic stock valuations. Such goodwill must be written off over a period of time even though it has been greatly eroded. Taking over a company with huge accumulated goodwill on its books would significantly weaken the balance sheet of the acquiring company. But in July 2001, the Financial Accounting Standards Board decided to end the practice of amortizing goodwill ending one of the greatest defenses against hostile takeovers.

With tech jobs harder to come by, talented employees of acquired companies are also less likely to quit when their former employers are hostilely taken over. So bargain hunters can boldly proceed with hostile takeover without fear of losing the most important assets of tech companies.

The purpose of industry consolidation is, of course, to reduce the number of competitors and excess capacity hoping to avoid ruinous price competition.