Corporate America returns to what it knows best


Genesco Inc. was a juggernaut by the mid-1950s, on the verge of cornering the U.S. shoe market. So the government stomped on its expansion plans and ordered the company to diversify.

Genesco started snapping up other businesses -- from soccer equipment to pricy men's suit manufacturers -- that bolstered sales but hurt profits. Last week, after losing $54.3 million in fiscal 1994 and watching its stock sink 66 percent in a year, Nashville, Tenn.-based Genesco threw in the towel: It will jettison everything but shoes.

"After 40 years, they're getting back to the one business they know," said Buzz Heidtke, a broker at Heidtke & Co. in Nashville.

That could be said about a lot of companies in corporate America these days.

Take Sears, Roebuck & Co., which two weeks ago announced plans to spin off insurer Allstate Corp., the last operation not connected with its retail stores. Since 1992, Sears has dumped its real estate unit Coldwell Banker Corp. and brokerage Dean Witter Reynolds Inc.

Or Eastman Kodak Co., which spent the 1980s expanding wildly into chemicals, drugs and household products, and just wrapped up a yearlong selling spree as it refocuses on photography.

The change in corporate America has been drastic. From 1965 to 1988, eight businesses a year split into pieces, according to a study by Rothschild Inc., a New York brokerage. In the 1990s, more than 30 businesses a year are being carved up, about four times the rate of "demergers" in the 1980s.

"Companies diversified, blind to any synergies, simply to smooth out earnings," said Barbara Goodstein, a spin-off analyst at Rothschild. "That thinking has been discredited, because investors can diversify their own portfolios."

The reasons for the return-to-roots movement are varied.

Some companies spin off units for a big payday that can be used to prop up core operations. Last week, Molson Cos. said it plans to sell its 153 Beaver Lumber stores by 1996, pocketing about $200 million, to focus on its brewing and chemicals businesses.

Others shed businesses that drag down results or make key customers uneasy. Medical products maker Baxter International Inc. bought Caremark International Inc., a home-care company, in 1987 for $528 million. Hospitals complained Caremark was competing with them, tainting Baxter's sales relationships. Baxter spun off Caremark in a $1.4 billion offering in 1992.

Other companies let go of operations because of clashing management styles. General Motors Corp. bought Electronic Data Systems Corp. from Ross Perot in 1984 for $2.6 billion, but the combination of the Industrial Belt automaker with the free-wheeling computer systems supplier never jibed. Earlier this year, GM said it planned to spin off EDS in part because the performance of the growing, entrepreneurial unit was constrained by GM's bureaucracy.

Whatever the reason, it's almost always "a smart business decision" when companies return to what they've done best, said Charles Ronson, an analyst at Balestra Capital in New York and editor of the Spin-Off Report, a newsletter.

Coca-Cola Co. illustrates just how big the payoff can be.

In 1989, Coke sold Columbia Pictures in 1989 to Sony Corp. for $3.4 billion -- six years after it bought the troubled movie studio for $750 million. Dead set again on focusing exclusively on quenching thirsts, Coke has since pumped $1.5 billion into expanding its operations in Eastern Europe -- an area dominated rival PepsiCo Inc. Coke now outsells Pepsi 2-to-1 there.

"Pepsi can't focus capital and management on building its beverage business like Coke can because it has to worry about its restaurant and snack food operations," said Roy Burry, an analyst at Kidder Peabody & Co. "Pepsi juggled too many balls at once, and ended up dropping an important one."

For example, the worldwide operating profits of Pepsi's restaurants -- which include Taco Bell, KFC and Pizza Hut -- declined 5 percent in the quarter that ended Sept. 30.

Coca-Cola Chairman Roberto Goizueta played a key role in "demerging" another corporate giant: Kodak. A powerful outside director at Kodak, Mr. Goizueta was disappointed that competitors like Fuji Photo were cutting into its dominance in photography.

So last October, Mr. Goizueta spearheaded a boardroom coup in which Chief Executive Kay R. Whitmore was ousted in favor of Motorola Inc.'s CEO George Fisher.

Mr. Goizueta warned Mr. Fisher that Kodak must be pared down to what it once was. That's been done. Mr. Fisher has sold, for a total of $7.8 billion, Sterling Winthrop Inc., a drug and consumer health product business; L&F; Products, a household products business; and its clinical diagnostics division. Kodak had bought these units for about $5.3 billion.

"The company finally is well positioned to compete," said Michael Ellman, an analyst at Wertheim Schroder & Co. "Now, Kodak is, well, Kodak."

Nothing that positive can be said about Borden Inc., a sad reminder of what happens to a company that doesn't see the light before it's too late.

Borden is best known as a huge food company whose products -- Creamette pasta, Cheez Doodles and Cracker Jack -- dominate the pasta, dairy and snack business. Thanks to a $1.9 billion, 91-company buying spree in the late 1980s, Borden is also the world's largest seller of wallcoverings, the No. 1 North American producer of consumer adhesives and the international leader in forest products adhesives.

That didn't do much for Borden's performance, which in the last two years lost $1 billion. Much of the blame lies with the company's failure to even attempt to integrate the subsidiaries into an efficient, centralized manufacturing and selling network. Chairman Anthony D'Amato this summer shared a perfect anecdote of how dysfunctional his company had become: One major retail customer complained about being called upon by 28 people representing Borden brands.

To fix the disaster Borden had become, Mr. D'Amato closed plants, cut payroll and centralized sales, marketing and management, and looked at selling some of the units. But things had already become too dire for anything but drastic moves. In September, leveraged buyout specialist Kohlberg Kravis Roberts & Co. agreed to buy Borden for $2 billion -- about one-third the company's stock market value three years earlier.

"Borden simply became a huge mess," said Beth Loewy, an analyst at UBS Securities.

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