Saturday, June 10, 2000

Measure of a company's value has changed


Consultant: Knowledge drives value

By Cliff Peale
The Cincinnati Enquirer

        What's a more valuable company, Procter & Gamble Co. or America Online Inc.?

        Several years ago, the question would have gotten you laughed out of investment banks across the country. Cincinnati-based P&G operates plants all over the world, and its brand names such as Pampers, Ivory and Tide are staples. At the end of last year, its book value was $2.62 a share.

        AOL, by contrast, is a “virtual” powerhouse. Without many physical assets such as buildings and heavy equipment, it operates in the netherworld of the Internet, with a 1999 book value of $1.17 a share.

        But AOL also has millions of customers it can reach with the tap of a button, providing all kinds of content and marketing. And that, Steve Samek insists, is real value.

        With a market value of about $132 billion, investors are effectively paying AOL several thousand dollars for each of those customers, Mr. Samek, a managing partner for U.S. operations at Arthur Andersen Co., said during a trip to Cincinnati this month.

        “It's no longer technology that drives value; it's knowledge,” he said. “Companies' ability to create, manage, license and trademark intellectual capital is as important as leveraging your inventory in a previous age.”

        Mr. Samek can't answer the question about P&G and AOL. But in a book, Cracking the Value Code, written with two Arthur Andersen colleagues, he does challenge the notion that value for public companies rests primarily in bricks, mortar and money.

        Just as important are assets such as customers, suppliers, technology and even a corporate culture that cannot easily be copied, he said.

        For Cincinnati corporate powerhouses such as P&G, Kroger Co., Federated Department Stores, Fifth Third Bancorp or American Financial Group, the consequences of a new value equation are obvious: Only those that spread their assets beyond the “old economy” measures will be winners in the 21st century.

        And if companies realize that and reap the benefits, stockholders will be the winners, Mr. Samek said.

        “The business model has got to be richer than the next sexiest Web site,” he said. “The real power is going to be when the so-called old economy companies get their act together. Those that transform their businesses will be the real powerhouses.”

        Mr. Samek's book outlines several types of assets, including physical assets such as land and buildings, customer assets, financial assets such as cash and investments, employee and supplier assets, and organizational assets such as unique corporate values, innovation or a successful brand name that customers follow.

        Many of the biggest Greater Cincinnati companies already have taken those steps, including:

        • P&G: Despite its recent stock-market slide, the consumer-products giant diversified by investing in the new reflect.com Internet site to provide cosmetics directly to customers. P&G also could capitalize on its brand-marketing system and turn that customer loyalty into a 21st century asset, Mr. Samek said.

        • Federated: The owner of Macy's, Bloomingdale's and Laza rus took a huge step last year with its acquisition of direct-marketer Fingerhut Cos. in Minnesota. That will not only give it a database with millions of names, but also the infrastructure to reach those customers directly through catalogs or Internet sites.

        • Kroger: The nation's biggest grocery-store chain obviously has dominated the physical asset category with more than 2,300 stores. But it has implemented some customer-loyalty card programs and also has installed self-service scanners in some of its stores.

        • Fifth Third: Like most banks, Fifth Third has slowed its rate of new traditional branches. It has long gained value from its Midwest Payment Systems unit that processes electronic transactions for other companies.

        And Fifth Third's famed corporate culture of trimming costs and aggressive sales also has given it value in the eyes of stock-market investors, Mr. Samek said.

        • American Financial: The traditional insurance company controlled by Cincinnati's Carl Lindner Jr. has long been known as a conservative player. But it has taken baby steps recently, including a push into selling auto policies directly over the Internet.

Summary, links to Friday P&G coverage



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