Star Tribune 100: Cut to the core

  • Article by: JOHN J. OSLUND and PATRICK KENNEDY STAR TRIBUNE STAFF WRITERS
  • Updated: December 3, 2007 - 1:07 PM

In a global economy with little wiggle room for the weak, Minnesota's biggest companies are electing to do what they do best -- and not much else. Consider:

• A Duluth electric utility enters the used-car auction business in 1995. Wall Street rewards the diversification strategy. But by 2003, a big shareholder urges the company to divest the auto unit. In October the utility, now called Allete, agrees to spin it off to shareholders.

• Lured by the huge profit potential of the brokerage industry, U.S. Bancorp in 1998 acquires Minneapolis-based neighbor Piper Jaffray for $730 million. After a couple years of boom, the brokerage industry enters a bust cycle. By 2003, the big bank agrees to spin off the brokerage to shareholders.

• Big-box electronics retailer Best Buy buys Musicland in 2000 for $425 million. The goal: extend Best Buy's footprint into shopping malls and smaller markets. The strategy never clicks, and Best Buy ends up giving away Musicland last year to an investor group.

File these deals -- and many others like them -- under "it seemed like a good idea at the time."

But don't conclude that these corporate adventures hobbled the surviving companies. Quite the opposite. In the past year, the market values of Allete, U.S. Bancorp and Best Buy rose faster than the values of Minnesota's 100 largest firms as a whole.

After three punishing years, investors in 2003 began to reward those companies that decided to remain true -- or revert -- to their core businesses, an analysis of state's 100 largest public companies suggests. Overall sales for the ST100 companies grew 8.3 percent in 2003 while profits rose 37.2 percent. Market value for the group recovered broadly, jumping nearly 30 percent overall after declining 12 percent in last year's survey. Nine of every 10 ST100 companies saw their market values rise.

Job growth, however, remains stuck in neutral. Although the headcount for the ST100 is up about 3.8 percent overall, virtually all of the growth came from two large retailers, Target and Best Buy.

Target Corp., which ranks No. 1 on our list, offers a classic focus-on-the-core example. While sales and profits at the big discounter rose 9.7 and 11.3 percent, respectively, its market value soared 49.3 percent. Much of the rebound is owed to a recovering consumer economy. But the stock didn't hit year-to-date highs until after Target announced early last month it was considering selling its Marshall Field's and Mervyn's department stores. Why the decision to sell? To focus on expanding Target Stores.

Here's another example. Saying it was "no longer a strategic fit," industrial glass maker Apogee in November agreed to sell its Harmon AutoGlass subsidiary -- the business on which the company was founded in 1949. Slim margins in the windshield replacement business had become a drag on the company, which makes higher profits from the windows it makes for commercial construction.

Comfort food

Corporate acquisitions and divestitures tend to go in cycles. The end of the last deals boom cycle coincided with the March 2000 market meltdown. The 9/11 attacks, followed by last year's war in Iraq, injected more uncertainty into the economy. Add to that mix the sweeping corporate reforms sparked by the Wall Street scandals of 2001-2002 and you create an appetite for what one economist calls corporate "comfort food."

"Businesses realize what they are good at," said Dan Laufenberg, senior U.S. economist with American Express Financial Advisors. "When they are under pressure and uncertainty, they go back to the things they know they can do ... the core business. It is like people who are under pressure looking for comfort food."

One item that has not yet returned to the corporate menu is hiring. Target and Best Buy added more than 20,000 jobs each last year. But take away those major discount retailers (who are busy building national franchises) and the headcount at the other 98 companies remained virtually flat. Fifty companies increased headcount year-over-year, while 41 reduced staff and nine held employment steady.

Within certain industries, however, there is significant growth -- most notably in health care. Medical device maker Medtronic added 2,000 jobs; its competitor, St. Jude Medical, added 1,349. Health care services giant UnitedHealth Group added 1,000 jobs.

Reflecting national trends, employment remained flat among the 25 manufacturers on our list. Minnesota's biggest manufacturer, 3M Co., reduced payroll by 1.5 percent, or 1,000 jobs.

There were exceptions: Industrial filter maker Donaldson Co. added 967 jobs and defense firm Alliant Techsystems 600. Meanwhile, air bed maker Select Comfort, industrial cleaning supplies maker Ecolab and meatpacker Hormel added about 400 jobs each while diversified manufacturer Pentair and contract manufacturer Pemstar added 300 jobs apiece.

When it came to downsizing, Northwest Airlines led the way, slashing 5,223 jobs, or nearly 12 percent of its workforce. Like other major airlines, Northwest continues to struggle in the post-9/11 era. The war in Iraq triggered the 2003 job cuts, while low-fare competitors and rising oil prices make hopes dim for a significant rebound.

Struggling credit-card lender Metris unloaded 1,200 jobs as it tries to right itself after a period of extending too much credit to consumers with too little means to pay their debts.

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