Downsizing, merger trends may be starting to backfire

The Economy

November 24, 1997|By Jay Hancock

IF DICK DAVIDSON hadn't fired so many people, he might have made some money last week.

Thursday, Nov. 20, was supposed to be his big score.

Options for a whopping 281,100 shares of stock in railroad Union Pacific Corp., in Davidson's name, were supposed to go live that day, regulatory filings show. Had everything happened according to plan, Davidson could have cashed options worth -- this is a conservative estimate -- $2 million.

Don't make a deposit on the Gulfstream yet, Dick.

The Nov. 20 options are worthless so far. Union Pacific is a mess. Company Chairman and CEO Davidson is out of the money.

And America's favorite corporate management technique is getting some mud on the fender.

For 10 years, it was hard to go wrong as a corporate chieftain by firing employees in droves.

Company stock a little tired? Nothing a good mass layoff won't cure.

Industry deregulating and consolidating? Be the meanest, fastest consolidator of all.

Net margin too thin? Gotta slash, gotta burn.

Even the most Cecil B. DeMille-like downsizings seemed to breed nothing but positive financial results. Common sense suggested that downsizing could be overdone, that at some point the bloodletting would weaken the patient.

But that spot never seemed to be reached.

In company after amputated company, the surviving employees redoubled their toil. Markets got researched somehow, products shipped, accounts balanced. And shareholders and options-laden executives stacked the results in their brokerage vaults.

Union Pacific's merger last year with rival railroad Southern Pacific seemed like a gimme.

With role models such as Al Dunlap, Hugh McColl and Lou Gerstner, Davidson and previous Union Pacific boss Drew Lewis didn't have to think hard about what to do. They bought Southern for $5.4 billion, announced the wipeout of 3,500 jobs and waited for stock in the merged company to levitate.

It did, at first.

But bad things happened when Davidson actually tried to run the combined Southern/Union operation, which just yanked its headquarters from Bethlehem, Pa., to Dallas.

Late last summer, Union Pacific found itself without enough locomotives, crews and management expertise to run the trains on time -- or at all.

Cars of grain, coal and chemicals got stranded from Texas to California to Omaha. Workers pulled 12-hour shifts day after day. Factories had to shut down for lack of supplies. Ocean freighters were delayed. Union Pacific, forced to use competitors to fill some of its orders, warned of a possible big loss this quarter.

The railroad's stock has plunged to $58.63, far from the $72, $82 and $92 targets in Davidson's Nov. 20 share options.

Oh, and five people have died in Union Pacific train accidents since June.

Davidson denies it's downsizing's fault. That's a "myth," he says, and instead blames "natural disasters" and "maintenance work" in a company news release.

The U.S. Transportation Department, which Drew Lewis once ran, demurs.

"We understand about the need for downsizing, but the railroad is getting too lean," department spokesman Jim Gowen said in newspaper reports. "Managers who in the past had a handful of people now have many more workers to oversee."

If Union Pacific were the only company to have merged and downsized itself into a ditch recently, nobody might notice.

But hospital megachain Columbia/HCA is now supine and splitting itself up. Insurer Aetna Inc., which laid off 4,400 as part of its takeover of U.S. Healthcare Corp., now admits having big problems making the merger work. Stock in both companies has tanked.

In boardrooms across the land, bosses are taking notice.

Aetna's and Union Pacific's problems "suggest that the downsizing and consolidation trends that have helped to boost profit margins may be beginning to backfire," says Merrill Lynch investment strategist Charles Clough.

At both companies, "their efficiency seems to have suffered, and they now plan to rehire some of the people they let go."

Hundreds of U.S. companies have shucked and restructured in the past decade, with or without mergers. Many needed it. The economy is better for it.

But maybe the bottom is in view. Now that it's not such a sure bet for shareholders, bosses may think twice about swinging the meat ax.

Pub Date: 11/24/97

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