New CEO motto: think profitable, not big

AOL Time Warner wrote off almost $100 billion last week, the equivalent of the gross domestic product of Morocco.

For the first time since 1974, last month saw no initial public offerings (IPOs) - those new stock offerings that sometimes resemble Roman candles.

And so far this year, Tyco International, the company that two years ago was known for buying a business practically every day, has not bought anything - and says it doesn't plan to.

In the aftermath of the first recession in a decade - and only the second in 20 years - these are some examples of how the business climate has changed. Business is no longer consumed with getting bigger - only more profitable. Investors, burned by the fickle stock market and corporate scandals, are considerably more cautious - which means entrepreneurs must have proven track records to get capital. Wall Street, which survived the last recession largely intact, is now shedding jobs and trying to figure out ways to win back customers.

In short, as a result of the stresses and strains of the past two years, the business and financial world has undergone the equivalent of a modest earthquake.

"It's more like a three on a scale of 10," says Fred Dickson, head of research at broker D.A. Davidson & Co. in Lake Oswego, Ore.

Despite the relatively modest shocks, they are still being felt, in large part because of the Iraq uncertainty hanging over the economy. "People are nervous a bigger quake is coming, and it's put people and companies at a standstill," says Fernando Diz, an associate professor at Syracuse University in New York.

Recessions have jolted the business world before. Ten years ago, a downturn in the economy resulted in the collapse of the US savings-and-loan industry, which had shoddy practices. For many small towns, the collapse of their savings-and-loans was a major tremor, resulting in ranchers losing their spreads and small businesses shuttering their doors. Consumer spending stuttered. As a result of this, most consumers today get their mortgages from commercial banks or nationwide mortgage lenders.

In this recession, the greatest impact has been on Wall Street and the corporate boardrooms. Take mergers and acquisitions. Two years ago, spurred by some enormous corporate linkups, such as the $350 billion AOL Time Warner merger, such deals totaled $1.7 trillion, according to Securities Data Corporation. Last year, they totaled $433 billion, down 74 percent from 2000.

"Companies are in a survival mode, not an acquiring mode," says Judith Radler Cohen, editor of Mergers & Acquisitions Report, part of Thomson Media.

That's certainly the case with Tyco, which has been stung by allegations of irregularities by its top officers. At one point, there were reports the company had failed to inform shareholders that over a three-year period, it had made about 700 acquisitions worth about $8 billion. Many of them, the company said, were too small to bother.

"For them to do deals now would be corporate suicide," says Ms. Cohen.

Not to worry. Gary Holmes, a spokesman for Tyco, says, "Today, under Tyco's new CEO, we're focused on internal growth."

The way new businesses get started has also shifted. Only two years ago, venture-capital firms were brimming with money. "Three or four years ago, you could have any crazy idea and get it financed," recalls Don Straszheim of Straszheim Global Advisers in Santa Monica, Calif. "Now, the hurdle you have to get over for any kind of risk capital is much higher than it used to be."

Nowhere is this more evident than the market for IPOs. Not only have there have been no new stock offerings, but even companies with established records are having trouble raising money.

For example, the Infinity Property & Casualty Corp. has subsidiaries that have been in existence for as long as 50 years. This week, the company, which insures high-risk drivers, had planned to issue an IPO. However, the market deteriorated, and the company reduced the price of the IPO, and then postponed it.

"We're still looking at it, but we're not sure when it will occur," says Anne Watson of American Financial Group, which currently owns Infinity. American Financial had been planning to use the money to help grow its remaining operations and reduce its debt load, she says.

With the paucity of such deals, Wall Street has been laying off investment bankers and other high-priced employees. "The pillars of Wall Street have undergone a comeuppance," says Mark Zandi, an economist at Economy.com.

Mr. Zandi says this seems to be part of a 10-year cycle. "At the start of every decade, we seem to have a recession," he says. "This means that the economy will be back in full swing by 2008 or 2009, and that's when the memories start to fade."

However, Wall Street firms are also very adaptive, and are quick to find the latest investment fads. "My sense is that Wall Street is awfully resilient," says Mr. Dickson. "Firms will keep intact and employ a cadre of workers so they can ramp up and handle the deal flow going forward."