Tuesday, February 7, 2012

America's Shrinking Corporate Giants

America's Shrinking Corporate Giants:

This post originally appeared at 24/7 Wall St.

It is rare for one of America’s largest companies to lose a third or more of its sales in a brief time. When it happens, it is usually either because of market or economic forces, or because of a designed refocusing. 24/7 Wall St. identified the eight largest American companies whose revenue fell the most in the past five years and analyzed the reasons behind the drops.

See America’s Eight Shrinking Corporate Giants >

Large companies can lose a significant amount of their revenues because they get into a great deal of financial trouble. A company may lose part of its customer base quickly because of economic forces, or it may be part of a financial catastrophe. As a result, the company’s revenue declines, and it begins to post large losses. In cases like these, companies often are forced to sell divisions to fund their survival. Alternatively, companies may close some of their operations that drain capital. General Motors and Citigroup are good examples of this category. Each moved from relative prosperity to difficulty in a very short period.

The other reason large companies shrink quickly is by design. The management of a corporation created by merger or acquisition activity may find that some of its pieces no longer fit together. One division may grow at a much higher or slower rate compared to others. Also, the way the stock market values one part of a large corporation may change because it is in a category Wall Street no longer favors. That, in turn, becomes a burden on the stock price of the entire enterprise. Telecom hardware company Motorola Solutions and media giant Time Warner fall into this category. Each is smaller than it was five years ago because it spun out a major business.

24/7 Wall St. used Capital IQ to screen the largest companies in America based on total revenue in 2006. We then screened for those that had the largest drops in total revenue between 2006 and 2010. Most of the eight companies on this list lost a third of their total revenue over the period, and some lost more than half. The list is ranked by total revenue loss from greatest to least.

8. The Home Depot

  • Drop in Sales: $6.8 billion
  • 2006 Revenue: $73.0 billion
  • 2010 Revenue: $66.2 billion
  • Pct. Change: -9.3%
  • Industry: big-box retail

Home Depot’s fortunes were hurt by two factors over the past five years. The first was the collapse of the housing market. A drop in home sales and a rise in unemployment smothered both home building and the ability of people to pay for repairs. There is still some question about when the housing market will rebound. In the first three quarters of 2011, Home Depot’s revenue rose only 2.9% to $54.4 billion.

The other reason Home Depot is smaller today than it was five years ago is that it sold its construction supply business in 2007 to concentrate on its in-store retail operations. The unit changed hands in 2007 when it was bought by private equity firms Bain Capital, Carlyle Group and Clayton, Dubilier & Rice. Home Depot built the wholesale construction-supply business through nearly 40 acquisitions totaling more than $7 billion over several years just before it was sold.

7. Citigroup

  • Drop in Sales: $14.3 billion
  • 2006 Revenue: $75.7 billion
  • 2010 Revenue: $61.4 billion
  • Pct. Change: -18.9%
  • Industry: banking

Citigroup, like AIG, reorganized its business during and after the credit crisis of 2008. The need for a bailout seemed improbable in 2006 when the company’s creator, Sandy Weill, retired. Known as the world’s financial supermarket, Citi was created by Weill through a series of mergers and buyouts that included The Travelers, Smith Barney and Salomon Brothers. But Citigroup’s holdings of mortgage-backed securities made it vulnerable to the collapse of the housing market, and its existence was threatened by huge losses on these securities.

The total rescue of Citi involved stunning sums of bailout capital. The government loaned the financial firm money in two tranches. The first was for $20 billion and the second for $25 billion. The Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. then agreed to guarantee $306 billion in portfolio losses after Cit’s first $36 billion in losses. The bank’s new CEO, Vikram Pandit, then began to cut out the portions of the company that were most in trouble, and those that could be sold to make the most money to cover losses and loan obligations to the government. At the end of 2008, Pandit said he would cut 52,000 jobs. The company got even smaller when it sold several large businesses like its student loan operations and much of its business unit in Japan.

6. Time Warner

  • Drop in Sales: $14.9 billion
  • 2006 Revenue: $41.8 billion
  • 2010 Revenue: $26.9 billion
  • Pct. Change: -35.6%
  • Industry: media

Time Warner is another company that was broken up based on a strategic plan set by its management and board. The conglomerate owned a series of cable systems, the world’s largest magazine publisher Time Inc., Warner Bros. studio, several cable networks, including HBO and CNN, and online portal AOL. First, management decided to change Time Warner’s focus to content, spinning off Time Warner Cable in the spring of 2009, about a year after its decision.

Time Warner also decided to leave the online portal business and further focus itself on print, movie and cable TV content. Internet portal AOL (NYSE: AOL) was spun off as a public company at the end of 2009. The results of all the divestitures was a five-year drop in revenue of more than one third.

See the rest of the story at Business Insider
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