Caution in The Boardroom

By Janice Castro

While Wall Street whipsawed wildly last week, America's companies tried to maintain their composure. Though many corporate executives were rattled by what has happened to their firms' stock, and their own personal wealth, since August, most were determined to stay calm and not make any rash moves. Almost no one rushed to slash production or shelve capital-spending plans. But many companies began taking a hard look at their operations, realizing that further market declines could bring on a recession. For companies that had been planning to issue new stock or for young firms hoping to go public, the impact of the Black Monday crash was immediate and devastating. Many were forced to put their plans on hold until stock prices rise substantially, and they faced the unsettling possibility that a renewed bull market might not occur anytime soon.

Anxiety was especially high in Detroit, where automakers feared the crash could deal a new blow to car sales, which are already slumping. Maryann Keller, a prominent auto analyst with Furman Selz Mager Dietz & Birney, a Manhattan-based investment firm, predicted that U.S. sales of cars and trucks would fall about 15% next year, to 9.5 million vehicles. One reason for her gloomy forecast, she said, was that the loss of wealth caused by the stock- market decline would have a "significant effect on consumer confidence and the ability to spend."

Prompted in part by the gyrating market and bleak sales prospects, Chrysler and General Motors said they would accelerate their cost-cutting campaigns. Noting that some people may now decide to put off the purchase of a car, Chrysler Chairman Lee Iacocca announced that his company would speed up previously planned efforts to reduce its payroll. Iacocca intends by the end of the year to trim 3,500 white-collar employees from Chrysler's salaried work force of 38,000. In addition, the company will suspend production at an assembly plant in St. Louis for two weeks this month and will cancel plans to produce the Allure coupe. At GM, Chairman Roger Smith said the company would cut its costs by $4 billion, or 4%, next year. Some of the savings will come from accelerating a program to close 16 aging manufacturing operations.

Most other companies were anxiously waiting to see how much fallout the stock crash would generate. "The dust hasn't settled," said Paul Jones, a spokesman for Westinghouse Electric in Pittsburgh. "Nobody knows what to do. You hear talk of recession, inflation, deflation, all kinds of things." But as the stock market continues to shimmy, many firms are already trying to assess the damage to customer confidence. Said Gerald Schultz, president of Bell & Howell, a Skokie, Ill., publisher and information-services company: "We're trying to sensitize our people to get their feelers out, with their customers, with their suppliers and their staff, to see what's going to happen."

Some executives remained confident that the economy was strong enough to withstand the market tumult. "The decline in the stock market in itself should have minimal impact on consumption," predicted Edward Brennan, chairman of Sears, Roebuck. Others argued that the crisis had been overblown by the press. Said June Collier, president of National Industries, an Alabama- based manufacturer of auto parts: "The stock market is nothing more than a kind of legalized gambling casino. Were it not for the perceptions being drummed into people's minds, the effect of the market crash on the economy would not amount to a hill of beans."

Hordes of companies have responded to the crash by snapping up huge blocks of their own stock, a trend that helped spark the rally on Wall Street late last week. IBM unveiled a plan to buy up to $1 billion worth of its shares, while the Kemper Corp., a group of insurance and financial-services firms, decided to spend as much as $46 million to purchase 2 million of its 61 million shares. Said Gerald Maatman, president of Kemper National Property & Casualty: "We think that there is a buying opportunity for our stock, and it's significantly undervalued." During the week following Black Monday, the Monsanto chemical company completed a ten-month buy-back of 3 million shares and promptly decided to acquire 5 million more. Among more than 100 other firms buying their own shares are Ford, USX, Du Pont, McDonnell Douglas and Motorola.

Companies pursuing this strategy have several possible motives. First, they want to prop up their share prices by demonstrating confidence in their earnings potential. Moreover, the companies can cut the number of shares outstanding and thus reduce the amount of money they have to pay out in dividends. Finally, the firms hope that buy-ups will make them less vulnerable to takeovers.

But if it was an opportune moment for companies to buy stock, it was a terrible time to try to issue shares. Nowhere did that reality hit harder than in California's Silicon Valley, home to hundreds of entrepreneurs who have become or hope to become overnight millionaires by taking their companies ! public. On Black Monday, Applied Immune Sciences, a small biotechnology firm in Menlo Park, Calif., that is developing treatments for AIDS and cancer, was in the final stages of preparation for its initial public offering of stock. But as the market collapsed, the possibility of raising a reasonable amount of cash by selling shares evaporated. Said President James Gregg: "We were in shock. Our initial reaction as we watched the market crash was 'You can't do this! We've come all this way!' I kept thinking that this was how our Olympic athletes felt when they were told they couldn't go to Moscow." In nearby Milpitas, Octel Communications, a manufacturer of telecommunications equipment, was also preparing to go public. "We dropped that idea fast," says President Robert Cohn. "It took a second to decide that this particular marketplace is absolutely crazy and that we want no part of it."

Similar despair was hitting small companies all over America. EZ Communications, a Fairfax, Va., broadcasting company with 15 radio stations, was expecting to raise $22 million in an initial public offering scheduled to take place the day after the market crash. Said Company President Alan Box: "These plans are now on hold for 60 days, six months, perhaps forever. We'll have to find other means of financing growth."

So will most other small firms. Unless the stock market recovers, young companies may have to go back to the venture capitalists that gave them seed money in the first place. But that source may be harder to tap, since venture capitalists generally make their investments in hopes of making a killing when the firm goes public. So whatever short-run damage the market crash produces, it poses an even more serious long-term threat: a slowdown in the growth of small companies and the rate of innovation in the U.S.

In many ways, the Crash of '87 has been like a sudden, savage typhoon. Major corporations, like large ships, are holding up well, but many small firms could be in real difficulty.

With reporting by Maureen O''Donnell/Chicago and Dennis Wyss/San Francisco