FALLEN COMPANIES

Can well established companies that have fallen get back in the race? One expert thinks not. While the companies in early growth stages may do it all the time, many established firms may never get a second chance once they fault their fundamentals. "What one has to question is the odds against it becoming a super stock once again and the clear demonstrated leader in its field. (Donaldson, Lufkin, Jenrette)" The Harvard Business Review notes that the sins of some of these companies include inconsistent product quality, slow response to the market, lack of innovative, competitive products, uncompetitive cost structure, inadequate employee involvement, unresponsive customer service and inefficient resource allocation. Further, management is solely to blame. And faulty management's remedies just won't cut it. The review says that the negative, risk adverse, bureaucratic work environments that flourished in the decades of easy growth, but now that undermine the company's competitive performance."

Yes, some managers, analysts, etc. say that you buy companies when they are down and wait for the turnaround. Quite true, but if the fundamentals are bad, bad and bad, the turnaround just won't happen.

Fallen companies: (Standard and Poors 2003) 75% of companies whose credit ratings fell below investment grade in the past 16 years never bounced back from junk status. Most of the companies were in the financial, retail and utility industries.

The research covered 383 companies from around the world that fell to junk status between 1987 and 2002.

A record 67 companies dropped to below investment grade in 2002 compared with only 6 in 1994. S&P expects a large number in 2003 as well.