Slump Spurs Grab for Markets

By LESLIE SCISM, MATTHEW DOLAN, ANN ZIMMERMAN and MICHAEL CORKERY After spawning legions of victims, the recession is forging a class of winners. J.P. Morgan Chase & Co. is raking in money from depositors -- a bank's lifeblood -- as weaker institutions teeter. Golub Capital, a little-known lender to smaller corporations, has zipped to the front of its field ahead of flailing CIT Group Inc. and General Electric Co.'s GE Capital unit. Ford Motor Co. is luring car buyers away from General Motors Co. and Chrysler Group LLC. Bed Bath & Beyond Inc. hung Linens 'n Things Inc. out to dry. Companies like these haven't "won" yet, with the economy still in the wringer. But the firms prevailing so far tend to share a few traits -- including a cushion of cash relative to their peers, a readiness to spend it and a willingness to go for the jugular -- that give them an edge for the moment at least. New York Life Insurance Co. took a sizable hit from the financial crisis, losing $3.5 billion on its investment portfolio last year, triggering a loss for the year. However, because of its relatively conservative investments, it fared much better than rivals like giant American International Group Inc., which took a huge U.S.-taxpayer bailout. New York Life executives went on the offensive. As the crisis raged, they told the firm's 11,000 insurance agents they had a "moral obligation" to explain the firm's strength to clients. The company gave agents a document ticking off rivals' woes and loaded them with materials describing New York Life's fat pile of rainy-day capital and triple-A ratings. In the first quarter, New York Life leapfrogged over AIG, Hartford Financial Services Group Inc. and Lincoln National Corp. as one of the nation's top sellers of life insurance and annuities. Market share grew to 5.4% in the quarter from 3.6% a year earlier, according to data from ratings firm A.M. Best Co. analyzed by The Wall Street Journal. "In normal times, you would not see those type of market-share gains," says Larry Mayewski of A.M. Best. Recessions routinely upend industries. Downturns "are very fertile fields of opportunity," says Nancy Koehn, a business historian and professor at Harvard Business School. Winners are the ones better at "walking into the space vacated by rivals," she says, and at tracking how customers behave in tough times. In the Great Depression, Campbell Soup Co. launched new lines that are still big today, including chicken-noodle soup. Revlon Inc. nail polish, also launched in the 1930s, showed that shoppers will embrace small, affordable luxuries in tough times. Bain & Co. analyzed 750 companies just before and after the 2001 recession, ranking them on sales growth, profit margins and shareholder returns. It found more companies showed major change (gains or declines) from 2000 to 2002 than from 2003 to 2005, a relatively stable period. Related Reading Golub Takes Lead in Leveraged Buyouts Vanguard Funds Find Buyers Winners aren't "crazy risk takers," says Darrell Rigby, a Bain partner, but are prepared to "take prudent risks." As the economy tanked last year, Bed Bath & Beyond launched an attack on Linens 'n Things, a major rival. Linens 'n Things had a weak spot: Back in 2005 it took on heavy debt, amid the leveraged-buyout boom, to become a private company. Around that time, it also announced a growth strategy focused on 100 key stores. Bed Bath & Beyond "figured out what 100 stores Linens was focusing on, and decided to destroy them," says Gary Balter, retail analyst at Credit Suisse. The chain matched Linens' deals and discounts dollar-for-dollar. It issued coupons galore, mimicking a Linens strategy. It was a costly bet, especially as demand for home furnishings shriveled amid the housing crash. Bed Bath & Beyond's advertising costs grew to 3.7% of sales last year, from 3% in 2006. The payoff: Linens 'n Things went out of business this past winter. After Linens closed its stores, Bed Bath & Beyond cut back on flooding the market with coupons, says Colin McGranahan, retail analyst at Sanford C. Bernstein. Bed Bath & Beyond executives declined to be interviewed. "We will be able to look back at this period as one which afforded us an exceptional opportunity to continue to gain market share," Chief Executive Steven Temares told analysts in a June conference call. In eliminating a weak competitor, the company claimed a bigger bite of a smaller pie. For the quarter ended May 30, sales at Bed Bath & Beyond rose 2.8%, compared with a drop of 13% for the home-furnishings sector. One key to surviving any recession is to have ready access to cash, a fact amplified the past year as lending dried up. Both Chrysler and GM entered the downturn in tough financial shape, despite some cost-cutting, and Ford didn't seem far behind. Last October, all three sent their CEOs to Capitol Hill to plead for a taxpayer rescue. A few months later, however, Ford broke from the pack and ditched its request for a $9 billion government credit line and set out to restructure its debt. Ford's advantage: Back in 2006, it had borrowed $23.5 billion by basically mortgaging almost everything of value -- including the Ford "blue oval" logo -- a radical move that showed just how dire the auto industry looked. However, having that cash when credit markets froze two years later, in late 2008, is the main reason Ford avoided the bailouts and bankruptcy filings that hit GM and Chrysler, analysts say. Amid widespread unpopularity of taxpayer bailouts for car makers and banks, Ford launched a campaign trumpeting its self-reliance. On the day GM said it would file for bankruptcy, Ford said it was boosting car production, a public demonstration of relative strength. Ford's share of U.S. light-vehicle sales in July was 15.9%, up 2.2 percentage points from a year earlier, while GM's fell 1.6 points to 18.8%, said Autodata Corp. Chrysler's share edged up slightly, to 8.9%, aided by rebates it offered on top of the government's "cash for clunkers" program. The top vehicle sold in the clunkers program in July was a Ford Focus compact. Overall, Ford's market share among regular car buyers (as opposed to fleet sales) has grown in nine of the past 10 months. As with Ford, the survivors in the home-building industry so far tend to be the ones that -- for whatever reason -- reacted a bit earlier than their peers. Now, a few of the surviving home builders are cautiously starting to feed on their dead rivals. "It was not a feat of strength to survive,'' said Robert Toll, the 68-year-old chief executive of Toll Brothers Inc., who led the company through three previous downturns. "It was following the experience we had gained in past housing recessions." Toll Brothers and a few other builders stopped buying land in mid-2006, as the market showed early signs of strain, even as others plowed ahead. This let Toll stockpile cash by eliminating a major expense. Miami-based builder Lennar Corp. also accumulated cash by slashing home prices relatively early. Now, Lennar, Toll and others are in the market to snap up land at deep discounts. Lennar, for instance, recently bought back a stake in a huge parcel of California land that it had sold two years ago -- at the top of the market. The deal values the land at about 18% of its value when Lennar sold it in 2007. Toll, too, has bought land in recent months. Mr. Toll says he's being cautious in case housing slumps further. "We would rather be safe than sorry,'' he said in an interview last week. Another lesson of the downturn: Surviving home builders financed their operations with debt that matured five to seven years out, providing them some breathing room. By comparison, struggling builders often had loans tied to specific real-estate developments now in default. That will likely force them to sell off the land at fire-sale prices. "That's one of the places where we will pick up [land] in the future," Mr. Toll said. Credit Suisse analyst Dan Oppenheim estimates that over the next few years the largest firms, led by a dozen or so publicly traded builders, will control as much as 35% of the new-home market, up from about 25% before the crisis. The business of mortgage lending is also seeing a dramatic power realignment, partly due to bank acquisitions hammered out when housing-crisis fear was at its highest. Last fall, as stocks plummeted, Wells Fargo & Co. agreed to snap up Wachovia Corp. And in January 2008, Bank of America Corp. agreed to buy ailing mortgage lender Countrywide Financial Corp. for a fraction of its peak value. Bank of America and Wells Fargo controlled nearly half of all mortgage originations in the first six months of this year, according to Inside Mortgage Finance. By contrast, in 2007, the top three lenders accounted for 37% of all mortgage originations. Countywide, the top mortgage lender for much of the boom, never crossed 20%. Wells Fargo's market share jumped to 24% at the end of June, from 11% two years ago. Bank of America's share rose to 21% from 6.8% two years ago. Lenders like Bank of America and Wells that didn't depend as heavily on exotic mortgage loans -- tongue twisters like pay-option adjustable-rate mortgages with negative amortization -- are now "picking up market share because the market has moved in their direction," says Fred Cannon, an analyst at Keefe, Bruyette & Woods. The acquisitions may not prove to be home runs. Wachovia had certain risky mortgages and a significant portfolio of commercial loans that could leave Wells vulnerable if business stays bleak. A Wells spokeswoman said Wachovia's loan portfolio "has been performing within our expectations." Bank of America's mortgage and insurance arm lost money in the second quarter, but mortgage-refinancing volume was up significantly. Countrywide "has made a positive contribution to the company's financial results in the first half of the year," said spokesman Jerry Dubrowski. New York Life entered the financial crisis with one of the insurance industry's fattest capital cushions, along with a traditional, if boring, product line. It had eschewed more profitable but riskier offerings, such as annuities with investment-performance guarantees tied to the stock market, which some rivals sold. Last year, as stocks tanked world-wide, rival insurers took a major hit. Some were forced to boost their reserves and capital to assure regulators they could make good on these investment guarantees. And AIG took a major U.S.-government bailout due to souring bets on particularly exotic investment products. With AIG's and other insurers' woes in the headlines, it suddenly became easier for New York Life to sell its reputation for caution. In good times, a message of financial stability "falls on deaf ears," says New York Life President Ted Mathas. "But in times of stress," he says, "people are listening." On Sept. 24, as Congress debated a bank-bailout plan, Mr. Mathas called an emergency meeting of the company's 13-person executive-management committee. Among other things, they talked about the fact that some clients were fretting whether even the strongest life insurers could be dragged under. Mr. Mathas recalls saying to the group, "We're built for times like these." The phrase became a sort of corporate rallying cry. The insurer changed its marketing message. For much of the prior year, its ads -- full of ice-cream cones and teddy bears -- urged people to buy coverage to protect loved ones. In the crisis, the message shifted to emphasize the firm's financial footing. The company upped its 2009 advertising budget by 24% over 2008. Meanwhile, as insurance agents talked to clients, they found many "in panic mode" with questions about investments from places other than New York Life, says Chris Blunt, a top executive. The company, which is owned by its policyholders, armed its agents with talking points specifically to address issues like these. By the second quarter, many clients were putting extra money into their insurance policies, viewing it as a safe haven, Mr. Blunt says. In the first quarter, New York Life jumped to second place, from ninth, in revenue from life-insurance premiums and annuity deposits. MetLife Inc. held on to first place while expanding its market share, and AIG tumbled a few spots to sixth, according to the A.M. Best data. "This is a crazy environment," Mr. Mathas says. "We probably never had a period where we could show our relative differentiation better."