At A Glance
Minnesota Mining & Manufacturing Co.
Chairman and CEO: W. James McNerney Jr.
Key products: More than 50,000 products ranging from Scotch tape, Post-it Notes, and Scotchgard fabric protectors to respirators, optical films, insulation, drugs, and fuel cells.
Analyst quote: "It's not surprising that 3M's stock is doing well. It reflects the transformation of the company from an old, cyclical industrial [firm] to one of the growth industrials." -- Jeffrey Cianco, UBS Warburg
Looking ahead: McNerney is cutting about 5,000 jobs and consolidating operations in an effort to save $75 million this year and $300 million annually by mid-2002.
When the U.S. stock market's dizzying 10-year growth fling finally ended in spring 2000, Minnesota Mining & Manufacturing Co. (NYSE: MMM) -- like most other old-line American manufacturers -- nervously watched its share price flounder. The price wallowed in the $80-$90 range for much of the year, and entering December was still stuck at a lackluster $95. Trading volume averaged only between 1 and 2 million shares a day. But suddenly, on Dec. 5, 3M's world turned. On that day, the price of 3M shares skyrocketed to $119 on a trading volume of -- get ready -- 14.6 million shares. Securities analysts, who previously had been at best lukewarm toward the St. Paul-based conglomerate, raced to give 3M enthusiastic "buy" recommendations. Overnight, the company became a Wall Street darling. By June the price reached $127, an all-time high. In today's down market, an all-time high for a stock is almost unheard of. Most companies are ecstatic simply to see their share price hold even. What happened? The cause of all the excitement was the announcement that day that W. James McNerney Jr. had been named 3M's new chairman and CEO. If there's such a thing as star quality in a CEO, McNerney has it. He's a product of Jack Welch's CEO incubator at General Electric Co., where he learned at the feet of the maestro for 18 years. His last job there was as CEO of GE's Aircraft Engines business, which followed stints as head of GE's Lighting and Asia-Pacific Operations. McNerney did so well in each that he was a finalist in the hot competition to succeed Welch as GE chairman and CEO; after he was passed over, he became one of the most heavily recruited executives in industry. "3M has the right guy at its helm," declares Jeffrey Cianco, analyst for UBS Warburg LLC. "It's not surprising that 3M's stock is doing well," he says. "It captures the transformation of the company from an old, cyclical industrial [firm] to one of the growth industrials. McNerney is the catalyst. He's dictating a culture at the company that allows growth to be reinvigorated." Cianco recently upgraded 3M stock from a "buy" to a "strong buy" recommendation. He has company. In late October, the monthly survey of 15 analysts who follow 3M closely, conducted by Chicago-based Zacks Investment Research, shows that six also gave 3M stock a "strong buy" recommendation. Others in the survey rated the stock as a "moderate buy" or "hold." None recommended selling. Buoyed by analysts' favorable ratings, 3M's share price-although down from early-year highs as part of the overall market slide-has "continued to hold up well," says Cianco. This solid performance comes in the face of trying circumstances: The company, which counts 53% of its sales from outside the U.S., has had to reduce its earnings forecasts as a result of weakening markets and unfavorable currency-exchange rates in Europe and Asia. But 3M is dealing effectively with these woes, which also are hammering its competitors, observes another analyst, John Roberts of Merrill Lynch & Co. Inc. Despite the company's earnings buffeting, he assesses, its "restructuring and cost-reduction programs are on track. We also believe there will be significant further changes when 3M eventually has an economic wind at its back." Moreover, Roberts tells clients, "A stock split may be coming. He notes, too, that despite the sharp recovery of 3M stock this year, its price still has underperformed the S&P 400 since 1997, leaving room for further growth. The restructuring and cost-reduction programs cited by Roberts underpin 3M's strategy to confront its earnings challenge. McNerney is ideally equipped to implement them, points out Mike Trigg, a columnist for
The Motley Fool
, a provider of online financial information. "Coming from GE," wrote Trigg last summer, McNerney not only "knows how to run a diversified business, but also how to cut costs and increase efficiencies." Indeed, 3M is diversified. The firm started out making sandpaper in 1902, but now manufactures more than 50,000 products ranging from Scotch tape, Post-it Notes, and Scotchgard fabric protectors to respirators, optical films, insulation, drugs, and fuel cells. Last year its sales reached $16.7 billion. And, being big, 3M offers vast opportunities for efficiency gains. "We know we can't manage the global economy," McNerney told 3M's shareholders' meeting in May. "But we can manage ourselves, our new product introductions, and our costs. And in that way shape our success." So far, the most visible element of McNerney's restructuring and cost-cutting efforts has been his plan to reduce 3M's global employment by about 5,000 -- roughly 7% of the company's workforce. These cuts are expected to save $300 million annually by mid-2002. Beyond that, McNerney is implementing four specific initiatives. "Jim put them in place in February, shortly after he arrived," says David Powell, 3M's vice president of marketing. "They coincided with the economy starting to go sour and us seeing the impact on our business. Jim did a quick analysis. He was concerned that we weren't as prepared as we should be for the new environment." The initiatives are:
Global sourcing, under which 3M is leveraging its size, centralizing purchasing, and cutting its number of suppliers.
Indirect cost reduction, a program that emphasizes closer monitoring of prices and a clamp-down on travel and use of contract workers and outside services.
E-productivity, which features tighter management of the firm's Web investments.
"3M Acceleration," an effort to speed product commercialization by focusing R&D. Overriding each of these, however, is the fifth initiative: the installation of GE-like Six Sigma quality throughout the company. "Our other initiatives are shorter-term, tied to our three-year strategic plan," says Powell. "But Six Sigma is forever. It's the umbrella." With more than 100 projects already underway, he says, "we'll see some benefits this year, but in spades next year." What's next? Beyond its current earnings difficulties, 3M faces a longer-term problem-managing growth. As Cianco, the UBS Warburg analyst, puts it: "It isn't easy to accelerate growth over such a wide economic base. How fast can you grow a $16 billion company? That's the question 3M must answer." Part of the answer may be a major acquisition-speculation about which McNerney has not discouraged. He also has talked of the need to "shift our center of gravity" by adapting products, which traditionally have been oriented to the U.S. market, more closely to individual markets overseas. Additional strategy moves surely will come. As Merrill Lynch's Roberts has pointed out, "Mr. McNerney is only age 51. We would expect much more change over his hopefully long tenure."