Is the Dow at 5-Digit Levels for Good?


On this day in economic and business history...

The Dow Jones Industrial Average broke past 11,000 points for the first time in its history on May 3, 1999, closing at 11,014,69 points. Despite worries that this might be the index's last major milestone for years to come, Ralph Acampora of Prudential Securities said the new record was "beautiful ... and it's going to last a long time." However, Charles Clough of Merrill Lynch told CNNMoney he worried that the market would become overextended.

Surprisingly, one of the biggest worries allayed on this day was that of "uncontrolled U.S. economic growth" -- perish the thought! The National Association of Purchasing Managers' index, a gauge of manufacturing activity, came in at 52.8, well below expectations of 55. It seems like another lifetime, when market watchers became unnerved by the thought of an economy growing too quickly.

The surge past 11,000 was the fastest 1,000-point gain in history, reached a mere five weeks after the Dow had surpassed 10,000 points. Prior to that, the record time had been a four-month rocket ride from 6,000 to 7,000 points. Unfortunately for investors, Dow 11,000 would be difficult to overcome. After topping out at the start of the following year, the Dow would spend a decade bouncing from peak to valley, reaching 11,000 two more times: at the start of 2006 and in the spring of 2010. No one can yet say whether the third time will be the charm and the Dow will leave its 11,000-point plateau behind forever.

A century of bleach
From Clorox's own corporate history: "On May 3, 1913, five California entrepreneurs invested $100 apiece to set up America's first commercial-scale liquid bleach factory, which they located in Oakland, on the east side of San Francisco Bay. In 1914, they named their product Clorox bleach." The Clorox Company was originally known as the Electro-Alkaline Company, and its most famous product was named as a portmanteau of its primary ingredients, chlorine and sodium hydroxide.

A year later, the new company offered 750 shares at $100 each in a private stock-offering. Its initial public offering, on the San Francisco Stock Exchange, took place in 1928. By that time, its products were available in 26 states, and it had recorded more than $450,000 in before-tax profits for the previous year. Its IPO resulted in a market cap of $4.3 million, with shares worth $21.50 at first.

Clorox became the focal point of a major antitrust lawsuit following its 1957 buyout by consumer products giant Procter & Gamble . The court ruled in favor of the government, establishing a precedent in that case holding that a large and diversified competitor cannot buy out a smaller company with dominant market share in a particular niche. As a result of that decision, P&G divested Clorox as an independent company again in 1967. The newly independent Clorox gradually began its expansion into a diversified consumer-products company thereafter, although many early efforts didn't quite pan out. Those that succeeded were quite good to long-term Clorox shareholders: From the company's IPO to the centennial of its founding, Clorox's market cap has grown by 9.7% per year.

Breaking the studio system
P&G is far from the only company to lose to the Federal Trade Commission for antitrust activities. On May 3, 1948, the U.S. Supreme Court decided in the government's favor in the case of U.S. v. Paramount Pictures, ruling that the seven major motion-picture studios were guilty of illegally monopolizing movie production and distribution. At the time, each of the Big Seven not only produced the vast majority of films shown in the country, but also owned or controlled nearly all the theaters in the country, and through this vertical integration they were assured of getting their films shown as widely as they wished.

This was understandably intolerable to independent film-producers. A cadre of leading independents, including Charlie Chaplin, Orson Welles, and Walt Disney -- who had been forced to distribute films like Snow White, Pinocchio, Bambi, and Alice in Wonderland through RKO Pictures, despite having early on amassed enough profit to be a legitimate distributor in his own right -- pressured the government into pursuing the lawsuit, which nearly fell apart in the early 1940s following a weak compromise deal. Once the Supreme Court decided against the Big Seven, it effectively ended the era of major studio control, and a golden age of cinema emerged as filmmakers were freed to take greater risk and strike individual deals with the now-independent theater chains.

The big get bigger (but maybe not smarter)
and Compaq completed a merger of equals (or very nearly equals) on May 3, 2002. Originally valued at $25 billion when first offered as an all-share transaction, the deal eventually dwindled to a final value of $18.7 billion, as it was completed near the bottom of the post-dot-com market slide. The deal's value had already dropped by $5 billion the day after the deal was announced in the fall of 2001, reflecting widespread investor apprehension over a combination of two of the world's largest PC-makers. After the deal was completed, the new HP became the world's top-selling company in servers, PCs, and printers, with more than $87 billion in combined annual revenue and operating earnings of $3.9 billion.

Despite many concerns, the new HP initially proved to be an ideal combination -- at least for a while. A number of commentators thought the two companies, despite similar business models, had fundamental cultural differences. However, Compaq's sales and marketing strategy took hold inside HP without much visible friction, and HP brought in enough complementary size to cover its weaknesses and enhance its strengths. As the undisputed PC-making champion of the world, HP actually became a better value to investors after the deal closed. In the five years that followed the merger, HP's stock gained more than 160%, making it one of the Dow's best performers through that time period.

Over a longer time frame, the deal's value began to unravel. The emergence of mobile computing and the commoditization of PC hardware significantly undermined HP's business model, which was little changed in 2012 from its focus in 2002. The company's stock still held an advantage over the Dow 10 years later, although by this point it had shrunk to a 60% gain against the Dow's 30% gain -- good, but hardly great. Investing in 2007, at the halfway point of the deal's first decade, would have been disastrous. The Dow, essentially flat from 2007 to 2012, still vastly outperformed HP, which suffered a 40% decline as its earnings began to collapse.

The massive wave of mobile computing has done much to unseat the major players in the PC market, including venerable technology names like Hewlett-Packard. However, HP is rapidly shifting its strategy under the leadership of CEO Meg Whitman. But does this make HP one of the least-appreciated turnaround stories on the market, or is this a minor detour on its road to irrelevance? The Motley Fool's technology analyst details exactly what investors need to know about HP in our new premium research report. Just click here now to get your copy today.

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