Prospects for state still solid despite buyouts by outsiders
Twenty-six years ago a young Massachusetts entrepreneur named Paul Fireman saw an opportunity in the sneaker business, bought a fledgling company called Reebok, and built it into a world-class business.
New Balance has managed to stay independent. E4
Now that Reebok has been sold, the latest in a long line of big Massachusetts corporations to meet that fate, two questions need to be asked: Does Massachusetts still have what it takes to create first-rate companies? And can those companies be survivors in the merger game?
In a relatively short period of time, John Hancock Financial Services, FleetBoston Financial Corp., and Gillette Co. have all been bought by out-of-town suitors. Boston's best-known department store, Filene's, is about to disappear, the result of a decision made by a distant parent company.
''It feels as if we are in a bowling alley watching all our pins fall down," said Bob Davis, a venture capitalist with Highland Capital Partners in Lexington.
Davis, ironically, was the chief executive of a Waltham-based search engine company called Lycos that was sold to a Spanish telecom firm at the height of the Internet boom.
Most economists and businesspeople believe Massachusetts can still produce winners.
''I don't think anything has fundamentally changed," said William Guenther, president of Mass Insight Corp., a Boston research firm. But Guenther and others acknowledge that producing winners and survivors may be somewhat more difficult today than it was in the past.
For one thing, they point out, Massachusetts has plenty of competition. In fields from mutual funds to software, other states and other countries have the same mix of talent and money that Massachusetts has. In venture capital, for instance, Massachusetts has traditionally been second only to Silicon Valley in its ability to raise money for start-up businesses. But in a recent survey, the New York area actually nosed out Massachusetts and New England for second place on the list -- an indication that this region can't rest on its laurels.
Size matters in the acquisition process, and for reasons that are difficult to pinpoint, Massachusetts historically has had trouble growing businesses beyond a certain scale.
''We have always been the farm team," said Howard Anderson, a longtime Boston venture capitalist. ''Our companies reach a certain size and then they get bought." The state's relatively high costs, and slow-growing labor force, could act as constraints on expansion here, economists say.
Virtually no one thinks the merger phenomenon will die down anytime soon.
''In today's world you either eat or get eaten -- there is no middle ground," said Davis.
But the optimists -- there are still quite a few -- argue Massachusetts can hold its own going forward. To back up their case, they make the following points:
Massachusetts has the world-class talent needed to build major companies. ''Our colleges and universities are not picking up and moving," said Paul Guzzi, president of the Greater Boston Chamber of Commerce. Boston, in particular, has a wealth of talent in healthcare, a business with a bright future. In its latest ranking of America's top hospitals, U.S. News & World Report placed two Boston hospitals, Massachusetts General and Brigham and Women's, on its honor roll. Boston was the only US city with two hospitals among the top 16 institutions.
Boston is not the only city losing major companies. The loss of Fleet, the city's last giant bank, triggered a good deal of hand-wringing locally. Yet many of America's biggest cities, including Dallas, Philadelphia, Chicago, and Los Angeles, no longer have locally headquartered banking giants. Regional department store chains like Filene's are going away everywhere. ''When I talk to my counterparts in other cities, they tell me they are experiencing the same things we are," said Guzzi.
A number of big Massachusetts companies have been buyers, not sellers, in the merger process. Boston Scientific Corp. of Natick, one of the state's fast-growing big firms, fits that description. In the past decade, the medical device company has made 26 separate acquisitions, most of them relatively small, to fill in holes in its product line. Just last year Boston Scientific paid $740 million for Advanced Bionics Corp., a company that makes devices to treat neurological ailments.
EMC Corp. of Hopkinton has pursued a similar strategy. The nation's biggest player in storage systems, EMC spent $4 billion over the past two years to acquire five small businesses, most of them in the software area. Largely through such deals, EMC has transformed itself from a hardware company to a firm that sells a mix of hardware and software.
The state's two biggest biotech companies, Genzyme Corp. and Biogen Idec Inc., both of Cambridge, also have used mergers to grow. Genzyme has done a series of medium-size deals. In 2003 Biogen bought Idec for $6.8 billion, creating one of the country's biggest biotech players.
''The future of the health sciences is exciting, but we have to be careful not to squander our lead there," Davis said.
Charles Stein can be reached at stein@globe.com. 