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The Boston Globe OnlineBoston.com Boston Globe Online / Business / Globe 100
When old meets new

Internet companies, traditional companies thriving side by side

By Kimberly Blanton, Globe Staff, 5/16/2000

he old economy and new economy are thriving, side by side, in Massachusetts.

The old-new distinction, though cliched, continues to be used by the news media and analysts as shorthand for the myriad ways in which selling a tangible product to consumers differs from luring eyeballs to a Web site.

In the Bay State, ''We have both worlds coexisting,'' said Joyce Plotkin, president of the Massachusetts Software and Internet Council. And both are driving the state's economic boom.

Cautioning that she is not an economist, Plotkin said technology has brought ''fundamental change'' to the US economy. ''The good news is Massachusetts is one of the places leading the change.''

This year, for the first time, new-economy stars are sprinkled among the Fortune 500 companies in The Boston Globe's annual ranking of Massachusetts' publicly traded companies, based on various performance measures.

The stock-market value of start-up Internet companies - some public for a year or less - rocketed to heights that rival those of Massachusetts' stalwarts. For instance, CMGI Inc.'s value had soared to $31.7 billion as of March 31 - fourth behind EMC Corp., Gillette Co., and FleetBoston Financial Corp.

Created by entrepreneur David Wetherell as a way to market to college students, Andover-based CMGI was transformed into an Internet investment firm, and Wetherell's name became synonymous with the new economy. While its stock leaped, Wetherell's company earned far less last year than did EMC, Gillette, or FleetBoston.

Standard-bearers of the old economy such as Eaton Vance Corp., DeWolfe Cos., Staples Inc., and Talbots Inc. were prominent names in the main Globe 100 ranking of companies, those which demonstrated the best financial performance last year. These old-fashioned companies sell or make things - mutual funds and real estate, paper clips, and smart, conservative clothing - and earn hearty profits doing so.

But even the line separating old from new is beginning to blur.

Brick-and-mortar companies, under pressure from online retailers with aggressive advertising strategies, turned to the Internet last year. Framingham-based Staples, for example, offers a Web site, Staples.com, to boost sales. EatonVance.com provides investors with quick access to their accounts.

And many old-line companies are increasingly doing business over the Internet with their suppliers. While invisible to customers and clients, these activities are helping to bring the two economies together.

Change has been quickest in the technology industry, though.

In Massachusetts last year, 36 mostly high-tech companies went public in an initial public offering market that had achieved record volume before Thanksgiving. According to CNet News.com, 370 initial public offerings by US technology companies raised about $39.6 billion last year - $10 billion more than was raised by nontech companies.

Soon after going public, some high-flying, money-losing companies in Massachusetts had grown to outsized proportions: Five months after selling its first stock in October 1999, Chelmsford-based Sycamore Networks Inc.'s market value had soared to $30.5 billion on March 31. Akamai Technologies Inc. of Cambridge went public around the same time, its value leaping to $14.9 billion by March 31. Both companies provide Internet software, and neither is profitable.

Another money-loser that rode the technology boom last year was Andover-based Engage Technologies Inc., an online marketing firm that offered its stock in July. Its worth on March 31: $4.1 billion. Allaire Corp., a Cambridge Web company, eked out a $1 million profit in the fourth quarter of last year. Its worth in the stock market 15 months after selling shares to investors: $2 billion.

In recent weeks, the Nasdaq Composite index has dropped into bear-market territory, causing the stock of fragile start-ups to sink 30 percent or more from their March highs. Fred Breimyer, chief economist at State Street Corp., said such risks to investors are a cost of innovation, which has fueled economic change throughout Massachusetts' history.

''One of the pitfalls we've seen in other times is that investors infuse [new technology] with great valuations, only to find out they can't earn the returns implicit in those valuations,'' Breimyer said. ''That was true of the railroads in the 1840s - people got carried away and were impacted negatively. That could happen here again.''

Behind the dazzle of Internet stocks, hundreds of Massachusetts technology companies are making profits. Technology, investment, and consumer businesses - all three played a role in an economic expansion that has driven the state's unemployment rate down, to 2.4 percent in March.

Unprecedented increases in the stock market last year helped a low-profile mutual fund manager in Boston ascend to number one among Globe 100 companies.

(Globe 100 companies are ranked by a composite score based on sales volume in 1999, return on average equity, and one-year change in revenue and profit margin.)

Eaton Vance, which has $44 billion in assets under management, is smaller than Boston mutual fund behemoths such as Fidelity Investments and Putnam Investments. But Eaton Vance proved agile in a strong market, and avid investor interest boosted its 1999 revenue almost 40 percent, to nearly $360 million. It posted a 47 percent return on equity - the second-highest for any public company in the state.

Other top performers were Massachusetts retailers and consumer products companies. Numerous retailers improved their position in The Globe 100 rankings over the previous year, at a time when US consumer confidence had reached all-time highs: BJ's Wholesale Club Inc., Tweeter Home Entertainment Group, athletic shoe maker Saucony Inc., Talbots, Neiman-Marcus Group Inc., and Staples.

Technology names dominated The Globe 100's top five - names that would be unfamiliar to many consumers. Two of those companies, Analog Devices and RSA Security Inc. (ranked second and third, respectively) saw large increases in their profit margins last year.

Norwood-based Analog Devices improved its profit picture amid an explosion in sales of its computer chips used in wireless communication systems. Bedford-based RSA Security altered its mission to keep pace with the demands of the Internet age, expanding its security services to e-commerce applications.

EMC, a standout for several years, ranked fourth in The Globe 100. The Hopkinton maker of computer-storage systems continued to deliver strong profits in 1999; net income has tripled in four years. Revenue last year grew 23 percent, no small feat for a Fortune 500 company that sold $6.7 billion worth of its refrigerator-sized boxes last year.

Fifth behind EMC was Needham-based Brooktrout Inc., which provides hardware and software used in transmitting data and voice. The company boosted its profit margin amid a 40 percent increase in revenue. Brooktrout and RSA Security are two examples of existing technology companies that are adapting to breathtaking change in their industries.

The Bay State has ''spawned a lot of new companies with innovations and new ideas,'' Plotkin said. ''That's the strength of Massachusetts.''


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