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For Investors, a Coke and a Frown

Frankly, it's beginning to get embarrassing, like watching a presumably competent Shakespearean actor flub a line that even the audience knows by heart: "Good night, good night, parting is such sweet sorrow; that I shall say good night till it be ... uh ... Thursday?"

From the Olympic-class gaffes department of CEO Land, we speak this week of the ongoing public spectacle of Douglas Ivester, 52, chief executive of Coca-Cola (KO), a man whose tin ear for public utterances seems well on the way to costing his shareholders billions.

Meanwhile, the evidence just accumulates that Ivester can't seem to make a public comment about his company these days without planting a Bunyan-sized foot in his mouth. It's too bad, too, because Ivester is otherwise doing an OK job at the helm of one of the world's biggest and most successful consumer brand companies.

As we'll see in a minute, it has been through no fault of Ivester that Coke stock has come in for a yearlong hammering. Driven to unrealistic heights by Wall Street's swooning love affair with Ivester's predecessor, Roberto Goizueta, Coke has now returned to earth with a thud. The trigger: some momentary business reversals in the consumer markets of Asia and Latin America, plus a couple of merger deals that have run into trouble, along with some ruffled feathers among local bureaucrats in several countries where Coke does business.

Those setbacks have knocked its stock down from the high 80s to the low 60s in the past year, and at a year-ahead price-to-earnings ratio of a still-lofty 40, it may yet have further to fall. But Ivester's idea of talking it back up has been to marginalize and belittle every setback and reversal the company has experienced. And that in turn has made him come across as a testy and thin-skinned phony. (Everybody knows it's a big deal when a major merger comes unstuck.) What's worse, his pose of indifference has simply whetted the appetites of antitrust regulators abroad -- where 63% of Coke's revenue comes from in the first place -- to redouble their efforts against him.

In case you haven't been following the festivities, Coke's problems began two years ago when the company ran into French regulatory opposition to its proposed merger with Pernod Ricard, the owner of the Orangina soft-drink brand. Then came further European opposition when the company announced plans in 1998 to acquire a number of brands from Cadbury Schweppes, the tonic-water bunch.

Then, in June, things got even worse when Coke's Belgian bottling operation somehow managed to let a few cases of Coke slip out the door with some kind of paint in the cans and some kids got sick. Finally, in July, Coke bottling plants and offices across Europe were raided by antitrust regulators looking for evidence of schemes by the company to suppress competition in the European soft-drink market.

And through it all, Ivester hasn't missed a single opportunity, when asked by the press, to wave it all away as the most errant sort of pish-posh nonsense ... as if pouring paint down the gullets of school kids were no big deal -- any more so, no doubt, than having antitrust cops from the Common Market come storming through the company's factories.

When reporters in New York asked Ivester to comment on the raids, he quite astonishingly described them as "pretty routine" and "not something I'm very exercised about."

Well, he'd better learn at least to sound exercised, or his minders had better get a muzzle on him fast, because his calculated stance of nonchalance toward Coke's quickening public image problems is doing the company no good at all. The July 19 issue of Fortune magazine has portrayed him as a man of almost dictatorial inflexibility, refusing to back down in the face of government opposition to Coke's business initiatives from Australia, Latin America and Europe. The magazine called his strategy "stupid" and made him seem like a kind of American version of Marie Antoinette when, as Fortune tells it, he dismissively assured Frenchmen that a fungicide that had turned up in some Coke wasn't harmful and, in effect, to go ahead and drink it anyway.

We should care about Coca-Cola -- and Ivester's ability to run the place -- if for no other reason than Coke is so huge and valuable as a business. For their part, investors seem to have taken the cut of his jib already. Twelve months ago, Coca-Cola was worth at least $220 billion on Wall Street -- which is to say, more than any company in America except Microsoft (MSFT) or General Electric (GE). Coke had (and still has) more than 160 brand-name soft drinks on store shelves in more than 200 countries. It had (and still has) nearly $19 billion of revenue, $3.5 billion of earnings, a $1.5 billion dividend payout, $19 billion of assets and $8.4 billion of equity. What it hasn't got anymore is a market cap of $220 billion.

Since the summer of 1998 -- a period beginning when Ivester had been on the job for nine months -- the value of Coke's shares has dropped by nearly 30%, wiping more than $65 billion from the portfolios of investors ranging from little old ladies to Warren Buffett. Meanwhile, the value of the Dow Jones Industrial Average -- of which Coke is (or at least was) the second-largest stock in the index -- has risen by nearly 20%.

Coke, as you may recall, was headed until two years ago by Roberto Goizueta, who was struck down with lung cancer in the autumn of 1997. But in the 16 years before then, Goizueta built Coke from a $5 billion market cap into by far the biggest soft-drink company on earth, with an almost unbelievable 5% market share for soft drinks, not just in the U.S. but worldwide.

Those in the know about how Goizueta ran things at Coke say his secret weapon was actually Ivester, who had been the company's president and chief operating officer since 1994. Goizueta devoted himself to sucking up to Wall Street while Ivester actually ran the business. By general agreement, it was finance man Ivester who built the Coca-Cola distribution system into the juggernaut it has since become, with freestanding and separate, but closely affiliated, bottling companies doing the actual work of mixing and packaging the end product and shipping it to customers.

Through a tricky accounting maneuver that Ivester is said to have played a key role in designing, Goizueta offloaded the heavy costs -- and the accompanying debt -- involved in producing Coke onto a group of independent but closely affiliated bottling companies. That freed Coca-Cola to command a much higher multiple on Wall Street, and the stock took off, rising from a split-adjusted 5 per share in 1986, when the biggest of the bottling deals was engineered, to its high last summer of more than 80.

With the number of shares increasing during the period by more than 700% through splits alone, the company's market value surged from $4 billion to more than $220 billion, and Goizueta found himself lionized in the press as one of America's most admired chief executives.

Yet even as Ivester's performance has continued to help pound Coke's stock lower, the global soft-drink market has begun to improve, raising the chances for a pop in the stock once investors realize how oversold it may have become by the end of the year.

Because Coke's shares are so widely held, Wall Street covers the stock closely, with 19 analysts tracking the company day to day. Wall Street now expects the company to earn 32 cents a share in the fourth quarter of 1999, which is up 33% from the depressed fourth quarter of 1998. Then, in 2000, the Street expects earnings to rise to $1.58. On that basis, Coke's stock is now selling for 40 times year-ahead earnings. That's quite a fancy multiple for a company that's had flat revenue for four straight years. By comparison, archrival Pepsico (PEP) is selling for only about 29 times earnings, and though the two companies aren't by any means clones, the numbers do suggest further weakness in Coke's price.

Be that as it may, one cannot easily think of another example in which a multibillion-dollar company with such high visibility among the world's consumers has been headed by a man more in need of coaching lessons in how to express corporate humility -- even if he doesn't mean a word of it. If Ivester keeps running off at the mouth the way he has been, the day may soon be upon us when Coca-Cola really is underpriced.

Christopher Byron's column appears in the New York Observer, and he also writes a Wall Street and investing column for Playboy. He is the former assistant managing editor for Forbes, the Wall Street correspondent for Time and the Bottom Line columnist for New York. Byron holds no positions in any of the stocks discussed in his column. While he cannot provide investment advice or recommendations, he welcomes your feedback at commentarymail@thestreet.com.

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