Of Oil and Paper

By James J. Cramer

Mobil spent millions of dollars trying to convince us that it had the cleanest gasoline, one that made your engine run smoother. Union Camp spent millions of dollars trying to convince us that it had the cleanest paper, Great White, that made your copier run smoother. In the end, few consumers were willing to pay more for a particular brand of either common commodity--gasoline or plain white paper. Now both companies are succumbing to longtime rivals, Exxon and International Paper, in deals that were unthinkable just a short time ago. Suddenly, neither Mobil nor Union Camp could be assured of making money for shareholders any other way, so they just gave up and sold out.

Union Camp and Mobil had simply lost control of their fate. For years these commodity companies had gone through booms and busts along with the world economy they played in. But for the past decade it has been nothing but bust. The new economy, with its focus on cost cutting and price competition, has tamed inflation to the point that each year Mobil and Union Camp faced progressively lower real prices for their products. Both companies had done pretty much everything they could to wring out costs, but it still wasn't enough.

Mobil, by dint of its huge cash flow, was always able to offer a steady stream of dividends, and Union Camp rewarded shareholders with a greater than 4% yield before the merger. But in a stock market mad for the kind of raw growth delivered by the likes of Cisco, Intel and America Online, both Mobil and Union Camp seemed like vestiges of a capitalist era past.

With no hope of even a cyclical upturn in the plain-paper business, Union Camp was shunned by the investors that most influence stock prices: the mutual funds. Before the bid by International Paper, Union Camp was one of only 12 among the 66 industrial companies in the S&P 500 that still traded below its 1987 high--after a decade when that index quadrupled.

The big winners from the demise of Mobil and Union Camp will be the remaining players--assuming the deals are approved by shareholders and regulators. The only way to get pricing under control is to take out capacity. Exxon's takeover of Mobil could lead to somewhat higher gas prices, as a price-cutting competitor gets vanquished. And International Paper's stock looks that much better, knowing it won't have to compete with Union Camp. Both companies can strip sales, marketing and technology spending out of the budgets of their prey. It is remarkable how much duplication and overlap can exist among competitors, enabling both companies to pay substantial premiums over what the marketplace was willing to pay for the stand-alone entities.

Both mergers had me scurrying to find other potential targets in these industries, but I thought better of it. Unless management at other laggards in paper and gasoline felt similarly inclined to boost shareholder value, I might be stuck in underachieving stocks for some time to come, as the pricing pressures seem only to be increasing. In the end, the victors will get the spoils: Exxon and International Paper will buy themselves several years of outperformance. In general, though, investors should look for companies that sell products and services with unique qualities, rather than commodities like fuel and paper.

Cramer manages a hedge fund and writes daily for thestreet.com an investing website. He holds investments in AOL, Cisco and Intel. Nothing in this column should be construed as advice to buy or sell stocks.