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Equity Research

Pan-European Pan-Europe/Strategy 22 October 1999

The New Millennium Project

David Mathers
44 171 888 0842
david.mathers@csfb.com
New Millennium Project

Page
7DEOHRI&RQWHQWV Introduction and summary 3
Preface 3
Executive summary for European stocks 3
Boom or doom? 4
Ten questions for the New Millennium 4
Mental models for successful investment 5
A brief history of long-run equity trends 6
European renaissance: The new corporate landscape 7
Global cement: trends in the New Millennium 8
Global chemicals: the next five to ten years 9
Speciality chemicals: aggressive consolidation
will characterise the next decade 10
Global energy group: same cycle, different century 11
European insurance: trends beyond 2000 12
European media: media in the digital millennium 13
Global paper & forest products 14
Global pharmaceuticals: new technologies
and expanding markets beckon 15
Retail: emergence of truly global players 16
Technology: telecommunication equipment 17
Technology: internet and new media 18
Global telecommunications overview 19

For tickers, prices and recommendations of listed companies mentioned in this

report, see page 20.

-2-
New Millennium Project

Introduction and summary

Preface
Our look at the next century represents the work of a number of analysts,
economists and portfolio strategists from all over the world. We asked our analysts
to think about their industries and their companies in a longer-term perspective
and to place them in the context of the next five to ten years. Often we do not get
the opportunity to think of industries or companies over the long term. As you will
see, a number of our analysts truly enjoyed the task and produced very thoughtful
and insightful work. Yes, there are investment recommendations, but we believe
the real value of the work is in the thinking about where the industries are going.
One analyst, for example, took a 20-year perspective, which is intriguing in a world
that worries about the whisper number and the next quarter.
Our strategists and economists looked at a variety of topics. We hope you enjoy
the thoughts about the New Economy being not so new and about the 200-year
cycle in equities. Maybe history does repeat itself.
Al Jackson
Global Director of Equity Research

Executive summary for European stocks

This document summarises the key conclusions of the New Millennium Project for
European stocks. From the 45 industry theme pieces, we have prepared 16 notes
that are most relevant to the European markets. This includes both research that
is globally important—work on the internet and New Economy in general—and
conclusions that specifically affect European stocks. For the sake of brevity, we
exclude research that relates purely to domestic US or Asian industries.
• Our strategists suggest that while the US market looks overvalued on
conventional measures, the impact of productivity gains and technology-driven
deflation justifies the excess returns that have been earned in this market and
bodes well for Europe. European leadership in mobile telecommunication
services and telecom equipment is generating its own ‘fat tail’ that is beginning
to match that seen in the US ROIC distribution.
• Our US Investment Strategist argues that different mental models must be
applied to analysis in this environment. Conventional approaches
underestimate the potential returns from successful New Economy
companies; we highlight that there are three clear industry winners: technology
(including telecoms), healthcare/pharmaceuticals and financial services.
• Of the long-term industry winners highlighted by our analysts, a number are
already on the CSFB European Focus List, particularly Nokia, Ericsson, Munich
Re and ING. The structural bias towards technology and telecoms in the Focus
List seems ever more appropriate in the light of the arguments presented in the
New Millennium Project. We are taking this opportunity to upgrade Glaxo
Wellcome to the Focus List: the longer-term potential in its drug pipeline more
than offsets current patent expiries that have contributed to a difficult 1999 stock
market performance.
David Mathers Stefano Natella

-3-
New Millennium Project

Boom or doom? Global Economics Team

Ten questions for the New Millennium
*LOHV.HDWLQJ 1. Are today’s changes unprecedented? No, endogenous
 technological growth is a long-standing phenomenon. This is
JLOHVNHDWLQJ#FVIEFRP more about a return to trend from the era of central control.
2. Is the knowledge economy really different? Yes, the IT
-RQDWKDQ:LOPRW revolution enhances every other technology invented,
 changes the price mechanism and, not least, tends to be
MRQDWKDQZLOPRW#FVIEFRP associated with increasing rather than decreasing returns.
3. Is US productivity growth peaking? No, the US is close to
an acceleration point in the benefits from its technology
([KLELW investments. Technology adoption normally follows an ‘S-
7KH6FXUYHDQGUHDOUHWXUQV
curve’, and this revolution should not be an exception.
4. Is the US stock market overvalued? Yes, on conventional
8=-
measures. However, the market is probably discounting the
:-
8' 6 I E P) U Y MX]
acceleration point in US productivity, the full benefits of which
9 6 I XY V R W
( have yet to be seen in today’s cash flows.
3
64

+ ( 4 4 I V ' E T MXE
5. How is industrial structure changing? Into an odd
combination of mega and micro firms: mega firms that can
 
 W
W 
   W 
   W
8 -1 )

   W truly exploit scale economies and ‘capital-light’ micro firms.
One risk is increasing anti-trust actions against ‘winner-take-
6RXUFH&6)%HVWLPDWHV
all’ results in the New Economy.

([KLELW
6. Will Japan recover? Yes, enough has been done to
(XURSHDQUHQDLVVDQFH&DSLWDOPDUNHWVGULYHUHIRUP
restructure/recapitalise the banks and limit systematic risk.
There is increasing focus on profit and return on capital, which
The New Capital Market
bodes well for the profit share of the Japanese economy.
•Equity Culture
•Venture Capital
•Wider Credit Spectrum
However, final demand growth will be held back by the
immediate restructuring costs.
Old Industries New Industries
•Reduce (Equity) Capital •Raise Equity Capital 7. Can Europe prosper? Yes, the euro is just one building block
•Shed Labour •Create New Jobs
(Higher Stock Prices) (Very High Stock Prices) in a broader reconstruction that should allow Europe to
prosper. Europe has so far lacked the ‘super return’ US PC-
Surplus Capital
oriented stocks, but there are signs of a ‘fat tail’ emerging in
Surplus Labour Labour Market Reforms
More Service Sector Jobs
telecom equipment and mobile telecom companies.
6RXUFH&6)%UHVHDUFK
8. What are the prospects for emerging markets?
Deflationary pressures are depressing the prices for
([KLELW manufactured goods and commodities, but the potential for
**'3JURZWK
g ( ) reallocation of underused agricultural workers still remains
16 16
huge. However, emerging country economies may remain
14 14
volatile even as volatility declines in the developed world.
12 12

10 10
9. Fewer emerging market crises? Yes, there have been
8 8
structural improvements in banking and corporate
Nominal
governance, and future capital allocation could be more risk-
6 6
aware and efficient.
4 4

2 2 10. Is an era of super-prosperity possible? Not only possible,

Real
0 0 but plausible, particularly if Europe and Japan can adopt the
-2 -2 US ‘S-curve’. Risks are future major wars and the continued
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 success of the Fed and other monetary authorities,
6RXUFH&6)%HVWLPDWHV
particularly in response to recurring financial asset volatility.

-4-
New Millennium Project

Mental models for successful investment

0LFKDHO0DXERXVVLQ Investment decisions require mental modelsframeworks drawn
 from different disciplines—to interpret reality, assess a company’s
PLFKDHOPDXERXVVLQ#FVIEFRP competitive position and make rational decisions in stock picking.
st
The mental models required for the 21 century are very different
from those that dominated even one generation ago.
• Revolutionary economic shifts. The information revolution
is as important as the agrarian revolution and the industrial
revolution; this technology enhances most other technologies
as well as providing wholly new ways of doing business. That
software is a non-rival economic good with replication costs
near zero means that New Economy businesses tend to
combine rapid falls in product pricing with simultaneous
increases in returns on investment. Successful investment
requires understanding of these non-linear economics and an
acute awareness of the appropriateness of the technology:
who owns the benefits from this intellectual capital?
([KLELW

6SUHDG RISURGXFWVLQWR$PHULFDQKRXVHKROGV • Globalisation. Aided by the information revolution, an

increasing proportion of the world economy will be competed
for on a global rather than a regional scale. This erodes local
pricing power and challenges inefficient country-based
monopolies/oligopolies.
• Accelerating rate of economic discontinuity. The ‘creative
gale of destruction’ becomes even stronger in this world. New
businesses, such as Amazon.com, grow much faster because
their basis is low-marginal-cost intellectual capital, but the
accelerating pace of technological innovation simultaneously
increases the chance that today’s winners are unseated by
further innovation. ROIC becomes higher for winners, but the
length of competitive advantage that should be applied
shrinks.
6RXUFH0\WKVRI5LFK 3RRU:0LFKDHO&R[DQG5LFKDUG$OP

%DVLF%RRNV Key issues to remember

1. Be aware of accounting-based distortions and focus valuation
([KLELW
on cash-based measures, whether conventional DCF-EVA or
%LWV VFDOHEHWWHUWKDQDWRPV*URZWKRI:DO0DUWYHUVXV
real option models.
$PD]RQFRP

$3,500
CAGR Sales
2. Don’t ignore technology. Technology stocks account for 22%
$3,000 WMT (74-77) 42%
AMZN (97-00E) 145%
AMZN 2001E
of the S&P 500. The New Economy will affect all the stocks
$2,500
that we invest in as strategic phenomena, such as network
effects, increasing returns to scale and the high upfront costs
Sales in millions

2000E
$2,000
of these new businesses, become common.
$1,500
1999E 3. Beware of the ‘red queen’ effect. We believe much of the
$1,000 WMT
1978
value generated by IT-driven efficiencies will be appropriated
$500
1998
1976
1977 by customers rather than shareholders.
1974 1975
1973
$0 1996
1997 4. There are three clear industry winners that are global, on-
6RXUFH&RPSDQ\GDWD&6)%HVWLPDWHV
trend demographically and knowledge-based: technology
(including telecoms), healthcare and financial services.

-5-
New Millennium Project

A brief history of long-run equity trends

We have conducted an analysis of the real returns from equities
+HOHQ0DF)DUODQH over the last two centuries in a number of countries. The key
 factors to emerge from this are:
KHOHQPDFIDUODQH#FVIEFRP 1. The slope of the real return from equities in the US has been
extremely stable at around 6.5% for the last 200 years. This
compares with 5.8% in the UK since 1869, 6% in Germany
since 1926 and 7% in Japan since 1958.
2. Although the last 17 years have seen real equity returns of
13.6% in the US, this deviation is not unprecedented. Similar
([KLELW
returns were observed in 1948−1965, 1865−1882 and
86UHDOHTXLW\UHWXUQLQGH[ 1919−1936. There is some evidence of below-trend real


ORJLQGH[ZLWK VGEDQGV 


returns in the years immediately following these cycles,
  although these were still on the order of 5−6% over the




 following five to 20 years.


 6ORSH  
3. Long technology waves tend to be associated with these 15-




  to 20-year periods of above-trend returns. Adoption of new
 
technology depresses retail prices and boosts real growth to
the benefit of bond and equities; this tends to peter out as the
  

technology matures.
 

([KLELWSDJH
                 
4. With the US bull market having now run for 17 years, and with
6RXUFH&6)%'DWDVWUHDP*OREDO)LQDQFLDO'DWD
the deviation from trend returns now up to 67%, it would be
tempting to hope the market could enjoy a structural break
from the New Economy effects. However, it is rather more
([KLELW likely that history reasserts itself and real returns revert to the
*HUPDQ\UHDOHTXLW\UHWXUQLQGH[ trend of 6.5% through a period of more normal performance.
 O RJLQGH[ Z L WK  V G EDQGV 

 5. Other markets have also enjoyed above-trend returns,

 

particularly the UK. However, this is less extreme in Germany.

  
By contrast, in Japan, real returns are 40% below trend.
 
 

6ORSH 
6. The historical US risk premium is normally stated at 6%this
 


is based on the 1918−1998 period. Our longer-term analysis
 

(another century) suggests that the excess return of equities


 
relative to bonds is closer to 4%; the higher estimate includes
                  
  
               
the benefit of the structural break in the 1950s and
6RXUFH&6)%'DWDVWUHDP*OREDO)LQDQFLDO'DWD consequently overestimates the relative performance of
equities. This 4% estimate is also close to the long-run
([KLELW

86HTXLW\ERQGUHWXUQUDWLR
average of 4−4.5% in the UK and Japan.

ORJUDWLRRIWRWDOUHWXUQVRQHTXLWLHVWRERQGV
 7. The historical risk premium in Germany is much lower: close
  to zero since 1957 and around 2.5% since 1926.
 
6ORSH 
8. On a forward-looking basis, we believe there is still a risk
 
premium in bond pricing to reflect the shock from the post-war
 6WUXFWXUDOEUHDN

inflationary surge that will take a prolonged period of long and
 
stable inflation to dispel. This would suggest that the future
 
6ORSH 
risk premium is even lower than it would otherwise be.
 

 
              

6RXUFH&6)%'DWDVWUHDP*OREDO)LQDQFLDO'DWD

-6-
New Millennium Project

European renaissance: The new corporate landscape European Economics Team

*LOHV.HDWLQJ There is an emerging revolution in the European corporate
 landscape. The introduction of the euro is only one building block
JLOHVNHDWLQJ#FVIEFRP in a much broader reconstruction of the region. While organised
labour remains strong, restraining progress on reform of labour
markets, this has not precluded deregulation of goods and
5LFKDUG.HUVOH\ services and the liberalisation of capital markets.

ULFKDUGNHUVOH\#FVIEFRP • Past a political watershed. Notwithstanding recent German
electoral defeats, 1999 has seen a definite shift towards more
market-friendly rhetoric and actions. German tax reform will
([KLELW
take the country to the bottom of the league of European tax
7RSFRUSRUDWHWD[UDWHVLQ*HUPDQ\ rates, a move that should precipitate corporate tax rates
65 65 elsewhere. The shift in rhetoric in France has been less
Top tax rate (includes local rates and solidarity
60 surcharge) 60 pronounced, but the government’s actions have increasingly
55 55 demonstrated a pro-market pragmatism (such as cuts in
50
Top Federal tax rate
50 payroll taxes to help offset the impact of the 35-hour week).
45 45
40 40 • Privatisation: greater scale, broader scope. In the last
35 35 three years, the scale of European privatisation has increased
30 30 substantially and, as importantly, assets are genuinely
25 Eichel’s proposals 25
escaping government control and operating in more
20 20
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
competitive markets. Eurozone privatisations have transferred
S CSFB around half of the potential asset pool into the capital markets,
6RXUFH&6)%
helping to lift the market capitalisation/GDP ratio to 42%
(versus 16% in the early 1990s).
([KLELW

7RWDOPDUNHWFDSLWDOLVDWLRQDVSHUFHQW*'3 • Liberalised capital markets. The old model—banks as the

main intermediaries of capital and savings—are giving way to
a US-style model dominated by borderless securities markets.
The ending of currency risk under EMU is the only factor
driving this change. The result is surging corporate bond
issues to accompany an already-buoyant IPO market.
• M&A boom. In the last two and a half years, M&A
transactions have been worth over 43% of the eurozone
market capitalisation. And, it is not just domestic
consolidation: cross-border M&A has now risen to around half
the level of domestic M&A.
• Deregularised goods and services. Prices of services
provided by once-government-owned monopolies are now
falling as increased competition forces the pass-through of
restructuring/reorganisation measures. This is noticeable in
telecoms and, particularly in Germany, in energy costs.
• Technology catch-up. Europe remains behind the US in
terms of PC ownership and internet usage. The US’s first-
mover advantage and dominance in major technologies gives
North America a compounding lead (and a ‘fat tail’ of high
ROIC stocks). However, we still expect catch-up benefits, and
Europe does have substantial technological leadership in
mobile phone infrastructure and handsets, an area that will
become more important as the internet and mobile telephony
converge. It is these businesses that will provide the ‘fat tail’ of
outperformers in Europe.

-7-
 New Millennium Project

Global cement: trends in the New Millennium

The global building materials industry is becoming increasingly
7DVVLOR0D\HU dominated by a few large groups and we expect this trend to
 continue in the first decade of the New Millennium.
WDVVLORPD\HU#FVIEFRP
• Developed world. The cement producers have pursued
consolidation as a means of increasing pricing power for a
-HDQ+XJXHVGH/DPD]H
high capital-intensity commodity product. This strategy has
 met with success; with the largest five European producers
MHDQGHODPD]H#FVIEFRP now controlling 65% of their regional market and cement
prices well above the ‘at sea’ commodity price. Similar
strategies are being pursued in the US, albeit that the sheer
scale of the market has meant emphasis on regional rather
than national domination. This trend seems set to continue in
the next decade, particularly with TEA 21 road programme
([KLELW improving the economics of the US market.
&RQVXPSWLRQJURZWKLQ$VLD

700,000
• Asia. The Asian crisis has provided an unmissable
600,000
600,000 opportunity for the global majors to extend their reach into
500,000
lower-cement-usage, but higher-growth markets. There are
400,000
several major cement companies still looking for deals—these
300,000
are likely to be completed in the next two years—but these
201,280 204,936
185,827 investments should prove very valuable as Asian demand
200,000
recovers in a now-consolidated market.
100,000 45,900 50,54559,430
12,10919,964
-
1975 1990 2010
• China. The principal exception to this is China, where as yet,
Asean Indian Sub-con China
the global leaders have virtually no penetration and production
remains extremely fragmented. This is likely to be an area for
6RXUFH&HPEXUHDX&6)%HVWLPDWHV
consolidation over the next five to ten years.
• Latin America. This is the final developing market targeted by
the majors. However, with the remaining local producers not
currently under pressure to sell (c.f., the situation in Asia
where financial pressures were greater following
overexpansion), this will be a more gradual process.
• Cement prices. The financial viability of these strategies
depend to a large extent on pricing power of the consolidated
cement majors. There does not yet appear to be any serious
threat to this pricing power. The European market has
weathered anti-trust investigations (most recently in 1993),
while the risk of a collapse in prices from Asian dumping has
largely come to nothing (helped by the restructuring of
ownership across the region). The once-chaotic US cement
markets have also stabilised as the industry has consolidated
and environmental barriers have restrained new construction.
• Stock selections. The long-term winners in this industry
combine stable, high-margin cash generation (principally in
the consolidated European market) with high-return
reinvestment strategies for this cash flow (principally in the
emerging markets). Holderbank, Lafarge and Heidelberger
/RQJWHUPVWRFN are the leaders in this strategy.
UHFRPPHQGDWLRQV
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/DIDUJH
+HLGHOEHUJHU

-8-
 New Millennium Project

Global chemicals: the next five to ten years

'DYLG%HJOHLWRU&)$ We expect the next decade in the chemical industry to be marked
 by three broad trends, one cyclical and two secular.
GDYLGEHJOHLWRU#FVIEFRP • The interplay of the industrial-economy and the capacity-
driven cycles. This determines global industry capacity
6LPRQ%RZQ utilisation rates, although there will be substantial company-
 by-company variations.
VLPRQERZQ#FVIEFRP • Continued strategic emphasis on portfolio transformation
towards higher-growth and/or higher-ROIC businesses.
-DPHV+LFNPDQ This should spur further industry consolidation. These deals
 will be driven by a combination of cost synergies (portfolio
MDPHVKLFNPDQ#FVIEFRP overlap facilitating cost elimination), revenue synergies (cross-
fertilisation of distribution channels, broader product offerings
([KLELW and a more competitive selling position resulting from lower
(WK\OHQHFDSDFLW\XWLOLVDWLRQYHUVXVFDVKPDUJLQV costs) and improved long-term industry pricing as the number
+LVWRU\DQGIRUHFDVW
of players declines. This final variable could manifest itself
102% $0.30

Year in which utilization was extremely high in Q1 and Q4, through greater industry price discipline in periods of excess
100% but below scarcity threshold in middle of year.

$0.25 capacity (we do not buy this thesis) or less overbuilding during
98%

96%
peak margin environments (another shaky assertion).
North American capacity utiliz.

Scarcity Threshold $0.20

94%
Striking the right balance between strategic and economic
$ per pound

92% $0.15
factors will be critical to value-creation. We believe most of
90%

$0.10
the deals struck in the last two years have stretched the
88%
economics in favour of the strategy. The historical bane of the
86%
$0.05 chemical industry (and mature, capital-intensive industries
84%
generally) has been falling in love with strategies at the
82% $0.00
expense of the economics.
1991

1992

1993

1999E

2000E

2001E

2002E
1987

1988

1989

1990

1994

1995

1996

1997

1998

•
Capacity Utilization Cash Margins

Further implementation of technologies like Six Sigma,

6RXUFH86&HQVXV%XUHDX,QWHUQDWLRQDO'DWD%DVH,'%
ERP (SAP) and more widespread use of e-commerce. This
([KLELW
should continue to lower the industry cost curve, translating
,QYHUVHUHODWLRQVKLSEHWZHHQVSHQGLQJOHYHOV into structurally lower prices through commodity cycles and an
DQG52,&² attendant long-term increase in the secular volumetric growth
25.0% rate. Implementation of these technologies varies between
companies, meaning those that are at the leading edge
NOPAT/Invested Capital

20.0%

LYO
should benefit disproportionately (particularly if better
15.0%
FMC
technology facilitates sounder practices in businesses that are
PX
HPC PPG
DOW already competitively advantaged). In other words, companies
Industry W ACC UK CBT MTC
10.0% A PD DD
EMN
FULL
OLN
executing such technology more effectively than others will
5.0%
WLM
retain a larger proportion of the reduced costs.
R2 = 0.45

0.0%
• The bigger companies with low-cost positions, strong
80% 70% 60% 50% 40% 30% 20% existing franchises and excellent science are likely to be
Capital Spending/EB DIT
disproportionate winners in the long term. We would
6RXUFH&RPSDQ\GDWD
single out Monsanto, DuPont and Dow Chemical as
companies well-positioned to distinguish themselves. Two of
these—Monsanto and DuPont—are also leading the
biotechnology charge (the third is Novartis), a technology that
st
could prove to be one of the revolutionary sciences of the 21
century.
/RQJWHUPVWRFN
UHFRPPHQGDWLRQV
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0RQVDQWR
'X3RQW
'RZ&KHPLFDO

-9-
New Millennium Project

Speciality chemicals: aggressive consolidation will characterise the next decade

'DYLG%HJOHLWRU&)$ The current position. Speciality chemicals is a highly fragmented
 US$100bn global industry that has traditionally centred on the
GDYLGEHJOHLWRU#FVIEFRP paper, plastics, textiles, food, coating, electronics, automotive and
adhesives markets. Growth sectors in the 1960s and 1970s, these
markets began to mature in the 1980s. Today, industry growth in
6LPRQ%RZQ the developed world is slightly above GDP at around 3.5−4%,
 although innovation generates niches with significantly higher
VLPRQERZQ#FVIEFRP growth levels.
Historically, speciality chemical companies grew revenues through
-DPHV+LFNPDQ a combination of price increases and market growth (sometimes
 as high as two to three time GDP), but, in the last five years,
MDPHVKLFNPDQ#FVIEFRP prices have come under pressure and growth has stalled. In
certain industries—particularly water treatment, lubricant additives
and dyes—historical price increases of 3−5% have now evolved
into annual declines of 2−5%. The challenge is to find ways to
jump-start growth.
Industry dynamics. The consolidation of customers is focusing
relationships on fewer, more globally-oriented suppliers. Preferred
suppliers in this market are those that have broad product lines,
leading technology and a global infrastructure that can provide a
consistent level of products and service regardless of location.
Acquisitions are increasingly the preferred method for companies
to achieve the critical mass to serve their global customers.
Strategy. The impetus for acquisition-led growth is also being
driven by the limited organic growth opportunities remaining in
many product areas. Companies are searching for both cost
synergies (scale economies, reduced overheads and improved
purchasing power) and revenue synergies (cross-selling of new
products and access to some of the faster-growing emerging
markets, such as electronic chemicals, speciality polymers and
drug intermediates).
Valuation and recommendation. Given the above, the critical
factor is picking companies with a demonstrated history of value
creation (positive economic profits with ROIC in excess of
WACC). Because consolidation is primarily a capital-spending
decision and secondarily an exercise in realising synergies,
companies that have demonstrated track records in value creation
should have a better chance of making optimal investment
decisions (acquiring the right businesses at the right price) and
operating businesses efficiently (which bodes well for realising the
promised synergies).
Our top European recommendation is BTP, which we believe has
the ability to deliver superior growth, due to its exposure to the
growing fine chemicals industry. The combination of a healthy
/RQJWHUPVWRFN product pipeline and a high-quality asset base should enable
UHFRPPHQGDWLRQV sustainable value creation.
(XURSHDQ
%73

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-10-
New Millennium Project

Global energy group: same cycle, different century

-DPHV&ODUN The oil industry is likely to look and behave over the next decade
 as it has over the past two decades: up, down, repeat. The
MDPHVFODUN#FVIEFRP cyclical nature of the business should continue to dictate the
financial performance of the industry. Oil prices should generally
remain in the historical US$15−22/barrel range, with mid-cycle
5RG0DFOHDQ
prices of US$18−18.5/barrel, reflecting economic, political and

social structures of OPEC and non-OPEC producers. Specifically,
URGPDFOHDQ#FVIEFRP we believe the following factors will continue to enforce the
([KLELW industry’s cyclicality into the beginning of the New Millennium:
6 32LO&RPSRVLWHYHUVXV6 3,QGXVWULDOV

210.0% 210.0%
• OPEC members’ fiscal obligations and desire to take market
share;
•
190.0% 190.0%
The integrateds’ and the independents’ recurring institutional
170.0% 170.0% memory loss;

150.0% 150.0%
• Non-OPEC oil producers’ continued price-taking; and

130.0% 130.0%
• Technology/highgrading to keep pace with maturation.

110.0% 110.0%
Beyond the mantra of same as it ever was, we anticipate the
following additional changes that could reshape the appearance
90.0% 90.0% and structure of the industry.
70.0% 70.0% Consolidation. We expect further consolidation as companies
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
attempt to remove redundant costs and improve competitive
6RXUFH&6)% positions; this is also a quick way to increase earnings in a mature
industry with an underlying growth rate of 1.5−3.0%.
• Integrated oils. Two types are evolving: the international
majors and the regional specialists.
• Independent E&Ps. Activity should focus more on the
acquisition of specific properties rather than on an increase in
M&A as independents scoop up assets divested by the
consolidating majors.
• Oilfield services. Consolidation efforts will be aimed at
acquiring new technology, entering complementary areas and
entering new markets with current businesses.
Privatisation: Asia joins the party. The Asia-Pacific national oil
companies should begin joining the private sector, most likely led
by the Chinese integrated oil companies. With asset bases similar
to the majors, these newly privatised companies will need to
transform themselves from state-operated entities into globally
competitive companies. Privatisations in these areas will also
open up what are currently closed markets to new competition.
OPEC taking market share. Having increased its share from 29%
in 1986 to 42% in 1998, we expect further gains by the cartel. OPEC
will remain market share-focused, has spare capacity of around 5−7
/RQJWHUPVWRFN
MMBD with low-cost, readily-available reserves. OPEC is also likely
UHFRPPHQGDWLRQV to control oil price hikes to limit non-OPEC reinvestment.
(XURSHDQ
5R\DO'XWFK6KHOO Investment strategy. We believe the primary means for
outperforming the broader market is by timing the cycle. The long-
term relative underperformance of the oil industry versus the
*OREDO market—it appears to be a secular short—means that we would
%DNHU+XJKHV avoid a buy-and-hold strategy over a full cycle.

-11-
 New Millennium Project

European insurance: trends beyond 2000

We see three factors affecting the insurance sector over the next
5RELQ0LWUD decade:

URELQPLWUD#FVIEFRP • Demographics. As in most OECD countries, the populations
of western Europe are ageing. The group of individuals in the
age bracket approaching retirement is increasing and the flow
of savings should increase substantially over the next five to
15 years. Most savings vehicles should benefit substantially
from this increase in demand and, given its tax advantages in
most countries, life insurance should be one of the key areas
to benefit from this change.
In addition, the proportion of people in paid employment is
lessening relative to those in retirement. Almost all social
security systems are now funded on a pay-as-you-go basis.
These will have to be pared back leaving a gap for insurance
companies and other savings media to fill. This extends not
just to pensions, but also to medical, health and
unemployment benefits. Insurance companies are preparing
themselves for an increasing role.
The life insurance companies most closely associated with the
increase in savings are the Italian insurance companies
Generali, Alleanza, Mediolanum, Unipol and INA. In addition,
companies such as Skandia, AEGON and AXA have focused
their activities on growth in the whole area of life insurance
and long-term savings. ING is the cheapest way to tap into the
savings growth.
• Consolidation. Across Europe, the larger insurance
companies have been expanding with the aim of achieving
leadership positions in most territories (particularly in the
higher-growth southern European markets). This is also being
driven by shareholder pressure to increase returns: scale
provides scope to reduce expenses. The primary barrier faced
by the companies in these efforts remains the unharmonised
tax regimes across Europe; the UK’s exclusion from the euro
provides a further organisational barrier.
• Internet. Although internet-based distribution has been little-
used to date (not helped by regulatory regimes), the
commodity nature of much insurance (motor, household,
some commercial products and single premium savings)
means this industry will eventually be targeted.
The rise of internet-based insurers can be expected to
challenge existing distribution routes; even a marginal
siphoning off of product would damage the economics of the
/RQJWHUPVWRFN exclusive agent and the independent broker. Even more
significant, a mature and successful internet sector would call
UHFRPPHQGDWLRQV into question bank distribution of insurance products; bank-
(XURSHDQ sold insurance products are essentially simple.
0XQLFK5H
However, the key beneficiaries of such a change—apart from
,1* those nimble enough to tap the internet themselves—are
those companies that can accept risk and provide capital. The
*OREDO role of the reinsurers would become ever more important in
$PHULFDQ,QWHUQDWLRQDO*URXS such a market.
(TXLWDEOH&RPSDQLHV,QF

-12-
New Millennium Project

European media: media in the digital millennium

0LNH3LFNHQ The media industry is being transformed by digital technology.
 Change is throwing up new opportunities, but this is coupled with
PLNHSLFNHQ#FVIEFRP heightened uncertainty, and a cash-call on those companies
wishing to take part in the upside.
/LVD+DOVDOO The digital wave
 We expect three key trends to affect media companies: 1) further
OLVDKDOVDOO#FVIEFRP proliferation of the platforms and formats used to distribute media;
2) the creation of new customised and interactive media products;
and 3) digital networks (for example, the internet) to provide new
routes to market.
([KLELW
Opportunities to accelerate growth
$YDOXDWLRQPDWUL[IRU(XURSHDQVWRFNV

FRE This period of change is throwing up a number of opportunities for

(n/a) RTR
(n/a)
media firms.
HI BSY
CLE (8)
• New media platforms are providing media companies with new
(19) markets in which to operate.
ESPI (15)
Digital • Shifting barriers to entry could allow media companies to enter
options
VNUN
SPG (28) previously closed areas of the industry—for instance, the
EMA (14) (18) TPI
UNWS classified advertising segment.
(10) TOC (20)
REED (10) • Media products, such as books, music, software and films,
LOW MNDI
(15)
PSON (20) lend themselves to distribution over digital networks; this could
MS WPP WLSN lower costs significantly.
(8) (18)
• Media companies have the opportunity to move into
(20)
SHORT LONG
Strength of franchise in new media era e-commerce, both in their own media markets and elsewhere.
6RXUFH&6)%UHVHDUFK Threats in the digital millennium
The digital wave is also a threat to traditional business models.
• The shift into digitally-enabled products must be well timed
because bad timing can affect both short- and long-term
profitability trends. The quality of management is likely to be
important.
• Traditional media companies must cope with increased
competition, and shifting entry barriers.
Winning strategies: the wish list
We believe companies should strive for media neutrality to protect
and extend the life of their existing franchises by:
• investing in branded content rather than distribution;
• populating markets with many formats; and
• cross-promoting between formats to dominate market niches.
In addition, we would like to see firms moving aggressively to tap
digital revenue opportunities by:
• using digital networks to sell direct to customers; and
• moving into the e-commerce space.
/RQJWHUPVWRFN We view the potential for e-commerce as immense, but expect
UHFRPPHQGDWLRQV the window of opportunity to close quickly. It seems to us that
(XURSHDQ media companies need to move rapidly by issuing e-capital and
:ROWHUV.OXZHU using it as currency to build businesses. Otherwise, they risk
(0$3 being forced to watch from the sidelines.

-13-
New Millennium Project

Global paper & forest products

th
/DUV.MHOOEHUJ The paper industry has been a poor investment during the 20
 century; in the last 30 years, the sector has outperformed the US
ODUVNMHOOEHUJ#FVIEFRP market for any length of time for only two periods. These were in
the extreme economic conditions of 1973−76 and the high-growth
:LOOLDP0:LGJHU&)$ phase of 1983−86. Outside of these periods, specific industry
difficulties have been exacerbated by the rise of new and more

attractive areas of the market, particularly technology. It cannot be
ZLOOLDPPZLGJHU#FVIEFRP argued that this underperformance is inappropriate: within our
global coverage, between 1994 and 1998, only five companies
([KLELW
consistently delivered a ROIC in excess of the cost of their capital.
2QO\ILYHFRPSDQLHVKDYHHDUQHGWKHLUFRVWRIFDSLWDO
The perennial asset write-downs that afflict the industry are a sure
3DSHUDQGIRUHVWSURGXFWVDYJUHWXUQLQH[FHVVRIFRVWRIFDSLWDO signal of excessive capital investments.
±

Nor is this just a European or US issue: the faster-growth markets

2.00 in Asia stimulated new investment in the latest technology by local
Average Enterprise Value/Invested Capital

1.80 KMB producers, a move that left the North American producers as
1.60 SWM marginal (or residual) suppliers. In this game, their role is not to
SSCC

WLL
1.40 CDP
WLL
build additional capacity, but to cut costs through consolidation
LPX TIN CSK
1.20
RYN
and restructuring. Three deals have already occurred to vindicate
FJ
BCC
PCH
GP
W
BOW
MEA
GLT
1.00 this strategy: the merger of Stora and Enso, the Smurfit-Stone
TJCO

CHA
0.80 Container deal and the takeover of Union Camp by International
0.60
R2 =55%
Paper.
0.40

0.20
Regardless of cyclical trends (and the recent upswing), there are
-
three things that management must do if the industry as a whole
-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% is to qualify as a group in which to invest for the next millennium:
Average ReturninExcessof Cost of Capital
• Keep capital spending under depreciation levels, even when
6RXUFH&RPSDQ\UHSRUWVDQG&6)%UHVHDUFK
earnings improve cyclically;
([KLELW
• Consolidate along grade lines and close the highest-cost
'HSUHFLDWLRQFRXOGH[FHHGFDSH[IRUILUVWWLPHLQDWOHDVW\UV

20
capacity in the combined system; and
0
• Continuously reduce expenses.
S&P Paper and Forest Index

(20)
At present, the signs are positive. For the first time in at least 20
Per Share Data

(40)
years, industry-wide capital spending is projected to be less than
(60)
depreciation levels. Furthermore, there have been closures of
(80)
some high-cost capacity and expense reduction programmes are
(100)
commonplace. This does provide grounds for believing that ROIC
(120)
will finally equal the cost of capital and earnings could increase in
1977
1978
1979
1980

1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995

1996
1997

1998E
1999E

a more sustainable fashion.

Year

6RXUFH6 3$QDO\VW+DQGERRN&RPSDQ\GDWD&6)%HVWLPDWHV
Our stock selections are those companies that have financially
astute managers and are able to carry profitable consolidation
moves. Key companies include Aracruz, Asia Pulp & Paper,
/RQJWHUPVWRFN Bowater, International Paper, Metsa-Serla and Stora Enso.
UHFRPPHQGDWLRQV
(XURSHDQ
6WRUD(QVR
0HWVD6HUOD

*OREDO
$UDFUX]
$VLD3XOS 3DHU
%RZDWHU
,QWHUQDWLRQDO3DSHU

-14-
New Millennium Project

Global pharmaceuticals: new technologies and expanding markets beckon

6WHYH3ODJ The global pharmaceutical industry consists of several ‘100-year-
 old’ growth stocks that have reinvented themselves many times to
VWHYHSODJ#FVIEFRP capitalise on the changing environment. This industry has been a
‘healthy oligopoly’, with patent expirations forcing each company
to refresh its sales composition about every ten years, a dynamic
-DPHV.HOO\ that ensures that no single company has a monopoly on brains or
 an immutable hold on the market.
MDPHVNHOO\#FVIEFRP
• Demographic demand. An ageing population will drive
demand growth, particularly as the increasing utilisation with
age means that sales growth should be in excess of
([KLELW
population growth. In particular, the middle-aged market
¶7KHJUD\LQJRIWKHJOREH·ZLOOGULYHXWLOLVDWLRQDVWKHVHQLRU

DQGPLGGOHDJHGJURXSVJURZWZLFHDVIDVWDV\RXQJHUSHRSOH
should be a lucrative target for new preventative medicines
*OREDOSRSXODWLRQJURZWK 
resulting from genome mapping.
We also think the developing world could provide a growth
surprise: 80% of today’s market is in North America, Europe
and Japan. Rising incomes in the rest of the world plus the
adoption of properly-enforced intellectual property rights could
result in a rebalancing over the next ten to 20 years.
• Financing this demand. The ‘public/private funding
pendulum’ is swinging towards increasing government
involvement in the US and increasing private involvement in
Europe. A more European approach in the US could put
margins in the most profitable world market under pressure.
Conversely, European markets could look more open, with
new therapies being adopted and two-tiered funding systems
emerging. However, an improving European market would not
offset likely margin erosion in the US. The ‘wild card’ remains
the opening up of the developing world.
• Technology. Global spending by the industry on R&D should
reach US$24bn in 1999, with 25% of this spent on external
collaborations. Over the coming years, this should both drive a
continuation of the current strategy (wider and faster versions
of traditional screening for compounds) and the development
of new screening targets from genomics. Genomics should
redefine the preventative medicine market: as a patient’s life
risk of disease becomes better understood, the benefits of
prevention become more obvious. Furthermore, as targeted
therapies reduce serious disease, it will be justifiable to
increase the spending on pharmaceuticals as a percentage of
the total healthcare budget.
Industry competitive advantage depends on continued technology
improvements and the maintenance of pricing power. Since the
largest growth opportunities come from global reach and critical
/RQJWHUPVWRFN mass in R&D, the largest global players are our preferred long-
UHFRPPHQGDWLRQV term recommendations, specifically Glaxo Wellcome,
(XURSHDQ AstraZeneca, Merck and Pfizer. Of the next tier, we would single
*OD[R:HOOFRPH out Eli Lilly and Warner Lambert on the basis of their immediate
$VWUD=HQHFD drug pipelines and, in the latter case, its investment through joint
ventures in real options in genomics, screening, gene libraries and
drug delivery.
*OREDO
0HUFN
3IL]HU

-15-
 New Millennium Project

Retail: emergence of truly global players

'DYLG6KULYHU The New Millennium will be marked by continuing structural
 change in the retailing industry. The most visible will be the
GDYLGVKULYHU#FVIEFRP emergence of a small group (no more than five) of regionally-
strong retailers with the ability to transfer know-how and structural
cost advantages to new market around the globe. This will form
-DPHV0DUWLQ the backbone for the emergence of truly global retailers. We
 expect the bulk of this activity to focus on food and general
MDPHVPDUWLQ#FVIEFRP merchandising formats that resemble hypermarkets on the
European continent and supercenters in the US. A secondary
form of this activity could be the spread of ‘big box’ retailers
around the world: Home Depot, Costco and Makro are examples
of this. Finally, e-commerce will be an increasingly embraced
means of doing business.
This globalisation process will be driven by the following:
• The emergence of new barriers to entry to the global retail
elite. Although barriers to entry have been low historically, new
barriers are developing, including access to management
capital, regulatory restraints to organic growth and, not least,
sheer financial muscle.
• The power of suppliers is waning. The ability of the global
retail elite to break down suppliers’ ability to control pricing in
individual markets is increasing as consolidation activity
accelerates.
• Retailers are increasingly able to segment markets through a
multi-format approach.
• Wal-Mart’s absolute size (estimated to be in excess of
US$300bn of sales by 2010) is encouraging its competitors to
devise strategies specifically to counter Wal-Mart.
• e-commerce will allow global retailers to enter markets earlier
and exploit pricing inefficiencies even before their physical
facilities are present.
Our recommendations focus on those best-positioned to emerge
as the leading global retailers: Wal-Mart and Costco in the US,
Carrefour and Ahold in Europe. Carrefour already has global
presence, and the acquisition of Promodes both reinforces its core
European market position (particularly in France) and provides a
stronger source of cash flow. Ahold is now a stage behind
Carrefour, but is the other likely European contender.
By contrast, the UK sector looks much less attractive. Growth is
low—both in pricing and volumes—and an unhelpful anti-trust
report means that a defensive merger (cf, Carrefour/Promodes)
/RQJWHUPVWRFN would be unlikely to gain clearance. Indeed, government policy
UHFRPPHQGDWLRQV seems to be leaning towards lowering barriers to entry. Tesco is
(XURSHDQ our preferred stock of the majors, but given that the UK is now
Wal-Mart’s largest European market (post-Asda), margins are
&DUUHIRXU
likely to continue to decline.
$KROG

*OREDO
:DO0DUW
&RVWFR

-16-
New Millennium Project

Technology: telecommunication equipment

,DQ%XUJHVV The new millennium will truly be an information age. We see an
 increased focus on communications over computers and the
LDQEXUJHVV#FVIEFRP development of successful applications. We estimate that the
overall market—wireline, data networking and wireless
infrastructure—will grow by 16% per annum over the next few
0DUF&DEL years. Our preferred strategy within this market is to focus on
 companies that either have a dominant position in the growth/
PDUFFDEL#FVIEFRP maturity stage of product life cycle or those at an embryonic stage
of an industry’s development that possess innovative (and, at
-DPHV3DUPHOHH times, unproven) technology. This strategy reflects the exponential
 rise in the power of incumbents as a product reaches maturity.
MDPHVSDUPHOHH#FVIEFRP • Data networking. Deregulation, the internet and
‘siliconisation’ (the spread of commoditised digital systems)
([KLELW are driving growth, innovation and industry restructuring. We
9RLFHGDWDFKDQQHOV
expect to see migration of the infrastructure from traditional
Worldwide Public Network Bandw idth Allocation circuit-based equipment to packet-based systems, a never-
100%
ending quest for bandwidth, and a shift in customer emphasis
90%
80% from enterprise to service provider and smaller businesses.
70%
Data channels exceed
Our core recommendations for winners in this area include
60%
50%
voice in 2000 Cisco (its leverage to the internet and its exposure to multiple
40% product cycles in the circuit-to-packet transition) and
30%
20%
Broadcom, the leading provider of silicon technologies for
10% broadband digital transmission.
0%
1997 1998 1999 2000 2001 2002 2003 2004 2005
• Wireless telecommunications. This has been one of the
Data Channels Voice Channels
hottest industry sectors in the past decade, and with huge
6RXUFH'DWDTXHVW²(TXLYDOHQW'62&KDQQHOV scope for future penetration growth, we see few signs of this
expansion waning. In both infrastructure and handsets, a
([KLELW

+RPHQHWZRUNLQJ
premier tier of three to five players dominates the market,
leaving weaker producers to suffer from the adverse
consequences of scale economies, cumulative R&D
investment and consumer branding. The dominance of Nokia
and Ericsson suggests, if anything, that this concentration will
increase in the next decade, particularly the investment that
has been made in new wireless technologies. Second- and
third-tier companies are likely to exit or become acquisition
targets for the larger groups.
• Wireline telecommunications. Deregulation and internet-
driven traffic growth are together driving a dramatic
acceleration in global spending on wireline communications
infrastructure where North America led, and Europe will
largely follow. As these trends continue into Asia and Latin
America, European companies with global reach should
/RQJWHUPVWRFN benefit. Broadband communication redefine usage even more
powerfully than the impact of the development of the ‘early’
UHFRPPHQGDWLRQV
internet. This, in turn, will enable new applications that will
(XURSHDQ themselves drive demand for further increases in bandwidth
1RNLD and performance. Our preferred companies include Marconi
(ULFVVRQ Communications and Ericsson.

*OREDO
&LVFR6\VWHPV
1RUWHO
/XFHQW7HFKQRORJLHV

-17-
New Millennium Project

Technology: internet and new media

/LVH%X\HU The internet industry cannot really be classified as industry at all: it
 consists of a universe of very different businesses and service
OLVHEX\HU#FVIEFRP providers that have been lumped together into a single group only
in the minds of investors and financiers. What they have in
common is that they have recognised the implications of
ubiquitous connectivity and they are racing to leverage these
changes into businesses. Winners in this market will be:
• Those with self-perpetuating business models.
([KLELW
Companies where the information attracts visitors who can
([SHFWHGJURZWKLQRQOLQH86KRXVHKROGV then be sold products directly for which services can then be
45 provided. Such a perpetual circle maximises the benefits from
42.1
40 39 the internet.
35 36
• Businesses that are first to scale. It doesn’t matter who is
Millions of Users

32.5
30
28.5
25
first, what matters is who can achieve significant scale. The
20
23 internet is an increasing returns-to-scale business where the
15 15.2
big appear to grow faster, in both absolute and percentage
10
terms, than their less-sizeable competitors. This is particularly
9.4
5
true where networking effects boost traditional economies of
4.7
2.6 3.3 scale.
0 0.9 1.1 1.6 2

• Businesses with better information. We believe the real

88

90

92

94

96

98

00

02
19

19

19

19

19

19

20

20

years
sustainable proprietary advantage of any internet company is
the data it collects and the information extracted from that
6RXUFH9HURQLV6XKOHU $VVRFLDWHV data. More knowledge about customer shopping preferences
can be translated into a better shopping experience, which
([KLELW

7RWDOH[SHFWHG86RQOLQHVSHQGLQJ
itself translates into more customers, each of whom should
$20.00
generate higher average sales.
$18.00 • Businesses dependent on multiple revenue streams.
$16.00 Internet business models are still new and evolving, and
$14.00
diversification is welcome when there is so much uncertainty.
Companies based on multiple revenue sources—commerce,
$12.00
advertising, subscriptions and telecom fees—are on more
$10.00
solid ground than those placing all their eggs in a single
$8.00
basket.
•
$6.00

Businesses with a deep and talented management team.

$4.00
Such an environment requires a breadth of talent.
$2.00

The speed of change, growth rates and the increasing returns-to-

$0.00
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 scale of internet businesses inevitably results in wildly-volatile
6RXUFH9HURQLV6XKOHU $VVRFLDWHV,QWHUQHW$GYHUWLVLQJ%XUHDX
stock prices. Coupled with the fact that the business models of
&6)%HVWLPDWHV
these companies are often evolving on a quarter-by-quarter basis,
it is virtually impossible to accurately quantify their potential value.
Our approach is to focus on definite business measures: revenue
per customer, variable costs per customer and fixed cost per
customer. Companies that show sustained quarter-by-quarter
increases in revenue and decreases in expenses are, in our view,
/RQJWHUPVWRFN showing evidence of building credible businesses and should be
rewarded with higher revenue multiples.
UHFRPPHQGDWLRQV
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-18-
 New Millennium Project

Global telecommunications overview

The telecommunications services industry is one of the most
5REHUW0LOOLQJWRQ dynamic in the world and one of the most important for investors
 as we look to the New Millennium. For telecommunications
UREHUWPLOOLQJWRQ#FVIEFRP services, the New Millennium will look increasingly different to the
old one as the forces of liberalisation, consolidation and
([KLELW
technological change erode existing business models and
*URZWKLQWHOHFRPPXQLFDWLRQVYHUVXV*'3

LQXQOHVVRWKHUZLVHVWDWHG
advance new ones. Defining trends should include:
 • Emerging electronic economy. Migration of traditional forms
 of commerce on to communications networks.

• Faster service diffusion. The rate at which major new

technologies penetrate the global mass market is continuously

accelerating.

 • Sustained mobile growth. Penetration will exceed 100% in
 the developed economies.
       
• Dramatic new entry. The number of players in the services
6RXUFH&RPSDQ\GDWD&6)%HVWLPDWHV
market will expand dramatically, with business start-ups and
encroachment from other industries like computing.
([KLELW

3DFHRIVHUYLFHGLIIXVLRQ • Lower costs. Packet switching, fibre transmission and

 photonic networks all offer order-of-magnitude reductions in

the cost of data transmission.

 The net effect is that volumes should grow dramatically: we
expect communication minutes to increase six-fold by 2010 and
P


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L

U
F
V
E
X
6

data transmitted to grow twelve-fold. The result will be that
telephone services will more than double its share of GDP over

the next 12 years. Key technologies, like wireless (mobile and

                  
fixed point to point) and roadband cable, could grow faster than
5DGLR
<HDUV
79 0RELOH ,QWHUQHW
the market overall. Winning companies will need to deliver against
a number of key objectives. Differentiating their product at a time
6RXUFH&RPSDQ\GDWD&6)%HVWLPDWHV
of real consumer choice, identifying emerging technology trends
and exploiting them vigorously and leveraging economies of scale
and scope.
We identify Vodafone AirTouch as the European operator best
positioned to establish global leadership for the New Millennium.
The company has substantial scale economies relative to its
competitors, is well-positioned for the exploding mobile data
market, has strong management and an established record of
leveraging its ownership position in key markets at attractive
valuations. We believe the company could achieve a trebling of
revenues in the first decade of the New Millennium from organic
growth alone.

/RQJWHUPVWRFN
UHFRPPHQGDWLRQV
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-19-
New Millennium Project

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-20-
New Millennium Project

-21-
New Millennium Project

-22-
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New Millennium Project

Europe
One Cabot Square
London E14 4QJ, England
44 171 888 8888

Amsterdam (31) 20 575 4890 Moscow (7) 501 967 8200

Budapest (36) 1 202 2188 Paris (33) 1 40 76 8888
Frankfurt (49) 69 75380 Prague (420) 2 2108 3111
Geneva (41) 22 394 7000 Vienna (43) 1 512 3023
Kiev (380) 44 247 1900 Warsaw (48) 22 695 0050
Madrid (34) 91 532 0303 Zug (41) 41 727 9700
Milan (39) 02 7702 2157 Zurich (41) 1 333 5555

Americas
Eleven Madison Avenue
New York, NY 10010, US
1 212 325 2000

Atlanta (1) 404 656 9500 Mexico City (52) 5 202 6000
Boston (1) 617 556 5500 Philadelphia (1) 215 851 1000
Buenos Aires (54) 1 394 3100 San Francisco (1) 415 836 7600
Chicago (1) 312 750 3000 São Paulo (55) 11 3048 2900
Houston (1) 713 220 6700 Toronto (1) 416 351 3500
Los Angeles (1) 213 253 2000

Asia Pacific
Three Exchange Square
8 Connaught Place Central
Hong Kong
852 2101 6000

Auckland (64) 9 302 5500 Shanghai (86) 21 6881 8418

Beijing (86) 10 6410 6611 Singapore (65) 538 6322
Melbourne (61) 3 9280 1666 Sydney (61) 2 9394 4400
Mumbai (91) 22 284 6888 Tokyo (81) 3 5404 9000
Osaka (81) 6 243 0789 Wellington (64) 4 474 4400
Seoul (82) 2 3707 3700

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