An optimistic view of Y2K

In a direct contradiction to many recent predictions, a new survey says corporations across the world are making aggressive efforts to tackle the Year 2000 technology problem, and most are making headway.

Merrill Lynch conducted a worldwide survey of thousands of corporations to gauge how prepared they are for the year 2000 and to assess the impact of these efforts for investors.

The report, released yesterday, seems to fly in the face of many industry experts, government officials, and economists who have criticized many in the corporate world for not taking the problem seriously enough. Those critics have also warned of dire consequences should repairs not be made on time.

Of course, it can be argued that assuaging the concerns of large investors about the stability of major banks and other businesses is in Merrill's best interests. A corporate world preoccupied by Year 2000 concerns certainly would not benefit an investment firm that counts on a robust, stable economy.

But the report does back up its assertions with strong survey results. The report found that most corporations in the United States surveyed expect to be fully compliant by year-end 1998. In Europe, many firms are using the Y2K, combined with the introduction of the Euro, as an opportunity to upgrade their systems.

Merrill's team even sees a silver lining in the Y2K for Japan. Historically, many Japanese companies have relied on customized software to run their businesses, which often resulted in inefficiencies. The report says the focus on Y2K compliance should result in more standardized software and open systems.

"Most companies have been working on their Y2K projects for two years and there are one and a half years left," Merrill Lynch Global Securities Research & Economics said in its 450-page report. "Microsoft, Latin America, and Communism all changed radically in a lot less time."

The report paints a far rosier picture than many other surveys. Just last month, Giga Information Group released a study of Year 2000 disclosures U.S. companies made to the Securities and Exchange Commission. That study said such disclosures revealed "severe preparation inadequacies among U.S. public companies."

However, the Merrill report challenged observers who say the complexity of networking and interfacing systems is increasing the potential for a year 2000 meltdown. "Our own view is that the very complexity and dispersion of these systems is, in fact, insurance against a complete shutdown of commerce when the millennium starts," the report says.

The report also said that, in general, companies are reasonably confident of their own Y2K preparations, but uncertain about those same efforts by their suppliers and customers. "Few companies expect earnings to be noticeably affected by Y2K expenses, although the cost of compliance is reported to be higher in the U.S. than elsewhere."

Likening Y2K to a space shuttle flight, the Merrill report said, "We do not see Armageddon, but like every space flight so far, there is an element of the unforeseen. If there are glitches, and there always are, companies expect to manage their way through them as they do in power blackouts, and as they did when the AT&T and AOL networks have occasionally shut down."

"There won't be a domino effect, because there are lots of switches throughout the system that will put on brakes," Merrill analyst Jeanne G. Terrile, who authored the overview of the report, said in a statement.

"One of the great ironies of the Y2K issue, which is about the simplest of things--the ability to write the correct date--is that it is exacerbated by virtually every modern management practice," she said.

Among these, Terrile points to just-in-time inventory and outsourcing as practices that have left companies more vulnerable to a crisis beyond their own walls. Globalization and decentralization further complicate making fixes, as companies with different systems across the world often must make individual upgrades to each system. And with the recent wave of megamergers and alliances, companies may have to both upgrade and integrate systems at the same time.

The Merrill report concluded that the real earnings impact in 2000, if there is one, is likely to be the result of some revenue shortfall in the short term if systems problems impact operations and companies are unable to ratchet down costs quickly.

"Y2K: Implications for Investors," is the third in a series of global reports Merrill Lynch has conducted to address issues of concern to investors.