OVERVIEW—Some of l.a.’s few remaining giants get swallowed and new powerhouses surface

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The year 2000 was a rollicking, up-and-down ride for dealmakers in Los Angeles. Venture capital continued to pour into the region, but those holding the purse strings became ever more selective as the months went on. Westside Internet companies that dreamed of lucrative initial public offerings in January were looking to sell themselves off for parts in September. This was reflected in a number of local mergers and acquisitions, which continued to grow, but more often it was manifested in smaller transactions.

And once again, Los Angeles found itself bidding farewell to a couple of Fortune 500 companies, one of which has been as much a symbol of the city as the Hollywood sign.

“It was an even frothier market than last year,” said Lindsey Alley, senior vice president at local investment firm Houlihan Lokey Howard & Zukin. “That’s reflected in the number of deals. In the first quarter of 2000, you had, in the public markets, an extremely high currency. But as the year progressed, because of the increasing difficulty in the public markets, it was almost impossible for medium-cap companies, especially New Economy companies, to make successful acquisitions.”

There were 621 mergers and acquisitions in L.A. County in 2000, according to Houlihan Lokey division Mergerstat, up from 530 deals in 1999. But the total value of those deals fell to $43.3 billion last year from $70.1 billion the year before. That is likely the result of the huge $27.8 billion acquisition of Atlantic Richfield Co. by BP Amoco of the U.K. announced in 1999, although it didn’t close until last year. Nothing in 2000 remotely approached that deal in size.

There were, however, ones that approached it in scope. The most stunning deal of the year was the sale in June of Times Mirror Co., and its flagship paper the Los Angeles Times, by the Chandler family to the Chicago-based Tribune Co. for just under $7 billion. The Chandlers had controlled the Times since 1882, and its sale, like that of Arco, spoke to the further erosion of the old downtown L.A. civic core.

Another media deal saw Universal Studios come under new management when French media giant Vivendi SA acquired Seagram Co. in a deal initially valued at $34.4 billion. Vivendi then created a new company, incorporating the studio into Vivendi Universal, to combine media, publishing and entertainment content over the Internet. Given the revival of Universal’s motion picture division and the strength of its theme parks, the new conglomerate was expected to be a force, but alas, it’s to be run out of Paris.

“L.A. continues to be driven by entertainment and media first,” said Lloyd Greif, president of local investment bank Greif & Co. “But these deals show that L.A. is a city with few pillars. It’s gone through such wrenching change in the last decade, capped by the Time Mirror-Tribune deal. It’s seems allergic to big companies, whether it’s Times Mirror, whether it’s Security Pacific Bank or whether it’s Arco.”

“The press still uses Fortune 500 companies and where they’re headquartered as proxy for a successful business environment,” Houlihan Lokey’s Alley added. “That is changing to some extent. It’s increasingly less important. A better example is a tech company like Gemstar. To me, the fact that they’re headquartered here is more important. They’re a New Economy company and they’re one of the fastest-growing companies around.”


Economies of scale

Pasadena-based Gemstar-TV Guide International Inc., in fact, pulled off one of the biggest deals of the year, the $14.3 billion purchase of TV Guide Inc. that gave it a virtual lock on interactive onscreen TV program guides.

Other deals also spoke to Southern California’s changing landscape. In an effort to achieve economies of scale, Northrop Grumman Corp. announced last month that it would buy Litton Industries Inc. for $5.1 billion in cash and assumed debt, combining L.A.’s last two defense industry mainstays. Northrop was also in the news earlier in the year when it sold its commercial jetliner structures business to a private investment firm for $1.2 billion. And Boeing Co. paid $3.75 billion in cash for El Segundo-based Hughes Electronics Corp.’s satellite business.

But perhaps no other deal epitomized the difference between the way the year 2000 started and the way it ended than the pending merger between America Online Inc. and Time Warner Inc. When it was announced last January, it surprised both Wall Street and Main Street and seemed to be the very essence of New Economy convergence, bringing together a seminal online presence with a massive offline media company. Although neither company is based in Los Angeles, the deal reverberated here for the impact it would have on Hollywood and beyond.

If AOL could afford to use its soaring stock price to take over Time Warner, including Burbank-based Warner Bros., could other multimedia deals be far behind? Conventional wisdom quickly focused on the Walt Disney Co., with its movies, theme parks and ABC network, as a possible target for a me-too deal, with the name most bandied about as prospective buyer being online portal Yahoo Inc.


Nasty hangover

This, of course, was when Internet currency on Wall Street was as good as gold, fueling the venture capital engine that seemed to be running fast and long. Los Angeles was at the center of it, as more than $2 billion of venture money poured in. Music companies, animation companies, retail companies and consulting companies, all of them based on the Web, were in the midst of raising capital. And there was plenty of it. Initial public offerings were planned, as investors and employees alike went to bed with dreams of “in-the-money” stock options dancing in their heads.

Then, everybody woke up, some with nasty hangovers.

The dramatic drop in technology stock values that began in April created turmoil that continued throughout the year, changing valuations and with it the conventional wisdom. AOL’s stock price was at $83 a share just before the Time Warner deal was announced, its high for the year. On Dec. 28, it hit a 52-week low of $35.25. Time Warner stock, on the other hand, had been trading at around $70 a share before the merger news hit; last week it was at around $54. Both had fallen, but now the Old Economy company’s stock is well above that of the New Economy company.

“If the AOL-Time Warner deal was done today, it wouldn’t be done the same way,” Greif said. “It would be Time Warner-AOL, with Time-Warner doing the buying. Therein lies the tale.”

Disney, therefore, might have been wise to avoid rushing into a deal. Yahoo’s market capitalization at the beginning of last year was around $145 billion. As of last week it was at $19 billion. Disney’s stock, on the other hand, may not have done much in 2000, but its market cap stayed steady at around $60 billion. And talk of unrest in the company’s boardroom settled somewhat when Disney Chairman and Chief Executive Michael Eisner seemed to anoint his successor, choosing ABC network chief Robert Iger as Disney president.

Nevertheless, the froth that spewed in the first quarter of the year led to the kind of deals that didn’t happen later on. A perfect example is Pasadena’s Idealab Inc., the groundbreaking incubator led by entrepreneur Bill Gross, which raised a total of $1.1 billion between January and March from corporate investors in exchange for somewhere around 14 percent of the company.

The brains behind such local public Internet businesses as eToys Inc., GoTo.com and NetZero Inc., and private ones like CarsDirect.com and Cooking.com, Idealab then announced its own IPO which at the time was greeted with applause.

But like many other Internet-based businesses, it was forced to shelve its IPO when the market went south. Nowhere was the downturn more evident that in the fate of eToys, whose wildly successful IPO was the Business Journal’s pick for top deal of 1999. Last week, its stock was trading for around 20 cents a share, as it looks for a buyer or other “strategic alternatives.”

“They continued to have difficulty demonstrating to the public markets they can have profits, while Toys R Us has a pretty nice online presence,” said Massoud Entekhabi, managing director in the Los Angeles office of TL Ventures. “You can do a lot online, but you can’t touch, smell and feel and people want that option.”

So the situation facing cyber companies like eToys brought a whole lot of business to M & A; specialists around town, especially in the second part of the year. And it cut off all but the most confident, profitable and well-backed IPOs, the number of which dropped to 12 in L.A. from 14 in 1999, while the money raised in those offerings fell from $1.9 billion to $1.7 billion.

“There was a mad rush to go public before,” Entekhabi said. “Now it’s a terrible time. The market just turns on you.”


Civic shifts

Outside of the financial world, there were other deals that affected Los Angeles. After a six-month search, the Board of Education settled on former Colorado Gov. Roy Romer to lead the huge and troubled Los Angeles Unified School District. Vowing change, Romer nevertheless helped keep the controversial Belmont Learning Center in the news by reopening environmental studies of the site.

Also on the political end was the Democratic National Convention in August, which was supposed to be a crowning achievement for the administration of Mayor Richard Riordan. In the end, it wound up costing the city more than 3 times the $11 million that civic leaders originally promised. While hotels and restaurants profited from the festivities, it apparently wasn’t as much of a windfall as expected.

Hollywood’s biggest strike in years ended in October, after six months, when members of the Screen Actors Guild settled their contract dispute with advertising agencies. Neither side really got what it wanted, and the deal did nothing to quell worries that actors and writers may strike when their contracts expire in mid-2001.

After 1999, when L.A.’s failed attempt to land a NFL football team often dominated the headlines, 2000 was a relatively quiet year on the sports front. One reflection of a strong economy, however, was the introduction of no fewer than three sports franchises to the city, including Arena Football and a new minor league basketball team. Both paled in hype though to the creation of the new XFL, a football league run by the World Wrestling Federation and NBC. The XFL put its L.A. team, the Xtreme, in the L.A. Memorial Coliseum, just where Eli Broad and Ed Roski Jr. wanted to put a new NFL expansion team.

The biggest sports news, of course, was the Los Angeles Lakers winning the NBA championship in June, the cornerstone of which was the dominating play of center Shaquille O’Neal.

“For the first time in years, the biggest sports story wasn’t in the courtroom or in the back office,” said local sports consultant David Carter. “It was on the court.”

Arguably so. But a noteworthy story was the one in which O’Neal was rewarded by team owner Jerry Buss with a three-year, $88.4 million extension to his already impressive seven-year, $120 million deal signed in 1996.

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