Is Wall Street so strong that it is going to start helping the local economy?

The idea works like this: that consumers feel something of a "wealth effect" when stocks go up, and so they become little more libertine at stores and restaurants.

Stan Plog, chief executive of Reseda-based Plog Research Inc., a consumer research firm, said there is something to the idea.

"Our surveys of consumers show strong intention to travel, and have since spring of 1994. Consumers travel when they feel pretty good travel is a luxury," he said.

Of course, a generally improving economy is a major impetus to improved consumer outlook, most economists agree.

Nevertheless, local consumers have been whacked in the wealth effect department, due to the 1990s slide in house prices. Many local consumers have watched home equity disappear in $100,000 chunks not the sort of thing to put one in a spending mood.

But with the stock market up, and with house prices appearing to bottom, or even appreciate, Angelenos may feel a little easier around ringing cash registers again, said Plog.

He noted that better airline and lodging industry stocks have been stellar performers since 1994. "The indications are that anything to do with the travel industry will continue to do well," he said. "Hotels are overbooked."

Growing up

Overbooked as well is Jim Freedman, founder and managing partner at Brentwood-based Barrington Associates Inc., a boutique investment banking shop.

"The M & A; (mergers and acquisitions) market is as good as I have seen in the last 10 years," said Freedman.

Sellers are plentiful, because business owners know the time to sell is when the economy is robust and profits are healthy, said Freedman.

There are scads of buyers, because of the desire for growth, particularly for publicly held companies, which can often pay for the buyout by issuing stock to sellers.

"Public companies are selling for high price-earnings multiples," said Freedman. "That allows them to use their stock as currency, and thus pay a good price to acquire another company (with stock), but still have it be accretive to earnings (on a per share basis)."

Competition is ferocious on the buy side. "We are in regular contact with 530 financial and investment groups," said Freedman. In the main, these are leveraged buyout funds, venture capital groups and others.

That doesn't count "strategic" buyers, such as public companies looking to make specific acquisitions, said Freedman.

By the way, we've called Barrington Associates a "boutique" shop for a long time, but now with 15 professionals, and looking for more, it is the largest independent shop in Southern California. Too, the deal size Barrington is involved in keeps growing, though Freedman empasizes, "we still are just as happy and committed with a $5 million to $10 million deal as with a $100 million deal."

Barrington has been getting involved in more and more deals in the $50 million to $150 million range, and working for medium-sized public companies.

Freedman said last week he is interested in expanding to 30 professionals, and "we are looking for both senior and junior people."

Better boards

We were delighted last week to get a phone call from Mark Lipis, of the Westwood-based Lipis Consulting Inc., a management compensation outfit.

Lipis took issue with some sentiments expressed in last week's column, from a money manager who felt that some boards and managements were far too cozy with each other, and that resulted in overpaid managements.

Lipis said that boards of publicly traded companies, and compensation committees of boards, are much different animals from 10, and even five years ago. (In general, publicly held companies will have a compensation committee of directors, usually three people. These directors are "outside members," in that they are not employed by the company.)

"The old days of a rubber stamp committee are long gone," said Lipis.

One sign of the change: 10 years ago, Lipis was always hired by and paid by management. Now "one-quarter of the time it is the board that is hiring me," said Lipis.

Of course, the board uses company funds to pay Lipis, but still, it is the board that approves final payment to Lipis, not management, a key change.

The tide is shifting from a situation of management devising pay plans with a board approving, to a situation where the board devises executive pay plans with the help of a consultant, to be presented to management.

Something to watch in the future, said Lipis: What happens to executive stock option "strike" prices, if there is a general, sustained bear market.

A bear market scenario presents a conundrum, even for shareholder advocates. If there is a long, soft market, and executive options become practically worthless, how does one continue to "incentive-ize" management?

If one merely lowers the strike price on the options, does that warrant criticism as a "rigged plan" in which management will make money even if the stock is a so-so performer?

Lipis, with Solomon-like evenhandedness, recommends that options be re-priced but that management takes a hit. The new options should be less generous than the old. "Otherwise, you could lose management to other companies that are offering fresh options. It's still and supply and demand situation too," said Lipis.

Horse of a different color

Chairman R.D. Hubbard runs Inglewood-based Hollywood Park Inc., and also owns Gentleman, one of the premier thoroughbreds in the country.

Now he wants to convert the publicly held Hollywood Park stock back to a "paired share" status, which the company had until 1992, according to a company news release.

Paired shares are a rarity; depending on who you believe, there are four or five paired share stocks in the whole country. The Santa Anita Race Track is owned and operated under this arrangement.

The IRS doesn't allow paired share stocks anymore, but some were grandfathered in.

A paired share arrangement allows operating profits in one company to be funneled through a real estate investment trust (REIT). REIT profits are not taxed at the corporate level.

Thus profits from running Hollywood Park, casinos and other gaming activities could be funneled through a REIT, without paying corporate income taxes.

If Hubbard wins back the paired-share status, look for him to acquire more properties, said one analyst close to Hubbard.

Senior Reporter Benjamin Mark Cole covers the investment community for the Los Angeles Business Journal

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