Every year, the Business Journal compiles a list of L.A. County’s 100 largest public companies. And every year, there are fewer Fortune 500 companies on it.
Currently, there are 17 remaining Fortune 500 companies headquartered in L.A. That’s two less than a year ago, following the acquisitions of Atlantic Richfield Co. by BP Amoco plc and Times Mirror Co. by Tribune Co.
Speculation is rife about why these giants keep disappearing from the local landscape. Are L.A. moguls less aggressive than business leaders in other cities? Is there something about the local economy that makes it more conducive to small entrepreneurial businesses than to corporate titans? The answers are elusive.
Though L.A.’s landscape of small employers is said to be a plus for the local economy because its diversity helps insulate against a single sector crash causing widespread pain, there is little question that when it comes to business, size matters. Larger companies tend to pay better, have better benefits and contribute more to local philanthropic causes than small companies. So whatever the reason, the continuing flight of large corporations from L.A. is a matter of concern.
It is highly unlikely that the bleeding has stopped. Many of L.A.’s remaining giants are in unstable industries or have depressed stock prices, making them takeover targets. This time next year, the Business Journal list is likely to contain even fewer Fortune 500 firms than it does now.
Here’s a look at the 17 remaining stalwarts, and their odds of staying or going in the near future.
Walt Disney Co.
1999 Revenue: $23.4 billion
1999 Net Income: $1.3 billion
Stock Price (July 6 close):$37.50
P/E Ratio: 81.52
Outlook: Staying put
L.A.’s largest public company isn’t going anywhere. The only entertainment and media conglomerate headquartered here reinforced its commitment to the area by recently relocating 100 or so ABC network executives from New York to Burbank.
Despite an ongoing brain drain of talent from its executive levels to various Internet startups around town, Disney is doing quite well these days, thanks in no small measure to the success of ABC’s “Who Wants to Be a Millionaire” game show. The program accounted for an estimated $100 million of Disney’s bottom line in the quarter ended March 31, although the company’s Go.com Internet venture is still draining profits.
When America Online Inc. and Time Warner Inc. stunned Wall Street with their merger announcement in January, it set off frenzied speculation of other like mergers, with Disney’s name being mentioned as possible acquisition bait by the likes of Yahoo Inc. But Disney’s renewed strength on Wall Street its stock is up more than 30 percent so far this year and the parallel slide in many Internet stocks has quieted any talk that the Magic Kingdom is in play.
Edison International
1999 Revenue: $9.7 billion
1999 Net Income: $623 million
Stock Price (July 6 close): $20.38
P/E Ratio: 11.99
Outlook: Staying put
As the holding company for Southern California Edison, one of the country’s largest electric utilities, Edison International is another of L.A.’s well-ensconced Fortune 500 companies, but one that is feeling the heat.
The recent hot spell in California sent electricity prices soaring, but because Edison’s rates are frozen, it has had to pay more on the wholesale market for energy without being able to pass the costs along to its customers. As a result, the utility has been at the forefront of efforts to cap the wholesale price of electricity in California. It has welcomed the recent decision to lower the cap from $750 per kilowatt hour to $500 and is seeking to get it cut further to $250 an hour.
While it’s possible that another utility could come along and buy up Edison, the price would be so high that such a deal is unlikely. And there are no indications that buyers are eyeing the company.
Computer Sciences Corp.
1999 Revenue: $9.4 billion
1999 Net Income: $402.9 million
Stock Price (July 6 close): $70.38
P/E Ratio: 27.33
Outlook: Staying put
As one of the dominant information technology companies in the country, Computer Sciences Corp. is doing the acquiring, not the other way around. The El Segundo-based firm saw revenues jump 17 percent in the fiscal fourth quarter ended March 31, to $142.9 million (84 cents per diluted share), thanks in no small part to revenue generated from corporate clients seeking to combat the Y2K problem.
CSC’s stock price fell somewhat after the company recently stated that revenue growth in the April-June quarter would be 11 percent to 13 percent, down from its previous projection of 13 percent to 15 percent, due in part to a severe falloff in Y2K-related business.
But the company is pursuing a tiered strategy of going after government and private-sector contracts while simultaneously focusing more on Internet-related business. E-business accounted for $600 million in revenue in the most recent fiscal year, or about 8 percent of total revenue.
With a 40-year history in Los Angeles, the company seems content to use L.A. as a base for its domestic and international expansion.
Northrop Grumman Corp.
1999 Revenue: $9.0 billion
1999 Net Income: $483 million
Stock Price (July 6 close): $66.44
P/E Ratio: 8.5
Outlook: May be taking flight
Northrop Grumman Corp.’s transfer of much of its operations to the East Coast could well auger a move of its headquarters from Los Angeles as well.
The aerospace giant last month agreed to sell its commercial jet-making operations to a Washington, D.C. investment group for $1.2 billion. The deal includes Northrop’s Hawthorne plant, where 1,000 workers make fuselages for the Boeing 747. Once the sale closes, Northrop had planned to relocate its Dallas-based Integrated Systems and Aerostructures Sector to Washington as well, but it reversed that decision this month, so the Dallas operation will stay put for now.
While Northrop executives say there are no plans to move operations to the East Coast in the foreseeable future, such a move would make sense, given that Washington is the locus of the defense industry.
Then too, ever since the U.S. Department of Justice scuttled Northrop’s 1998 proposed merger with Lockheed Martin Corp., the L.A. aerospace outfit has been mentioned as a likely takeover target by various European defense conglomerates, such as DaimlerChrysler Aerospace AG, although there would be political obstacles to such a merger.
Foundation Health Systems
1999 Revenue: $8.6 billion
1999 Net Income: $147.8 million
Stock Price (July 6 close): $14.50
P/E Ratio: 13.8
Outlook: Likely to go
In a sector that continues to be buffeted by patients’ rights legislation, lawsuits and medical costs rising faster than premiums, Foundation Health Systems is fighting to reinvent itself. Failure to do so could well mean its demise.
Along with the other large managed care providers in the country, Foundation Health, which covers 5.8 million Americans in 21 states, is facing major class-action lawsuits alleging it has engaged in fraud by relying on undisclosed financial incentives and controls to limit the medical care available to its customers.
At the same time, massive consolidation is underway in the health care industry, and managed care organizations are restructuring as fast as they can, trying to rid themselves of unprofitable operations. Foundation Health is no exception: Late last month, the Woodland Hills-based company said it is pulling out of markets affecting 19,000 Medicare beneficiaries in Arizona, New York, Connecticut, New Jersey and California.
While it has not been mentioned as a takeover target, Foundation’s local competitor, WellPoint Health Networks, recently failed in its attempt to acquire Aetna Inc., and could be still looking around for an acquisition. In an interview in the L.A. Times in April, Foundation Health CEO Jay Gellert said that without fundamental changes in the health care industry, “I seriously question whether it’s possible for this business model to continue.”
Occidental Petroleum Corp.
1999 Revenue: $7.6 billion
1999 Net Income: $561 million
Stock Price (July 6 close): $21
P/E Ratio: 8.43
Outlook: Takeover target
The mergers between Exxon Corp. and Mobil Corp. on the one hand and BP Amoco and Atlantic Richfield Co. on the other have increased the pressure on mid-sized oil companies, and Oxy is no exception. In fact, Oxy has been bandied about as a possible takeover target by Chevron Oil, particularly late last summer after Chevron lost almost $1 billion in a lawsuit with its smaller competitor.
Oxy, however, is proceeding as if it intends to remain independent. The oil-and-gas company recently bought Altura Energy Ltd., which operates 6,400 oil wells in Texas and New Mexico, for $3.5 billion.
But the company continues to face a lackluster reception on Wall Street, and was rated one of the worst-performing oil companies by a consulting group last fall. Chevron, incidentally, was rated one of the best. Oxy could be wearing stripes in the not-too-distant future.
WellPoint Health Networks Inc.
1999 Revenue: $7.5 billion
1999 Net Income: $297.2 million
Stock Price (July 6 close): $73.38
P/E Ratio: 16.06
Outlook: Staying put
While it is far too early to determine which HMOs will still be around in a few years, WellPoint and its main division, Blue Cross of California, looks to be one of the survivors. The company is far more profitable that its local competitor, Foundation Health Systems, and has been aggressive in using that money to expand.
Its most recent effort along those lines was a $10 billion joint takeover bid for the nation’s largest insurer, Aetna Inc., in partnership with ING Group, a Dutch investment bank. The buyout was rejected, but it pointed up the degree to which WellPoint has rebounded since the mid-1980s, when as Blue Cross of California it was near bankruptcy.
Reviled for its poor service 15 years ago, WellPoint was named the most admired company in the health care field by Fortune magazine last year. While other managed care providers are struggling, the Thousand Oaks-based company’s operating profit, excluding one-time gains and charges, rose a respectable 13 percent in 1999 to $297 million, on revenue of $7.4 billion.
Unocal Corp.
1999 Revenue: $6.1 billion
1999 Net Income: $113 million
Stock Price (July 6 close): $32.19
P/E Ratio: 33.88
Outlook: Likely to go
In some sense, of course, discussing whether Unocal will stay or leave Los Angeles is moot, because its presence here as a corporate entity has dwindled to almost nothing.
The striking downtown headquarters campus was abandoned in the mid-1990s as dramatically downsized corporate operations moved to El Segundo. The Union 76 stations that dotted the landscape and once were a mainstay of Dodger promotions are now owned by Tosco Corp.
But Unocal has retained its super-independent reputation over the years, so much so that recent rumors that Texaco Inc. was making a bid for it in the wake of industry consolidation were quickly discounted.
But the company is proceeding with plans to develop land owned in Ventura County, eventually envisioning a 615-acre industrial park and business center, along with 590 acres of residential development. Ground breaking isn’t expected to begin for several years, but the site could well become the company’s new headquarters, moving Unocal out of Los Angeles in name as well as fact.
Hughes Electronics Corp.
1999 Revenue: $5.6 billion
1999 Net Income: $2.1 million
Stock Price (July 6 close): $27.94
P/E Ratio: N/A
Outlook: Likely to go, but not soon
Does Rupert Murdoch have his eyes on Hughes Electronics?
Murdoch, controlling shareholder of News Corp., apparently was contemplating a hostile takeover of General Motors Corp., which owns El Segundo-based Hughes, earlier this year because of Hughes’ satellite television subscriber base.
The idea was dropped, but it points to Hughes’ prominent position in the satellite industry. (As a subsidiary of GM, Hughes isn’t technically a Fortune 500 company, but has its own tracking stock, and with $5.6 billion in 1999 revenue, could qualify for the list if it were independent.)
Since its decision in January to sell its satellite manufacturing division to Boeing Co. for $3.75 billion in cash, Hughes now considers itself a telecom company, with DirecTV its main asset.
CEO Michael Smith has backed an aggressive campaign to boost subscribers, find new broadcast content and become a major player in broadband technology, all reasons to exploit the local market. But with the entertainment and technology giants rapidly converging, DirecTV is likely to be gobbled up eventually.
Mattel Inc.
1999 Revenue: $5.5 billion
1999 Net Loss: ($86.4 million)
Stock Price (July 6 close): $13.19
P/E Ratio: N/A
Outlook: Takeover target
Amazon.com? Wal-Mart? Time Warner Inc.? Walt Disney Co.? Anyone?
Although no company has stepped to the forefront, speculation abounds as to who will make a play for beleaguered Mattel. Three years ago, the toy maker was well run and profitable. Today, it is losing money hand over fist, a consequence of the disastrous reign of ex-CEO Jill Barad.
Though she is gone, other top executives have left as well, adding to the company’s disarray.
Mattel is trying to sell the educational software company, although it is expected to take a bath doing so. Last month, Mattel sold its Cyber Patrol filtering-software unit, which was part of Learning Co., for $100 million in cash and stock, but Learning Co. itself is expected to fetch no more than a fraction of what Mattel paid for it. The company remains vulnerable as a takeover target, and it seems only a matter of time before Barbie has a new corporate master.
Merisel Inc.
1999 Revenue: $5.2 billion
1999 Net Loss: ($61.1 million)
Stock Price (July 6 close): 81 cents
P/E Ratio: N/A
Outlook: Takeover target
Like many companies in the computer hardware and software distribution industry, Merisel is in trouble, and is a likely takeover target.
Despite repeated attempts to recover profitability, the El Segundo company continues to find rough going. While it is one of the largest companies of its kind, Merisel lost $61.2 million (76 cents per diluted share) in 1999 after posting a net profit of $18.5 million (23 cents a share) in 1998. The company’s stock price remains barely visible at less than $1 a share, and the company is therefore ripe for the plucking.
Speculation is rife that another computer distribution company, such as Ingram Micro or Tech Data, or electronics manufacturing services companies, such as industry giants SCI Systems Inc. or Flextronics Inc., will pick up Merisel for a song. Another line of thought is that Merisel (and others of its poor-performing competitors) might be an attractive target for online resellers Amazon.com Inc. or Buy.com Inc., both of which are heavily involved in distribution.
Dole Food Co. Inc.
1999 Revenue: $5.1 billion
1999 Net Income: $48.5 million
Stock Price (July 6 close): $15.88
P/E Ratio: 18.68
Outlook: Takeover target
Dole Food is currently off the block, but that could well change.
Westlake Village-based Dole retained Goldman, Sachs & Co. in January to explore a possible sale or merger, but then said in March it was no longer looking to sell the entire company, instead deciding to auction off non-core assets piecemeal.
One problem is finding a suitor for the world’s largest grower of fruit and vegetables, whose stock has been wracked by volatility for much of the past two years. Rival Chiquita Brands International Inc. of Cincinnati has been experiencing even more financial difficulty than Dole, but a possible merger of the two could face serious antitrust scrutiny because together Dole and Chiquita control 40 percent of the worldwide banana business. Similar concerns seem to rule out a combination with No. 3 U.S. grower Fresh Del Monte Inc.
When Dole was up for sale earlier in the year, Philippine conglomerate San Miguel Corp. attempted to buy a controlling stake for about $210 million, but failed.
Then too, what Dole does is pretty much up to one man: CEO David Murdock, who has been spending his energy trying to buy all of real estate company Castle & Cooke, once a Dole subsidiary. At 73, Murdock may be seeking to merge the two companies again and then sell the combined entity off. If so, it is unlikely to remain in L.A.
Litton Industries Inc.
1999 Revenue: $4.8 billion
1999 Net Income: $120.6 million
Stock Price (July 6 close): $45.44
P/E Ratio: 16.17
Outlook: Takeover target
With further aerospace consolidation likely, Litton could well be on the move, although the company has been trying to quiet such rumors by improving its performance.
The nation’s largest builder of non-nuclear ships was mentioned as possible acquisition bait for TRW Inc. last year, and because it is only the seventh-largest defense contractor in the country, it could well be seen as a ripe target by its larger competitors.
Takeover rumors were especially loud when Litton’s stock price plummeted from a high of more than $73 last July to as low as $26 and change in March, after Litton announced that cost overruns on two development contracts would hurt second-quarter earnings. But the company posted a net profit of $61.6 million ($1.35 per diluted share) for the quarter ended April 30, up 22 percent from $50.7 million ($1.10 a share) in the like quarter a year ago.
The company has been making efforts recently to increase its non-defense electronics and commercial shipbuilding operations, delving into areas such as information technology, aerospace and marine navigation equipment.
But 70 percent of earnings comes from defense projects, and investor unease about Pentagon-dependent companies persists, so don’t be surprised if Litton seeks safety in the arms of a larger suitor.
Kaufman & Broad Home Corp.
1999 Revenue: $3.8 billion
1999 Net Income: $147.5 million
Stock Price (July 6 close): $20.25
P/E Ratio: 4.69
Outlook: Staying put
There certainly has been consolidation in the homebuilding industry over the past decade, and Kaufman & Broad has been in the forefront of it. The Westwood-based company shows no signs of going anywhere.
Competition has squeezed the margins of several of its competitors, but Kaufman & Broad is steaming ahead, with net profits rising for six straight quarters on a per-share basis. Although the rise in mortgage rates has hurt its mortgage banking business, the company has cut costs in its mortgage branches and is expected to save $6 million annually as a result.
Despite the good performance, Wall Street remains relatively unimpressed. Investor interest in tech stocks has come at the expense of homebuilders, and Kaufman & Broad’s stock has languished for some time. But the company is clearly one of the biggest players in the industry, and its acquisition last year of Upland-based Lewis Homes for $544 million makes it the top homebuilder in the country. The company has continued to buy back its own shares aggressively.
Avery Dennison Corp.
1999 Revenue: $3.8 billion
1999 Net Income: $147.5 million
Stock Price (July 6 close): $66.94
P/E Ratio: 25.26
Outlook: Staying put
In a less-than-dazzling industry, Avery Dennison keeps on keeping on, and as such seems destined to remain in Los Angeles, where it has been headquartered since its founding in 1935.
The Pasadena-based manufacturer shows no sign of ceding its position as a global leader in labeling products. The company instituted some dramatic cost cutting last year and is currently enjoying worldwide sales growth, making acquisitions in places like Germany and Italy along the way.
Its labels are found on everything from plastic Coca-Cola bottles to Dove soap products; it also makes the “test” strips on Duracell batteries. Not content to simply stay in the offline world, Avery Dennison last year entered into agreements with the two companies licensed thus far to sell postage stamps over the Internet, E-Stamp Corp. and Stamps.com, to produce special mailing labels.
Per-share earnings leveled off last year but only after rising for nine straight years, and Wall Street continues to favor the stock. In short, it isn’t going anywhere.
Countrywide Credit Industries Inc.
1999 Revenue: $3.4 billion
1999 Net Income: $410.2 million
Stock Price (July 6 close): $31.31
P/E Ratio: 9.32
Outlook: Takeover target
After saying for years that he would never sell, Countrywide Credit founder and Chief Executive Angelo Mozilo recently hinted he would no longer rule it out.
Countrywide is the top independent mortgage lender in the United States. Even among the nation’s largest banks, only Chase Manhattan Mortgage and Wells Fargo actually made more loans than the $75 billion Countrywide underwrote in 1999.
But while the company has made steady profits while staying on the top of the mortgage business, it has failed to attract much attention from Wall Street, despite a consensus among analysts, shareholders, and company executives that it is substantially undervalued.
As a result, industry observers have pegged Countrywide as an attractive takeover target. Mozilo seems to be amenable to offers, although one school of thought is that he is just trying to boost his company’s share price. If so, it worked the mortgage lender has gone from around $25 a share to about $33 since May, when Mozilo made his comments.
No particular buyer has stepped forward, but if Countrywide gets bought out, it won’t be by a company headquartered in Los Angeles.
Amgen Inc.
1999 Revenue: $3.3 billion
1999 Net Income: $1.1 billion
Stock Price (July 6 close): $73.25
P/E Ratio: 70.43
Outlook: Staying put
Amgen is doing so well that there has been speculation that the biotechnology giant may be looking to acquire a traditional pharmaceutical company, shoring up its reputation as one of L.A.’s most exciting Fortune 500 firms.
Such a move by Amgen would symbolize a sea change in each industry’s fortunes, as drug companies have long-established histories and biotech firms are relatively new. But thanks to continuing strong sales of Amgen’s blockbuster drug Epogen, the company has an astounding market capitalization of around $75 billion.
While no specific deals have been mentioned, analysts recently speculated that Amgen might want to buy pharmaceutical giant Bristol-Myers Squibb, given that the former is launching an improved version of Epogen, its top-selling cancer and dialysis drug, and the latter has a well-regarded sales force with experience in the cancer market.
With the money pouring in net income for the most recent quarter rose 7 percent to $266.2 million (25 cents per diluted share) the company looks set to stay and expand in Los Angeles.
