Ailing State Too Much for Medical Clinic Operator

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Last week’s announced departure of DaVita Inc., one of only 14 Fortune 500 companies in Los Angeles County, could be evidence that the state’s worsening economy is driving businesses out of California.


DaVita, which operates 1,400 kidney dialysis clinics in 43 states, on May 27 said that it will move its corporate headquarters from El Segundo to Denver to take advantage of cost savings and that city’s central U.S. location.

Larry Kosmont, president of economic development consultancy Kosmont Cos. in Encino, said California deserves most of the blame for creating a business-adverse environment for large corporations.

“The state has become so burdensome that even cities like El Segundo, which are competitive and friendly to business, have a hard time,” Kosmont said. “I don’t view this as El Segundo’s weakness. I see it as a sign of California’s declining competitive posture in a commercial world.”

Jack Kyser, economist at the Los Angeles County Economic Development Corp., said he was surprised that DaVita didn’t approach local officials to discuss staying. But he wasn’t surprised that another state tried to lure away the company.

“Colorado and Nevada are running programs right now to get companies to relocate,” he said. “Meanwhile, in Sacramento, the Legislature is in a bubble. They don’t understand the competition for businesses. A lot of other states are recruiting California companies in this downturn.”

Kosmont said Los Angeles is a great environment for starting companies, but once they grow past about 500 employees it becomes advantageous to leave. That’s because of high costs for real estate and medical insurance, along with regulations that apply to bigger enterprises.

“We are a large economy, so every company needs a presence here, but between the state’s dysfunction, workers comp and other issues, we are rapidly becoming the state where corporate leaders are measuring the least presence they can have here,” he said.

Both Kyser and Kosmont agree that Los Angeles fills the vacuum created by departing Fortune 500 corporations with startups, but the exodus still represents a real loss for the economy.

Kyser points out that a corporate headquarters purchases business services such as legal, accounting, advertising and consultants, so there’s a multiplier effect to the loss in the local market.

Kosmont added that startups don’t get much involved in civic and charitable projects as much as larger corporations, and that Los Angeles has suffered from that.

Also, large companies can compete for significant government contracts, grants or investments that can create wider community benefits.

“Big fish attract big contracts, and the small fish swim in their current,” Kosmont said. “Big companies attract large economic investments and everyone does better. Having a lot of small fish fending for themselves just doesn’t work as well.”


Bigger implications

The announcement is the latest in a series of large companies to leave the county. In the last few years, Hilton Hotel Corp., Computer Sciences Corp., both on the Fortune list, and Nissan USA, all left.

Hilton moved from Beverly Hills to Virginia after its purchase by private equity firm Blackstone Group; CSC moved from El Segundo to Virginia; Nissan was lured from Gardena to Tennessee.

Ten years ago, Los Angeles County had 19 Fortune 500 corporations. The exit of DaVita drops that number to 13.

The losses include home-grown successes such as Home Savings, which was bought by Washington Mutual; Lockheed, which merged with Martin Marietta; and Times Mirror, which was acquired by Tribune Co.

El Segundo officials first learned about DaVita’s decision when they read the newspaper.

“I don’t believe we’ve had any direct contact with them at all, and it came as a surprise,” said Mayor Kelly McDowell. “They tend to be a very quiet company anyway, and in this case, there were no negotiations.”

Three years ago, El Segundo won an award as the most business-friendly city in the county. But according to the mayor, state considerations carry more weight than municipalities.

“In our city, we have low taxes, high levels of service and minimal regulation,”said McDowell. “But the state of California has high taxes and regulation that amounts to strangulation for businesses. Colorado apparently was willing to pony up a lot of money to get them there, while California has billions less than no money at all.”

In its announcement, DaVita cited four reasons for the relocation: Denver’s central location, its reputation as a livable city, the company’s existing presence there, and the high cost of living and working in Los Angeles.

“In terms of geography, Denver is somewhat ideal,” said LeAnne Zumwalt, DaVita’s vice president of investor relations. “It facilitates a national organization to pick a central location that will save on travel costs and time.”

Richard Grenell, vice president of corporate communications, said the company has grown substantially since 2000, and much of that growth has occurred in the eastern states. That makes travel a greater concern for top management.

“Los Angeles is a wonderful place to live and work,” he said, “but Denver is closer to the middle of the country.”

Grenell said the company considered other centrally located cities but declined to name them. He also declined to discuss incentives offered by Denver. He said the decision has been in process for months and was approved the board.

The company expects to save millions of dollars with the move, but Zumwalt declined to discuss specific business expenses.

In terms of employment, the impact of the move will be minimal. The company has about 288 employees in El Segundo, but only Chief Executive Kent Thiry and “several other senior executives” will move to Colorado. Grenell said, however, that future job growth will be in Denver.

L.A.-area employees would be offered voluntary relocation to Denver as needed over time, said Brad Chase, a company spokesman.

DaVita already has about 250 administrative personnel at a regional headquarters in Denver.

Despite its small employment footprint in Los Angeles, DaVita ranked as the 13th largest public company in the county by market capitalization last year and had 2008 revenue of $5.66 billion. The company’s stock surged slightly after the announcement of the move but never strayed far from its long-term trading price of around $46 a share.

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