Financial Services

The watch word in the Los Angeles investment community in 1998 will be caution.

While the feverish pace of consolidation and initial public offerings is not expected to ease significantly, it could become more selective due to the instability facing financial markets.

“The more logical path in a time of volatility is the flight to quality. Volatility makes financing smaller firms that much harder,” said Michael Gardner, managing director of capital markets at Wedbush Morgan Securities.

While the full impact of the Asian financial crisis will not be known for months, economists are already predicting that U.S. gross domestic product growth will be cut by around half a percentage point. That impact may be most sharply felt in Los Angeles, a transshipment point for U.S.-Asia trade and home to many firms that depend on Pacific Rim exports. In California, some economists are predicting up to 60,000 fewer jobs next year as a result of the Asian troubles.

As a result, there could be a decrease in the number of smaller, more speculative local companies going public, while larger firms looking for acquisition targets will be taking a little more time when it comes to due diligence.

But consolidation is likely to continue. After years of downsizing, L.A.-based companies are about as lean as they are going to get and can no longer boost earnings through efficiency alone. Growth through consolidation may be the only viable means of increasing shareholder value.

Sectors of the local economy most likely to see further consolidation are technology, health care, financial services and banking.

In the long term, the weakness in Asia might actually boost merger-and-acquisition activity in Los Angeles. Many Asian-based companies could follow the lead of Sumitomo Bank and attempt to sell their Californian divisions. It also could create more opportunities among U.S.-based businesses.

One indicator of optimism in the investment banking community is the pace at which firms are hiring new staff. Los Angeles investment banks generally plan to boost their staff levels by an average of 15 percent in 1998.

All such predictions, however, go out the window if the stock market takes a big hit. So far, though, the betting remains on stocks cautiously.

Jason Booth