By EDVARD PETTERSSON
One after another, the corporate giants just keep disappearing from Los Angeles.
Twelve of L.A.’s largest public companies have been swept away by larger acquirers in the past year, according to the annual list of the 100 largest public companies in Los Angeles County. And soon, the acquisitions of Atlantic Richfield Co., Marshall Industries, and Dames & Moore Group will remove those corporate stalwarts from the list.
To top it off, Northrop Grumman Corp., L.A.’s last remaining big aerospace company, which came close to being acquired by Lockheed Martin Corp. a few years ago, is again rumored to be a takeover target, this time by a European defense firm.
When will the trend end? Not any time soon, several experts agree. But the larger question may be: Does it really matter?
No, the experts concur, at least when it comes to the long-term health of the L.A. economy.
The actual long-term impact of the corporate exodus on the local economy seems negligible, as job growth and personal income both continue to show robust increases.
“There is nothing alarming about it,” said Joe Magaddino, chairman of the Department of Economics at Cal State Long Beach. “It is an outgrowth of the dynamic U.S. economy, and it is certain that the process of mergers and acquisitions will go on indefinitely.”
In fact, the combined market capitalization of L.A. County’s 100 largest companies has actually increased substantially over the past five years.
In 1994, their aggregate market value was $128 billion; this year it’s $269 billion, a 110 percent increase. While that growth rate is far short of the Nasdaq index’s 267 percent spike and the Dow Jones Industrial Average’s 210 percent jump, it is strong growth nonetheless.
The larger part of this five-year increase, however, is due to the stock performance of some of the remaining old-style corporate giants, which have been the favorites of Wall Street investors to the neglect of the many small and mid cap companies on the list. The Walt Disney Co. alone added roughly $40 billion to its market value over this period, close to 30 percent of the total increase for all the companies on the list combined. Computer Sciences Corp., another local heavy weight, increased its market cap five-fold over this period to over $11 billion.
As many local big names exit, a few others are busy expanding and acquiring, both nationally and overseas. For example, Litton Industries, Kaufman & Broad Home Corp. and CB Richard Ellis have been aggressively expanding their operations by buying up other companies.
Among the most impressive performers on this year’s list is Torrance-based Total Renal Care Holdings Inc., which saw its revenues almost triple to $1.2 billion in 1998 from $438 million in 1997. The company, which provides integrated dialysis services for kidney patients, acquired Renal Treatment Center last year and, during the first five months of this year, it added 30 new centers through acquisitions and management agreements.
The company angered its shareholders, however, when annual earnings fell well short of expectations. Now it is facing class-action lawsuits from investors who allege that the company deliberately misled them in order to raise money on Wall Street to finance its acquisition strategy.
Such is the nature of L.A.’s new corporate citizenry. No longer staid, dividend-paying, button-down operations. Corporate L.A. today is aggressive, entrepreneurial and often volatile in terms of market capitalization.
And the disappearance of staid, old-line corporations is far from a situation that’s unique to Los Angeles; it’s a nationwide trend.
Because of deregulation and market forces, many industries have undergone major consolidation drives meaning there are fewer Very Large public companies everywhere as the giants get bigger by snapping up smaller players.
“Los Angeles has always been the whipping boy, and other cities like to look at us and point out what is wrong with Los Angeles that so many corporations are leaving the city. But you see the same thing happening all over. In San Francisco, they’ve seen Bank of America, Pacific Bell and American Presidents Line leave, among others.”
This is not to say there are no ramifications whatsoever from the corporate flight from Los Angeles. The downtown office vacancy rate crept up to 27.1 percent during the second quarter ended June 30, largely due to space being vacated by Wells Fargo & Co., Bank of America, and Arco, according to Cushman Realty Corp.
Brain Ulf, a vice president with Cushman, said that although there is some impact on the office market from the departure of major corporations, the impact is blunted because much of the vacated space is in locations that are not in demand. The best buildings downtown are 99 percent leased, Ulf said, whereas the bulk of the available space sees very little demand.
Besides commercial landlords and brokers, others hurting from the corporatae exodus are professional services, such as consulting firms, law firms and public relations firms.
“Certainly, as mergers and acquisitions continue to occur and company headquarters continue to move out of Los Angeles, it can hurt opportunities for us,” said Greg Garrison, managing partner with PricewaterhouseCoopers LLC. “On the other hand, other opportunities are created through these mergers and acquisitions, as companies that go through this process require various consulting services, although some of these may be (one-time) opportunities.”
To adapt, consulting firms have become more aggressive in selling and marketing their services, in particular to the increasing number of smaller start-up companies in the information technology and high-tech sectors, where there is a lot of growth, Garrison said.
Magaddino acknowledges that there can be some fallout for service-providing firms when local corporations are acquired by out-of-town entities, but he does not see the trend as detrimental in the long run.
“When Boeing acquired McDonnell-Douglas, they moved the R & D operations to Seattle. As a consequence, we saw a drop in engineering consulting jobs in Long Beach, but you have to ask what the overall magnitude of such changes is, and again, I don’t see any alarming developments here,” he said.
Indeed, business services remains the fastest-growing segment of the Los Angeles job market, according to the state Employment Development Department, adding 3,900 local jobs in May alone.
Another sector of the local economy said to be hurt by the corporate flight is philanthropy.
“When you had corporate leaders here, they could make decisions on the spot,” said Jack Kyser, chief economist with the Los Angeles County Economic Development Corp. “Now that they are no longer here, you’ve got to go through the chain of command to get to the top, and you become one of many communities that begs for their attention.”
Gone from the ranks of L.A.’s public company ranks last year’s list are H.F. Ahmanson & Co., SunAmerica Inc. and Pinkerton’s Inc., to mention just a few of the more prominent names. Their disappearance is felt in the numbers; the combined revenues of the 100 companies on this year’s list added up $166.3 billion, compared to a combined $175.3 billion for the largest 100 public companies a year ago.
Similarly, this year’s companies had a combined market capitalization of $269.0 billion, compared to $292 billion last year. All this during a year in which the U.S. economy, and the stock market, soared.