Why is Los Angeles losing its major corporate citizens?
That question, pondered by shell-shocked L.A. executives throughout the recessionary years of the early 1990s, is at center stage again following the announcement that Northrop Grumman Corp. will close its Century City headquarters after it is acquired by Bethesda, Md.-based Lockheed Martin Corp.
The $11.6 billion aerospace merger comes on the heels of a flurry of transactions involving longtime L.A. institutions.
Those deals include the recent acquisition of Chatsworth-based Great Western Financial Corp. by Seattle-based Washington Mutual Inc.; Seattle-based Boeing Co.’s proposed takeover of McDonnell Douglas Corp.; and San Francisco-based Wells Fargo & Co.’s buyout of L.A.’s First Interstate Bancorp.
Nor have such deals been limited to aerospace and financial service firms. Recent years also have seen Pleasanton, Calif.-based supermarket giant Safeway Inc. swallow L.A.’s Vons Cos. and Cincinnati-based Federated Department Stores take over the Broadway department store chain (formerly known as Carter Hawley Hale Stores).
Even before the recent moves, L.A. had trailed other major cities in the number of corporate headquarters based here. Last year, Fortune Magazine listed Los Angeles as having only nine Fortune 500 companies, compared with 46 in New York.
To be sure, each of the L.A. departures was driven by its own set of circumstances. But they do share at least one feature in common: In each case, it has been a Los Angeles company being swallowed by a faster-growing, more aggressive competitor from outside the area.
The question is: In the rush to consolidate, why are L.A. companies almost always getting the shorter end of the stick?
The answer may have less to do with any vulnerability among L.A. firms than it does with the peculiar evolution of the Southern California economy, according to local economists and executives.
“If this were the news five years ago, we would be wringing our hands,” said Jon P. Goodman, director of the Annenberg Center Incubator Project, a program for new media start-up firms at USC.
“But this economy has come back,” she said. “We’ve gone through a fundamental restructuring and ended up looking different.”
Rather than being dominated by a handful of large employers, Goodman said, L.A.’s economy has taken on a far more entrepreneurial cast, in which the bulk of new jobs is being created by small- and medium-sized firms particularly in emerging areas such as information technology, international trade, biomedicine and multimedia.
The takeovers of companies such as Great Western and Northrop, according to Goodman, represent a unique moment in L.A.’s economic history, in which the old model is being superseded by a new one.
And despite their relative anonymity, young and growing firms are accounting for much of the economy’s dynamism.
“The way industry and the economy are changing, so many of the really important companies are ones that have not been around for a huge amount of time,” said Kerry K. Killinger, chief executive of Washington Mutual, the Seattle-based thrift that last month purchased Great Western for more than $7 billion.
“Up in the Northwest, the major drivers of the economy, for the most part, are companies that weren’t even there 20 years ago,” Killinger said.
And that’s likely to become the case in Los Angeles, as well, suggested Robert Franko, president of Imperial Financial Group Inc. in El Segundo.
“There are a lot of new companies starting up that are not yet ‘names,'” Franko said. “But in the next 10 to 15 years, they could become significant headquarters for us.”
According to Franko, the recent takeover deals actually reflect the continuing attractiveness of the Southern California marketplace.
“If you are headquartered in a place like Seattle, you have to go out of the area to grow,” he said. “Out-of-state companies have reached their limit where they are and they are looking at California as an opportunity.”
There are those who believe that the string of takeovers of L.A. companies constitutes nothing more than an historical accident.
“To me, there is no nexus between where these companies are located and who’s buying who,” said Jay Wintrob, vice chairman of the Westwood-based financial services firm SunAmerica Inc. “I don’t think this is an L.A. versus the rest of the country issue. It is an industry issue. You have to look at things on a case-by-case basis.”
But if the loss of major corporate headquarters does not represent a significant blow to Los Angeles, it nonetheless brings with it an array of challenges.
The departure of a major corporation never constitutes good news for a region particularly one whose image has been as battered as that of Los Angeles.
Then there is the issue of job loss. The Northrop deal will eliminate 475 jobs at the company’s Century City headquarters, most of them high-paid, executive positions.
Some economists express concern about the nature of the new jobs being generated by the region’s economic restructuring.
“There is growth in high-income occupations software, entertainment and electronics, and there is growth at the lower-paying end of the scale,” said Tom Leiser, associate director of the UCLA Anderson Forecast. “But one thing we are losing is solid middle-class, high-paying employment. I’m not sure we’ve seen anything come along to fill that gap.”
Not everyone agrees with Leiser’s assessment.
L.A.’s newly created jobs indeed provide “good, high-paid, entry level employment,” generally in the $9 to $15 dollar an hour range, according to Rocky Delgadillo, L.A.’s newly appointed deputy mayor for economic development.
“Whether or not a headquarters is here doesn’t mean there isn’t job creation and investment flowing through our city,” Delgadillo said.
But observers agree that the continued loss of corporate headquarters is likely to exact a heavy toll on other aspects of L.A.’s business climate particularly in the areas of civic life and philanthropy.
“Corporate donors like to give money where they are located,” said economist Lewis Solmon, vice chairman of the Milken Institute for Job and Capital Formation in Santa Monica. “I’m sure the chairman of Lockheed is going to be more concerned about conditions of the schools in Maryland than in L.A.”
The challenge for business leaders, according to Wintrob, “is how to bring in a highly fragmented group of people where relationships have not yet been developed. A lot of people are meeting each other for the first time.
“It makes it more challenging to organize our corporate community,” he said.
So what is L.A.’s next likely takeover target?
With the Northrop deal, the region’s aerospace industry has more or less been picked dry. The area’s large retailers were snatched up long ago. Entertainment firms seem unlikely after all, The Walt Disney Co.’s acquisition of Capital Cities/ABC was one of the few recent deals in which the L.A. company involved was not the target. A few local thrifts, Glendale Federal Bank and Coast Savings Financial, and a couple of banks, City National Corp. and Imperial, are considered likely targets.
But whichever firm goes next, there likely will be little that city officials can do to resist it, said UCLA’s Leiser.
“These mergers are hard to turn around,” he said. These companies are not just looking to cut costs; they are fundamentally realigning themselves. There’s not a whole lot you can do.”