Takeover Wave Chills Business Climate in S.F. : Casualty List Grows as Ripple Effect From Recent Mergers, Cutbacks Widens
A chill as cold as the summer fog is beginning to creep into this city’s financial district as the recent wave of mergers and acquisitions exacts a bigger and bigger toll on corporate headquarters here.
Thousands of workers are losing their jobs, and ripple effects are starting to hurt a growing list of restaurants, advertising agencies, printers, stationery stores and other small suppliers of goods and services.
This month alone, two old established companies will lose their independence: Crocker National Corp. will be swallowed up by Wells Fargo & Co., and Crown Zellerbach Corp.’s forest lands will be stripped away by corporate raider Sir James Goldsmith, with most of the rest of the company being taken over by James River Corp.
“Business is soft all over downtown,” complains John Kukulica, proprietor of the Iron Horse and former president of the Golden Gate Restaurant Owners Assn. Kukulica says his own restaurant got a boost this month when 120 Crocker executives held a “farewell bash” where “they all got loaded.”
Long List of Takeovers
Crocker and Crown Zellerbach are the latest in a long list of San Francisco-based companies that have succumbed in recent years to takeovers. The list includes such venerable concerns as Southern Pacific Co., Castle & Cooke Inc., Del Monte Co., Natomas Co. and Pacific Lumber Co. as well as such relative newcomers as Itel Corp. and Genstar Corp. Some have moved, others remain here as subsidiaries and still others are being liquidated.
While some takeovers have led to the loss of only several dozen headquarters employees, in other cases the casualty list numbers in the thousands. Thousands of Crocker’s 11,500 employees will be laid off after the acquisition by Wells Fargo, insiders say. At Southern Pacific, more than half of the 1,800 headquarters jobs are expected to be eliminated when it is merged later this year into Chicago’s Santa Fe Railway.
The trend hasn’t yet shown up in unemployment statistics. At 5.4%, San Francisco’s March unemployment rate was up slightly from 5% in January but well below the statewide rate of 7.1% and the U.S. rate of 7.5%.
“The sky isn’t falling,” says John Jacobs, executive director of the San Francisco Chamber of Commerce. Adds Mayor Dianne Feinstein: “There’s some volatility, but every indication I have is that the economy is strong.” She points in particular to strength in retailing and tourism.
And though Los Angeles is emerging as the financial capital of the West, San Francisco remains the economic hub of Northern California and provides financial, legal and other services for the Silicon Valley and other fast-growing communities nearby.
With its great universities and well-educated work force, the Bay Area remains an incubator for new technology, notes local attorney and commentator James W. Haas, pointing to semiconductors, microcomputers and biotechnology. “The problem is that this city has tended to ignore the needs of new enterprises.”
Among the biotechnology firms, Genentech is across the border in South San Francisco while Cetus Corp. is in Berkeley. “We need new and visionary leadership to ensure that San Francisco doesn’t become a pleasant anachronism like Venice,” Haas says.
And, while employment figures still look good, labor analysts note that most of the big merger-related layoffs didn’t begin until this month--and thus aren’t reflected in the statistics. Another big job cutback, San Francisco-based Chevron Corp.’s recently announced 15% reduction in its work force, also hasn’t shown up in the numbers yet.
Observers say that the cutbacks are also particularly severe in the management ranks. “A lot of these people are executives in their 40s and 50s,” notes historian Kevin Starr. “Where are they going to go?”
In addition, many big employers, including Bank of America and Pacific Telephone, are keeping their headquarters in town but are moving huge numbers of back-office workers to less costly communities across the bay. Pacific Telephone’s move will involve at least 5,000 jobs.
Unaggressive Business Culture
All of this has led to a good deal of soul-searching in this sometimes smug and self-satisfied community. Some, such as Mayor Feinstein, think it’s just a coincidence that so many local firms have been singled out for takeover. Others fear that the city lacks the political and economic climate to attract and nurture new businesses and wonder whether the high takeover rate reflects a business culture that is somehow soft and unaggressive.
“Maybe,” suggests Mark W. Buell, former city director of economic planning, “we should have had more of our kids become cutthroat MBAs for whom the bottom line is everything.” Though his suggestion is facetious, it reflects a widespread perception that many of the companies that succumbed to a takeover had tired and sleepy managements that were unable to capitalize on rich natural resource holdings.
Others blame the city’s board of supervisors, which has passed a number of measures that business leaders call onerous, including a tough anti-apartheid statute that bars city contracts with companies that have ties to South Africa. They also cite controls on downtown development and a law prohibiting most mandatory drug testing.
“The Board of Supervisors is constantly telegraphing to businesses in the U.S. that they shouldn’t locate in San Francisco,” contends C. Derek Anderson, who recently sold his discount brokerage firm here to Security Pacific Corp.
Adds Michael Bernick, executive director of a group called San Francisco Renaissance, whose goal is reducing inner-city unemployment: “Unfortunately, the debate here is couched in terms of growth versus no growth. It’s crazy. The question should be how we channel growth to areas outside of the financial district.”
‘Worrisome Trend’
Whatever the reason, the loss of so many corporate headquarters “is a worrisome trend,” acknowledges James R. Harvey, chairman and chief executive of Transamerica Corp., whose pyramid-shaped headquarters tower has become a powerful marketing tool and thus ensures Transamerica’s continued presence here. Headquarters, he says, provide jobs, tax revenue and support for the arts and other charities.
Indeed, one of San Francisco’s top fund-raisers says money is harder to come by. “Things are definitely tighter,” says Charlotte Maillard, a socialite whose causes include the opera, symphony and Special Olympics. Crown Zellerbach, once a pillar of the San Francisco community, has cut out its charitable giving, although the company says the move is temporary.
The merger wave is also taking its toll on small-business service companies that depend on local companies. Advertising agency Lowe Marschalk Inc.’s San Francisco office was forced to drop 21 of its 60 employees when RJR Nabisco decided to move many of Del Monte’s operations from here to New Jersey, the base of its Nabisco unit.
The Del Monte account “went to our New York office,” says Dan Cohen, chief executive of Lowe Marschalk’s San Francisco office, who is moving east himself. Cohen has put his home in Tiburon up for sale and is trying to sublet about half of the firm’s office space.
“You have a total sense of being helpless,” he says, noting that a reorganization by Reynolds two years ago brought him to San Francisco. “It’s a very sad state of affairs,” he says, noting that his agency’s cutbacks will immediately hurt local photographers, graphic artists and film production houses.
Payroll Cut
Allen & Dorward, another local advertising agency, had to cut its payroll about 10% after losing the business of Castle & Cooke’s Dole unit. Castle & Cooke was purchased last year by Los Angeles businessman David Murdock, who promptly moved the company’s headquarters to Los Angeles.
Public relations firms are also being hurt. “There’s a lot less work involving annual reports and analysts meetings,” said Donald Winks, senior vice president and head of Hill & Knowlton’s San Francisco office. “The reason is straightforward: There are fewer big companies headquartered here.”
His own firm lost such clients as Itel and Castle & Cooke after they were acquired and moved out of town.
“Business is off 6% or 7% this year,” says Ed Rathbun, president of Decorative Plant Service, which rents plants to corporate customers and recently lost big chunks of business with Crocker and Bank of America, which is still reeling from major loan losses last year.
Doros restaurant owner Don A. Dianda says lunchtime business at his Montgomery Street establishment is off 25%. “It hasn’t been this bad since the recession in 1974,” he says, “but at least back then the companies didn’t disappear.”
And the Morrison & Foerster law firm is bracing for the loss of Crocker’s corporate legal business but will continue to handle existing litigation involving the bank, sources at the firm say.
To be sure, the emerging downtown business slump is partly masked by a construction boom in both office buildings and hotels. But the boom has brought dramatic increases in vacancy rates.
The office vacancy rate was 15.7% downtown at the end of March, up from 10.9% a year earlier and 6.9% in March, 1984, according to Coldwell Banker. Five years ago, the rate was less than 1%.
The high vacancy rate “is good,” insists Mayor Feinstein. “It means that rents are dropping and the city is becoming more competitive.”
RECENT AND PROJECTED JOB LOSSES IN SAN FRANCISCO
Crocker National. Sources estimate that nearly 5,000 of 11,500 employees will be laid off as a result of the company’s acquisition by Wells Fargo at the end of this month. Staff functions such as personnel, law, finance and communications, all based in San Francisco where total employment is 4,100, will be especially hard hit.
Southern Pacific Transportation Co. Sources estimate that more than 1,000 of the 1,800 headquarters jobs will be lost when the railroad is merged later this year into Chicago-based Santa Fe Railway and regional headquarters moves to Los Angeles. Some computer, legal and sales personnel will remain.
Crown Zellerbach. About 350 headquarters jobs will be eliminated over next 12 to 24 months as a result of this month’s spinoff of forest holdings to financier James Goldsmith and acquisition of most of the rest by James River Corp.
Chevron. About 540 of 3,600 headquarters positions will be eliminated in companywide belt-tightening resulting from lower oil prices. Another 1,500 will be let go in nearby Contra Costa County.
Pacific Telephone. At least 5,000 positions are being moved from San Francisco to San Ramon in Contra Costa County because of lower real estate costs.
Del Monte. RJR Nabisco said it is “substantially reducing” Del Monte’s San Francisco work force of 1,100 due to consolidation with another of its subsidiaries.
Castle & Cooke. About 185 headquarters positions will be lost when the company completes its move later this year to Los Angeles after being purchased in 1985 by David Murdock.
Itel Corp. Thirty-five headquarters employees were laid off or declined transfers after Samuel Zell last year bought the company and moved it to Chicago.
