From banking to retailing, aerospace to Mexican food, mergers and restructuring have wrought massive changes in California’s corporate landscape.
Of the 100 largest publicly held industrial corporations headquartered in the state last year, eight do not appear on the 1987 Times roster of leading California companies because they were acquired or converted to private ownership.
Corporate restructuring also gave rise to major new players in the state. Henley Group, a La Jolla-based conglomeration of 32 businesses with $3.2 billion in revenue, placed No. 14 on the list after being spun off last year by Allied Signal. Henley Group, in turn, spun off Fisher Scientific Group, which is ranked No. 39 in its first year on the list. Los Angeles-based Kaufman & Broad took its home-building business public and created Kaufman & Broad Home Corp., which made its debut at No. 55.
Like the rest of the nation, California has seen merger and acquisition activity increase steadily since the late 1970s. The current Times roster reflects a flurry of business combinations in 1986 and so far this year. Safeway Stores has gone private by buying its shares back from investors, Thrifty has been acquired by Pacific Lighting, Western Airlines has been swallowed by Delta Airlines, AirCal has been purchased by American Airlines and Lloyds Bank California has merged with Sanwa Bank.
Top State for Takeovers
In 1986, 261 firms in California were acquired, making it the leading state for corporate takeover targets. That was up from 258 corporate acquisitions in 1985, according to W. T. Grimm & Co., a Chicago consulting firm that tracks corporate mergers.
The attraction of the state’s companies is clear. “California has many companies that are perceived to be in high-growth industries,” said Grimm President James Kelly. “It’s just a big marketplace.”
California companies, however, were no wallflowers when it came to acquiring others. They purchased 221 corporations, up from 216 in 1985.
Some of the state’s acquisition-minded concerns included Occidental Petroleum, which shelled out $2.6 billion for natural gas pipeline operator Midcon and $860 million for the industrial chemical subsidiary of Diamond Shamrock; Wells Fargo, which purchased Crocker National from its British parent in a deal valued at $1.07 billion; Wickes, which paid $1.16 billion for Collins & Aikman, and Maxicare Health Plans, which coughed up about $453 million for two health maintenance organizations.
Many Jobs Eliminated
While some analysts argue that such mergers will result in more efficient companies in the long run, the immediate result of merger mania in several instances has meant the loss of jobs: Up to 5,000 Crocker Bank employees will have lost their jobs by the end of this year as a result of last year’s merger with Wells Fargo; 14,000 Gemco employees in California, Arizona and Nevada were out of jobs when Lucky Stores shut down the subsidiary last October in a corporate restructuring to thwart a takeover threat; 2,000 Western Airlines jobs were transferred out of Los Angeles to Atlanta and other cities after the carrier was taken over by Delta in April.
“It’s hard to determine to whether it (merger activity) is positive or negative for the state economy,” says Joseph Wahed, chief economist at Wells Fargo Bank. “There are no hard and fast rules.”
As economists argue about what effect the shuffling of corporate assets will have on the state’s economy, California’s robust economic expansion, which began in early 1983, is showing its age:
- The gross state product, the value of all goods and services produced, last year rose 3.2%--slightly slower than it did in 1985, and only half as fast as in 1984, according to the UCLA Business Forecasting Project, which studies the California economy. Still, the state continues to outpace the United States, which saw the gross national product grow by 2.6% last year.
- Personal income rose 3.7%, adjusted for inflation. While relatively unchanged from the 1985 pace, that was well below increases in the 5% range recorded in 1984 and 1983. Personal income is expected to grow even slower this year, increasing 3%.
- Non-agricultural employment rose 2.4%, the lowest increase since 1983, says UCLA. About 400,000 new jobs--primarily in service, trade and financial businesses--were created in the state last year.
- The pace of consumer spending, which had been driving economic expansion, slowed down dramatically in 1986. Taxable retail sales increased only 0.2%, adjusted for inflation. By comparison, retail sales pushed ahead 2.6% in 1985.
Overall, “California saw fairly solid growth in 1986,” said Robert Skinkle, an economist at Wells Fargo Bank. “But the pace of growth slowed,” he added, describing the state’s economy as “unspectacular.”
Export Gains Likely
Economists expect the cheaper dollar--by boosting exports and making imports more expensive--to help out some of the state’s beleaguered industries, primarily electronics, manufacturing and agribusiness. But those gains may be tempered by the slower growing housing industry, a slowdown in office and commercial construction, leaner times for the aerospace industry and friction between the United States and its trading partners.
The star of the state’s economy last year was the housing industry. Spurred by a decline in long-term mortgage rates to below 10% at the end of last year, the number of housing permits issued soared to 371,000. Economists say 250,000 permits is a good showing.
“The housing market expanded better than we thought it would,” said Phillip Vincent, senior economist at First Interstate Bank. “The housing boom probably added a percentage point of employment growth to the state.”
But economists expect the pace of home construction to slow this year, particularly with the recent rise in mortgage rates.
A backlog of government defense contracts and the replacement of aging commercial jet planes kept aerospace firms busy. “They had another good year,” said Skinkle. “But down the pipeline,” he added, “there are some problems with lower defense spending and, on the commercial scene, there’s more competition from Airbus (Industrie),” the European aerospace consortium.
California agribusiness continued to founder. Farm income, employment and land values continued to decline in 1986, but economists believe that the worst is over. The falling value of the dollar against foreign currencies should make the state’s crops more competitive in overseas markets and boost farm exports.
Overcapacity and weak demand for semiconductors dogged the electronics industry. “I thought there would be kind of a rebound,” said Vincent. “Only at the end of 1986 did we see any glimmers of hope,” he said, for an upturn in sales and profitability.
Sagging Oil Prices
In another key industry, petroleum, hopes for an early recovery were dashed when the price of oil sank to $10 a barrel in mid-summer before snapping back to prices in the high teens.
The troubles of the oil and high-technology businesses are reflected in The Times’ roster of leading California companies.
Plummeting revenues at oil companies, which account for some of the state’s largest corporations, were the main reason why total 1986 revenues for the 100 largest industrials fell by $20 billion--or 10.3%--to $180 billion. It was the largest dollar and percentage decrease in total revenue in five years. Profits for the 100 leading industrials also took a beating, falling 23.8% to $4.2 billion.
Chevron saw its revenue sink $17.5 billion, but the San Francisco-based oil company remained the largest publicly held industrial corporation in the state with revenue of $26.6 billion. Occidental Petroleum, one of the few oil giants whose revenue increased, moved up one notch to second place because of acquisitions, replacing Atlantic Richfield, which dropped to third.
Of the 21 industrials that reported revenue decreases, 14 were involved in high technology or petroleum. Tosco, an independent oil refiner, suffered a 48.4% decline in revenue, the largest percentage drop among the industrials. As a result, Tosco’s ranking on the 1987 list of leading industrials fell to No. 42 from No. 25 the year before.
Five high-tech firms--Oak Industries, Spectra-Physics, Avantek, MICOM Systems and Monolithic Memories--were forced out of the top 100 industrials because their revenues were too low to qualify. Pauley Petroleum, Jacobs Engineering Group and coffee maker Farmers Bros. were also dropped for the same reason.
A total of six industrials were lost to mergers and acquisitions: Lear Siegler was bought by the Forstmann Little investment group, Baker International merged with Hughes Tool, United Artists Communications was acquired by Telecommunications Inc., Quotron Systems was purchased by Citicorp, and Healthcare USA was acquired by Maxicare Health Plans.
Winn Dropped From Roster
Two industrials--El Torito Restaurants and Kaiser Cement--were taken private. Winn Enterprises, which filed for protection under federal bankruptcy law and declined to provide financial information, was dropped from the industrials roster.
Of the 17 new industrials, seven moved onto the list because they issued shares to the public last year: Henley Group, Fisher Scientific, Kaufman & Broad Home Corp., Sun Microsystems, MAI Basic Four, Atari and Aaron Spelling Productions.
High technology, which claimed some of 1986’s poorest performing companies, also fielded some of the year’s fastest growing corporations. Seagate Technology, maker of computer disk drives, saw revenue zoom 133.7% to $709.5 million, making it the fastest growing of the 100 industrials. In fact, the four fastest growing industrials were high-tech companies.
On The Times roster of leading publicly held merchandisers, Lucky Stores, moved up a notch to No. 1, replacing Safeway Stores, which went private. Thrifty, No. 7 in 1985, was removed from the list after being acquired by Pacific Lighting. Newcomers Businessland and Federated Group rank Nos. 8 and 9, respectively, in their first year on the list.
The transportation roster lost Western Airlines, No. 2 in 1985, and AirCal, No. 7, to mergers. Viking Freight, No. 7, and Wings West Airlines, No. 10, were new to the list.
Of the leading banks, Sanwa Bank California, which merged with Lloyds Bank, moved up to No. 7 from No. 13 in 1985. Central Bank was bumped off the list and replaced with newcomer Bank of the West. Another newcomer, Mitsubishi Bank of California, was ranked No. 14.
To be included in The Times roster, companies must have their principal headquarters in California and, with the exception of certain financial institutions, their stock must be publicly held. Limited partnerships with publicly traded stock are included. The requirements eliminate many companies in the state generating billions of dollars in sales and profits, because their head offices are located outside California or because they are privately owned.