Surviving a Corporate Exodus

When Procter & Gamble of Cincinnati stuffed Max Factor & Co. of Hollywood into its cosmetics case in 1991, company executives were only dimly aware that they were also buying a local institution: the Max Factor Museum of Beauty.

The new owner promptly set out to close the quirky little museum, a homage to the art of makeup on the site of Max Factor’s original salon to the stars. Community protests delayed the action, but in June the Museum of Beauty was unplugged like an old bonnet dryer and its collection scattered.

Losing a corporate headquarters is never pretty, though usually the toll is measured in more weighty terms. Jobs, taxes, corporate spending accounts, rent payments, community involvement, philanthropic spending and prestige are among the casualties when an HQ goes AWOL.

But away from the debris generated by any corporate uprooting lies a strange notion perhaps peculiar to Southern California, where fire, earthquake, drought and monsoonal rain are just temporary disruptions: Maybe the loss of a major corporate headquarters is no big deal.

Los Angeles--the second-largest city in the country but home to no major national bank, no big-time retailer and no professional football team--has managed to survive a series of well-publicized corporate jiltings during recent years. Despite some wounded pride and a few dings to the civic image, the city has endured, even prospered in unexpected ways.

That’s because Los Angeles is emerging from the early 1990s blast furnace of recession and economic restructuring with a bustling economy of small and medium-sized firms whose names never make conventional lists of the biggest or the most, some economists say. This economy of unrecognized and undercounted firms--many owned by immigrant or ethnic entrepreneurs--is growing quickly, and creating jobs and generating taxes to make up for what was lost when bigger companies took a hike.

These smaller firms, without public stockholders or publicity machines, form an almost invisible wellspring of economic activity. Frequently dubbed the “New Economy,” it is a conglomeration of small and medium-sized businesses across an array of industries whose output and employment are poorly measured by conventional means.

“When you lose a corporate headquarters, there’s a blow to your prestige because everyone immediately pulls out Fortune magazine and says, ‘How many Fortune 500 companies are left?’ ” said Jack Kyser, chief economist of the Economic Development Corp. of Los Angeles County, a local jobs promotion group.

“But we are more of an Inc. 500 town,” he said, referring to a list of fast-growing smaller companies published each year by Inc. magazine. “What we do is grow companies. Southern California is literally an incubator.”

Thriving clusters of companies are developing in places that Wall Street has never visited, such as the toy wholesalers on the edge of downtown and the Taiwanese-American computer hardware industry in the San Gabriel Valley. These companies can be found in every industry, but are growing most quickly in the fields of entertainment, international trade, biomedical manufacturing, tourism and apparel.

Economist Joel Kotkin, who has championed the strength and resilience of the New Economy, said that “the Los Angeles economy is recovering, and it’s recovering more from the bottom up than the top down.”

“There are a tremendous number of artisan-like companies that are very flexible,” said Kotkin, senior fellow with the Pepperdine Institute for Public Policy. “It certainly is a very vibrant economy, but the problem is it’s very hard to see and track.”

Like large cities around the nation, Los Angeles has lost many big names during recent years through mergers or relocations.

The latest case has Lexington, Mass.-based Raytheon Corp. planning to buy the defense operations of Los Angeles-based Hughes Electronics Corp. for $9.5 billion. In the process, Raytheon will be gobbling up a longtime symbol of Southern California’s dominance of the U.S. aerospace industry. Left behind will be Hughes’ somewhat smaller but thriving commercial satellite operations.

Aerospace is just one local industry that has suffered from CEO-ectomies. Toss in shuttered headquarters in the retail, financial services, oil, airline and other industries, and one could compile a list that reads like a corporate Who Was Who.

From the retail world, there were Bullock’s, Broadway department store parent Carter Hawley Hale, Robinsons and Thrifty Drug Stores. Security Pacific, First Interstate and Union Bank were among the financial institutions taken over by out-of-towners. Getty Oil was soaked up by Texaco. Western and Continental airlines winged their way to other cities.

Pacific Enterprises, parent of Southern California Gas Co., will relocate to San Diego when its merger with the parent of San Diego Gas & Electric is complete later this year.

But in the areas of greatest importance for the local economy--jobs and taxes--a single corporate headquarters is not that large a loss, economists say.

Part of that stems from corporate downsizing and decentralization, which shrunk the traditional corporate headquarters by eliminating layers of management and put much of what is still out in the field closer to the work force.

But more important are the changes in the Southern California economy, which has become more entrepreneurial as well as less focused on manufacturing and more concentrated on services.

The region is creating small companies by the thousands, thanks to a confluence of technology, infrastructure, a huge consumer market, a gigantic work force with a variety of skill levels, and seasoned managers who were laid off by big corporations and want to try running their own companies.

The small companies grow into medium-sized companies, which are responsible for most of the job creation in the area, Kyser said.

Unfortunately, the economic activity of these firms is difficult to track with the outdated measuring and classification systems now in use, Kyser said.

“You’ve got a buggy-whip kind of governmental statistical system, and in L.A. you have a new, vital economy and it doesn’t measure it at all well,” Kyser said. What is certain is that small companies that employ fewer that 100 people are responsible for more than half of the jobs in Los Angeles County, and those companies are becoming even more important an economic force, he said.

These jobs don’t necessarily involve flipping burgers or changing tires. Digital graphics firms, for example, are so hungry for artists with the requisite computer skills that they search the globe for job candidates. Computer animators command starting salaries of $40,000 or more.

While acres of office space sit empty in downtown Los Angeles, premium industrial space can be difficult to locate. Southern California’s centers of corporate growth are becoming more diffuse all the time.

The folks at RLA, the organization created to help restore Los Angeles after the 1992 riots, consider these smaller companies the future of the city.

“On one level, people may despair about these large companies leaving, but on the other hand we have many small and mid-sized manufacturing businesses that have been here all along but have been ignored,” said Linda Wong, chief financial officer of RLA, which is phasing out and becoming part of a new organization called L.A. Prosper Partners. “While individually they may not be as important an economic presence as a large company . . . in the aggregate, they are really the drivers of the economy.”

“These are the companies that have really toiled in anonymity,” Wong said, adding that RLA has worked to unite these companies in trade groups that will give them more clout.

One such group is the Food Industry Business Roundtable, with the apt acronym of FIBR, that has brought together 15 small and mid-size food processors to push for things that are most important to them, like changes in regulations and improvements in work force education.

The president of the trade association is Gina Harpur of Juanita’s Foods, which has operated quietly in Southern California for more than 50 years but has swelled in size in recent years on the popularity of Mexican foods, particularly the company’s canned menudo.

These companies “have never had the glamour that aerospace had,” Wong said. “But they are as important to the overall economy and certainly to urban neighborhoods.”

Although breaking up is undeniably hard, those who remain after a headquarters relocation can move on to new relationships.

The city of Calabasas expected to suffer an annual loss of about $50,000 in tax revenues when Lockheed merged with Martin Marietta and moved its 250-employee headquarters to Bethesda, Md., in 1995.

But since then, the property has been sold to Pasadena-based Countrywide Credit Industries, the nation’s largest independent home mortgage lender, which is growing so fast that it has run out of space in existing facilities. The Calabasas building will house as many as 750 employees, more than replacing the projected losses to the city in utility, property, sales and hotel bed taxes.

What’s more, on its way out of town, Lockheed Martin donated $100,000 to the city to upgrade the Calabasas library, which had been operating out of a small room in City Hall. The library recently moved to new digs in a larger space with new furniture and books.

“Life went on and we didn’t suffer appreciably because we were able to get a new tenant so quickly,” said Calabasas City Manager Charles Cate. “We’re looking forward to having Countrywide as a new corporate neighbor.”

Much of what a city loses when a corporate headquarters goes is intangible. Its image as a serious business center might be harmed, or the political clout of the local business community might be diminished in some way. Certainly downtown Los Angeles no longer boasts the collection of high-powered chief executives that it once did.

The most obvious and immediate victims of a headquarters loss are the company’s workers. It is not yet clear how many layoffs will result from the Hughes sale, but Raytheon Chairman Dennis J. Picard said the company will need to eliminate jobs during the next two years to reduce costs by 10%.

Then there is the loss of tax revenue. In addition, a corporate headquarters is a spending machine, generating revenue for local accounting firms, consultants, advertising agencies, law firms, public relations companies and the deli down the street.

Also feeling the impact are the many charities and community organizations that rely on the deep pockets of big corporate donors to fund their programs, as well as the volunteer time of employees.

Although the rapidly growing small and medium-sized companies more than replace the job losses created by each large corporate defection, many small companies tend to be less involved in community affairs, economist Kyser said.

Community agencies in Los Angeles still bemoan the loss of Security Pacific National Bank and the corporate philanthropic largess that evaporated because of its 1992 merger with Bank of America. The roughly $4 million a year that San Francisco-based Bank of America spreads around locally falls short of the $7 million to $10 million a year that Security Pacific routinely contributed to Southern California organizations.

“We would argue that where a company is headquartered matters less than what it contributes to the community,” Bank of America spokesman Cary Walker said, pointing to a local work force of 25,000 as well as such things as small business lending and affordable housing financing. “The Security Pacific-Bank of America merger really illustrates how a company headquartered out of town can become, in many respects, a local company,” he said.

Even when a company relocates, it doesn’t always forget its old home town.

U.S. Borax & Chemical Corp. moved to Valencia four years ago, and yet company employees continue to drive 70 miles one way to volunteer time at Garvanza Elementary School in northeast Los Angeles, said Eiko Moriyama, director of the partnership and adopt-a-school program for the Los Angeles Unified School District.

“I have tremendous confidence in the conscience of companies,” Moriyama said. “They can’t ignore us and we’re going to catch them one way or another.”