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Hurdles Abound Despite Improvements

The stock market is up, unemployment is down. What could be bad? But if 2004 was better, on the whole, than 2003, it wasn’t all good. The recovery got underway but hiring did not. Profits improved but companies did little spending to fuel further economic growth. Workers’ compensation reform was passed, but companies say the promised savings have not generally materialized, at least not yet. Business tax reform passed, but other costs energy, health benefits, construction rose, in some cases precipitously. The mergers and acquisitions market improved but not enough to deploy the cache of pent-up funds at venture capital and equity financing firms. The dollar weakened and the trade deficit ballooned. So did the federal budget deficit. And through it all, more headaches were piled onto the shoulders of company managers. Public companies struggled to implement the requirements of the Sarbanes-Oxley Act and braced for the added cost of the paid family leave act. The Walt Disney Co. fought a $200 million shareholder lawsuit amidst a continuing corporate stigma brought on by Enron, Adelphia and others. There were lapses in the security of online transactions, questions about ethics in managing the Port of Los Angeles and worries over the prospect of rising interest rates. If the arrival of 2004 was met with great expectations, the end has left many asking, “Is that all there is?” “We’re really disappointed with the growth in employment,” said Scott Anderson, senior economist at Wells Fargo. “It faded in the summer, and it hasn’t really picked up. I think the story remains pretty good overall, but people don’t feel that growth. They feel it when they see wages and salaries growing, and that’s still very sluggish.” Many greeted the arrival of 2004 with great expectations, and initially at least, with good reason. Productivity was soaring and the Valley was on track to add some 11,000 new jobs. An early upswing in the stock market brought a renewed burst of M & A; activity. Initial public offerings swelled as compared with 2003, and a number of Valley companies got a financing boost from venture capital. But much of the latter part of the year unfolded like the proverbial morning after. The Nasdaq Composite Index and the Dow Jones Industrial Average both took a series of hits as the year progressed before ending 2004 at pretty much their early-year highs. Income growth, hearty at first, began to decline in the third quarter, and hiring, as it turned out, was largely limited to temporary jobs, many related to the implementation of the Sarbanes-Oxley Act, which became one more burden for the smaller companies least able to afford the additional costs. Even the end of the grocery strike did not bring much good news. Large chains are still laboring to bring business back to earlier levels and some company benefits will be lost to new workers who sign on. Not quite enough Although most companies stemmed the income losses that characterized 2002 and 2003, they were hard pressed to increase revenues enough to push earnings forward. “The third quarter was the beginning of the slowdown,” said Anderson. “Before-tax profits declined 2.4 percent in the third quarter,” the largest decline since 2001, when corporate profits dipped 9 percent. IPOs continue to run well ahead of their year-earlier levels as do mergers and acquisitions, but a closer look at the M & A; market shows that it replaced any real internal growth opportunities for a number of companies. “Fundamentally, companies have been focused on cost reductions and M & A; is a very strategic product you can use to grow business,” said Doug Gonsalves, managing director of The Spartan Group, a boutique investment banking firm in Burbank. “While it’s not a robust general economic environment, there is still a perceived improvement in the economic picture and companies are under the gun to show growth.” Several acquisitions reflecting this growth strategy took place in the Valley in 2004. LandAmerica acquired Southland Title Corp., a Burbank title agency, one of 15 such acquisitions the company made in 2004 in a move to offset the decline in mortgage loan originations. Acordia Inc., a unit of Wells Fargo & Co., acquired Sherman Oaks-based insurance brokerage Speare & Co., one of four acquisitions the Chicago-based company made in 2004 to increase its market share. And General Electric Co.’s GE Consumer Finance acquired WMC Finance Co., the Woodland Hills-based non-prime mortgage lender to expand its credit business into the mortgage arena. Using acquisitions to increase revenues is faster than expanding or building a new business from within. “And they may not have the capabilities in house or (the company acquired) may be a proven entity, and if they can generate synergies, so much the better,” said Gonsalves. “They can justify a reasonable purchase price.” But for many other companies, 2004 was a year to focus on regrouping and rebuilding, not growth and expansion. Charles Dunn Co. closed its West Valley office, focusing on the higher-producing East Valley unit. Moves, layoffs Tekelec moved manufacturing to North Carolina where business costs are lower. In Moorpark, CardService International laid off 20 percent of its workforce and consolidated call center operations at its parent company’s Maryland unit to reduce redundancies. And Health Net Inc. laid off 500 workers nationally, 100 in its Woodland Hills operation, as it struggled with a big decline in quarterly corporate profits. Corinthian Colleges Inc., the new owners of Learning Tree University closed down the 30-year-old school for continuing education, no longer able to justify the expense of the operation in relation to the revenues it generated. Cardinal Health, the new owners of Syncor, consolidated most of the operation into its Dublin, Ohio operations. And Honeywell Airport Systems shuttered its Simi Valley plant, laying off 85 employees. A number of other companies, like Countrywide Financial Services, set their sights on expanding elsewhere. And still more companies, among them Precision Dynamics, the largest employer in the city of San Fernando, moved jobs to Mexico and other locales with lower wage scales. Indeed, the number of defections and closures led the Economic Alliance of the San Fernando Valley to table its mission of bringing new businesses into the area, at least for now. “We’ve really switched from an attraction mode to a retention mode and most of our effort (in 2004) was on retention more than anything else,” said Alexander Rosas, director of economic development for the Los Angeles County Economic Development Corp. and the Valley Alliance. There were, of course, a number of bright spots. Tierra del Sol, an ambitious effort to provide a community combining schools and residences for lower-income residents, got underway and is set to open in May of next year. A renaissance of the languishing North Hollywood area began as JH Snyder Co. and JSM Construction Inc. broke ground and commenced construction on sorely needed housing. The Jewish Home for the Aging and Valley Presbyterian Hospital both expanded, bringing additional services to the community. More schools were built, consumers continued to spend and homes continued to sell, although the pace fell off somewhat. Slightly fewer single family homes were sold in the San Fernando Valley in 2004 than in 2003. But on average prices continued to soar, increasing 27 percent over last year to date. But for each step forward there was often a step back. And for many of the Valley’s small and mid-sized businesses, especially those in manufacturing, the increased cost of business overshadowed most improvements the year brought to the economic climate. “You don’t hear about the good things that were happening,” said Rosas. “You hear more about state regulation.”

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