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Tuesday, Sep 26, 2023

Public Companies: Change is Always Happening

Business: Smaller firms mean lower combined revenue.

Countrywide Financial, WellPoint Health Networks, 20th Century Industries, Superior Industries International, THQ, K-Swiss.

The companies that for years dominated the top ranks of the Business Journal’s public companies lists, many with revenues topping $1 billion.

Today, however, none is to be found on those lists. Some foundered and had to be bailed out. Others were taken out of the public company realm by private equity firms. Many more were acquired by out-of-state companies.

But unlike their brethren in the rest of Los Angeles County, few moved their corporate headquarters away from the region in search of lower-cost locales.

However they left the ranks of public companies in the San Fernando, Conejo, Santa Clarita and Antelope valleys, the effect was the same as in the rest of Los Angeles County: the combined revenue of the remaining and replacement companies was less when adjusted for inflation, meaning the companies on the public company lists got smaller in revenue over time.

From 2007 to this year, the combined revenue of the top 20 public companies on the lists fell slightly, from $133 billion to $129 billion, when adjusted for inflation. That’s contrary to the expectation that public companies tend to grow their revenue over time, relative to inflation.

“As the big-revenue companies have left, the companies replacing them are smaller, which has led to a flattening of revenue,” said Larry Kosmont, a downtown-based corporate-location consultant who also publishes a periodic report comparing the costs of doing business in various cities throughout the Western United States.

The most common way companies have cycled off the public company lists has been through acquisitions. Woodland Hills-based WellPoint was acquired in 2004 for $20.9 billion by Indianapolis, Indiana-based Anthem Inc., which recently changed its name to Elevance Health.

Another Woodland Hills health insurer, HealthNet Inc., was acquired in 2016 by St. Louis, Missouri-based Centene Corp. in a deal valued at $6.3 billion.

And yet another Woodland Hills insurer, Zenith National Insurance Corp., was acquired by Toronto, Canada-based Fairfax Financial in 2010 in a deal valued at around $1.3 billion.

In the entertainment sector, DreamWorks Animation SKG of Glendale was acquired in 2016 by Philadelphia, Pennsylvania-based Comcast Corp. for $3.8 billion.

For the most part, these deals went one way, with the out-of-state company acquiring the Valley-area company – with two huge exceptions.

“These deals are mostly organic,” Kosmont said. “But some of these combined companies are so large that they look at California and decide whether it makes sense to remain with the region’s high-cost structure.”

And that is when the decision is often made that the headquarters of the combined company will be with the out-of-state company.

The huge exceptions to this trend, of course, have been Burbank-based Walt Disney Co. and Thousand Oaks-based Amgen Inc. Both of these giants have spent billions of dollars on a series of acquisitions, making them even bigger. For example, Disney acquired CapitalCities/ABC Inc. in 1996, in a deal valued at $19 billion, and Pixar in 2006 in a $7.4 billion deal. 

As for Amgen, the Thousand Oaks behemoth in 2001 made what at the time was the biotech world’s largest acquisition, paying $16 billion for Seattle, Washington-based Immunex Corp. And just last month, Amgen announced it intends to spend $4 billion to acquire San Carlos-based ChemoCentric Inc.

Relocations lacking

While mergers have been common, straight-up relocations of Valley-area companies to other regions and states have not.

In a quarter century of lists of public companies in the quad-valley area, only three companies moved their headquarters outright: Glendale-based American Reprographics, which moved to the Bay Area and changed its name to ARC Document Services Inc.; the aforementioned aluminum-wheel maker Superior Industries of Van Nuys, which moved to a suburb of Detroit, Michigan; and Calabasas-based On Assignment Inc., which changed its name to ASGN Inc. and moved to a Richmond, Virginia suburb just two years ago.

Of those three, only ASGN had revenue exceeding $1 billion at the time of its move, coming in at roughly $4 billion.

That’s a very different picture than for Los Angeles County as a whole, where the ranks of large-cap, huge revenue companies that picked up and moved their headquarters has been quite large by comparison. Northrop Grumman Corp., Computer Sciences Corp., and Hilton Hotels Corp. all moved to northern Virginia, while Occidental Petroleum Corp., AECOM and Jacobs Engineering Group all moved to Texas. These firms had billions of dollars in revenue at the time of their headquarters move, with several exceeding $10 billion.

Taking private

Meanwhile, several of the public companies on the valley-area lists have been taken private over the years. Beverly Hills-based Platinum Equity acquired two companies: In 2016, it purchased Van Nuys Electro Rent Corp. for $382 million, and in 2020 it bought Valencia-based Wesco Aircraft Holdings for $1.9 billion.

In other deals, in 2007, Boston-based Bain Capital acquired Westlake Village-based Guitar Center Inc. for $1.9 billion, and in 2012, Calabasas-based Tekelec was acquired by a consortium led by New York-based Siris Capital Group in a deal valued at roughly $780 million. The next year, Oracle Corp. acquired Tekelec from Siris Capital.

And a few companies hit tough times where they struggled financially, prompting outside companies to rescue them. The biggest and most notorious such case occurred in 2008, when Calabasas-based mortgage giant Countrywide Financial Corp. had been slammed by the mortgage-lending crisis and agreed to be acquired by Charlotte, North Carolina-based Bank of America Corp. for $4 billion in stock.

Five years later, Westlake Village-based athletic shoe company K-Swiss Inc., which had racked up several years of losses, was sold to Korean firm E-Land World Ltd. for $170 million.

Only one company filed for bankruptcy: Calabasas Hills-based THQ Inc. After several years of financial struggles, stock value drop, and debt accumulation, the video-game maker filed for Chapter 11 bankruptcy in December 2012 and its assets were liquidated the following month.

Smaller replacement companies

All of these valley-area firms coming off the public company lists over the years has allowed smaller-revenue companies to move up. Among these: Westlake Village-based Velocity Financial Inc., which had revenue of $76 million last year, and Lancaster-based drug discovery and development software firm Simulations Plus Inc., which had $48 million in revenue last year.

“These are more high-end specialty service-oriented companies that are higher-margin businesses that can afford to pay the high salaries that allow their employees to live in the Los Angeles region,” Kosmont said. “But they just don’t have the same sales volume that companies producing goods do. So, their revenues are smaller – not small, just smaller – than the companies they replaced,” he added.

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