Year of the deal It's the year of the deal. Since January, mergers and acquisitions have hit a level not seen here since the junk-bond era of the 1980s, when ownership in kamaaina companies like Amfac, Hawaiian Airlines and Castle & Cooke changed hands.
Liberty House. First Hawaiian Bank.
schuler homes. They are among the
longtime kamaaina companies being
swallowed by outside businesses in
a nod to globalization. How did this
happen? and how will it affect how
they do business?By Rick Daysog
rdaysog@starbulletinWith a little less than two months to go, the year has seen more than $4.6 billion in mergers-and-acquisitions activity, with deals equivalent in value to about half of the market capitalization of all of Hawaii's publicly traded companies.
Century-old names such as Liberty House and C. Brewer are disappearing while First Hawaiian Bank, the state's largest financial institution and a longtime isle political kingmaker, will become wholly owned by a French banking giant.
Former dot-com high flyers Digital Island and Cheap Tickets have been swallowed up by larger, better capitalized competitors while Schuler Homes Inc. will be acquired by a Texas homebuilder.
The economic and social ramifications are potentially huge -- especially for the thousands of people who work for or do business with the buyout targets.
"Like it or not, Hawaii is going the way of globalization just like everywhere else," said David Heenan, Campbell Estate trustee and former dean of the University of Hawaii's business school.
Economy's toll
Some analysts blame Hawaii's weak economy for the recent rash of deal making.Even before the terrorist attacks of Sept. 11, Hawaii's sluggish economy was taking its toll on isle companies.
Liberty House, for instance, operated for three years under Chapter 11 bankruptcy protection before Federated Department Stores acquired the company for $200 million in July. Federated is in the process of converting the Liberty House locations into Macy's West department stores.
Crazy Shirts, meanwhile, struggled during recent years before filing for Chapter 11 reorganization on Sept. 10 with debts of $24 million. Only The Best Inc., a locally based subsidiary of retail outfit Waikiki Trader Corp., is acquiring the company for $7 million to $10 million.
Meanwhile, last year's dot-com bust helped send Digital Island and Cheap Tickets into the arms of deeper-pocketed suitors.
"The deals are being done more in the interest of selling out rather than buying in," said Harlan Cadinha, chief executive officer of Cadinha & Co., a locally based investment advisory firm. "The environment is creating more sellers than buyers."
Selling up
Not all deals are being driven by a sluggish economy.First Hawaiian Bank, for instance, had been enjoying strong income growth before France-based BNP Paribas in May unveiled its $2.5 billion offer for 55 percent of parent BancWest Corp.
That offer came about after a previous stock acquisition agreement between BNP and BancWest management expired.
BNP purchased 45 percent of BancWest Corp. in 1998 but was prohibited from buying additional shares for three years.
BNP's $35-a-share offer, which represented a 40 percent premium from the trading price at the time of the announcement, has been approved by BancWest shareholders and its board but requires the approval of the Federal Reserve.
Bank managers have stressed that First Hawaiian will retain its local flavor, saying the company's decision making, product lines and top management will be unchanged.
Like the First Hawaiian deal, many of the recent takeovers made financial sense, analysts said.
In Macy's, Liberty House is getting an owner that is much better capitalized and has the marketing clout of a Fortune 500 company.
The local department store chain also can rely on Macy's immense buying power which allows the company to negotiate better prices from its vendors, said Richard Dole, local stock analyst and chief executive officer of Dole Capital LLC.
The lower cost structure, in turn, will make the local Macy's department stores more profitable than when they were run by Liberty House, he said.
The upshot for consumers: Better prices and improved selection.
The trade-off comes in the 174 layoffs in Liberty House's administrative and distribution departments. Those positions duplicated Federated jobs already existing on the mainland.
Run from afar
One view holds that the buyouts will harm Hawaii's interests: Jobs leave the state, corporate donations to local charities dry up, and company decisions are made on the mainland with less sensitivity to local concerns.Lowell Kalapa, executive director of the Tax Foundation of Hawaii, said many of the mainland corporations that acquired the former Big Five companies during the 1970s and 1980s were less committed to the local community than the previous locally based owners.
Bank of America Corp. ran into that criticism after it acquired the former Honfed Bank in 1992. The banking giant invested millions of dollars into its Hawaii operations but was criticized when it moved some of its operations to the mainland.
One group of customers sued the bank during the early 1990s, saying its lending policies were biased against minorities. Bank of America sold its 39 Hawaii branches to American Savings Bank in 1997.
"There is a lesser involvement in the community from civic affairs to community affairs," said Kalapa. "With the loss of these locally owned companies, there's not going to be much of an investment in the community by those who bought them out because they're absentee landlords."
That's not always the case, said stock analyst Dole.
Tesoro Hawaii Corp., for instance, beefed up its Hawaii operations and has contributed generously to local causes after it acquired local gasoline refiner and retailer BHP Hawaii Inc. in 1998.
Local ownership has its own set of problems. The days when Hawaii's business community was dominated by the locally based agriculture companies were marked by a protectionist regulatory environment, Dole noted.
Plantation companies, meanwhile, dominated the local business community through a host of interlocking directorships, he said.
"The kamaaina way of doing business, which may have been unique at one point in time, is giving way to a more typical, mainland way of doing business," added Cadinha. "The net effect is that Hawaii is becoming integrated just like any other mainland city."
A YEAR OF DEAL MAKING
BancWest Corp.
(Parent of First Hawaiian Bank)>> Acquirer: BNP Paribas (France)
>> Purchase price: $2.5 billion for 55 percent of company's outstanding shares
>> Founded: 1858
>> Number of employees: 5,500 (2,200 in Hawaii)
Schuler Homes Inc.
>> Acquirer: D.R. Horton Inc. (Texas)
>> Purchase price: $1.2 billion
>> Status: Pending
>> Founded: 1988
>> Employees: 500
Cheap Tickets Inc.
>> Acquirer: Cendant Corp. (New York)
>> Purchase price: $425 million
>> Status: Pending
>> Founded: 1986
>> Employees: 1,300 (440 in Hawaii)
Digital Island
>> Acquirer: Cable & Wireless Plc. (England)
>> Purchase price: $340 million
>> Status: Completed in June
>> Founded: 1995
>> Employees: 900
Liberty House Stores
>> Acquirer: Federated Department Stores Inc. (Ohio)
>> Purchase price: $200 million
>> Status: Completed in July
>> Company founded: 1849
>> Employees: 2,890
>> Layoffs: 174
C. Brewer & Co.
>> Status: Liquidation of assets / pending
>> Company founded: 1826
>> Employees: 1,000
Crazy Shirts
>> Acquirer: Only The Best Inc. (Honolulu)
>> Purchase price: $7 million to $10 million
>> Status: Pending
>> Founded: 1964
>> Employees: 500
Hawaiian Natural Water Co.
>> Acquirer: Amcon Distributing Co. (Nebraska)
>> Purchase price: $2.9 million
>> Status: Pending
>> Founded: 1995
>> Employees: 36
Honolulu Publishing Co.
>> Acquirer: Pacific Basin Communications (Honolulu)
>> Purchase price: N/A
>> Status: Completed in September
>> Founded: 1888
>> Employees: 20
>> Layoffs: 20
Honolulu Star-Bulletin
>> Acquirer: Black Publishing Ltd. (Canada)
>> Purchase price: $10,000
>> Status: Completed March 15
>> Founded: 1871
>> Employees: 90