Local firms got cozy
or got out as Hawaii’s
recovery collapsed

Mergers, sales and bankruptcies
dominated the state's business
news as 2001 forced many to
make tough choices

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By Tim Ruel
truel@starbulletin.com

People will likely remember the year 2001 for everything that happened after Sept. 10, but for Hawaii, the most significant business trend -- corporate consolidation -- started early in the year.

Following the terrorist attacks, Aloha and Hawaiian airlines announced they will combine into Aloha Holdings. Greg Brenneman, former president and chief operating officer of Continental Airlines, will take a 20 percent stake in the new firm and assume the titles of chairman and chief executive.

The state's plunging tourism arrivals served as a backdrop for the news. Domestic visitor counts cumulatively fell 20 percent during September, October and November from the same period a year earlier, while international arrivals plummeted by nearly half. Arrivals for January through August had been down just 1 percent overall from 2000, which was a record year for Hawaii tourism.

The Aloha-Hawaiian merger capped a year of heavy corporate consolidation in Hawaii, in which the pool of locally-owned independent companies shrunk considerably. Stockholders cashed in and employees checked out.

The trend made rumblings in February, when three hospital firms Kapiolani Health, Straub Clinic & Hospital and Wilcox Health Systems on Kauai agreed to merge into Hawaii Pacific Health, forming the state's largest health system.

In May, Paris-based BNP Paribas SA announced it would buy out the parent of First Hawaiian Bank in a $2.5 billion deal. That same month, Honolulu-founded Digital Island Inc. said it was being acquired by Cable & Wireless plc of London for $340 million.

July: Federated Department Stores Inc. of Cincinnati bought 151-year-old Liberty House for $200 million and later converted the stores to Macy's. It is in the process of firing more than 370 Hawaii employees.

August: Honolulu-based travel discount firm Cheap Tickets Inc. agreed to be sold to Cendant Corp. of New York for $280 million.

October: Texas home building giant D.R. Horton Inc. said it was buying Schuler Homes Inc. for $1.2 billion. Schuler, founded in Honolulu in 1988, would become part of the second-biggest home builder in the country. In the same month, Crazy Shirts Inc. hit the auction block in bankruptcy court and was sold to another local firm, Waikiki Trader Corp., for $8.25 million plus a percentage of sales.

All of the deals, save for the Schuler and Hawaiian-Aloha mergers, have been consummated.

Hawaii hasn't seen so many buyouts since the junk-bond era of 1980s, when several of the former Big 5 companies and others changed hands.

This time around, the abundance of mergers and acquisitions is more coincidental, said Gregory Pai, former chief economist at First Hawaiian Bank, who noted his views were personal observations.

BNP, which acquired a 45 percent stake in First Hawaiian's parent in 1998, was recently released from a three-year lockdown from buying more shares. Crazy Shirts and Liberty House lost sales from the weakening of Asian tourism to Hawaii in the late 1990s. The hospitals said they started suffering financially after the federal government cut insurance reimbursements in 1997. The building industry has been consolidating for years. And Digital Island needed a cash infusion after the dot-com gold-rush went bust in 2000.

The state's struggling economy encouraged the deals in the background, said Pai.

"There might be general condition in the economy that set the stage ... but whether or not a company has the propensity to [sell] still depends on a lot of specific industry characteristics," he said.

The underlying economic circumstance is the fact that Hawaii is a small market that only recently opened to large outside competitors, said David Ramsour, former chief economist of Bank of Hawaii. Oahu is home to less than a million people.

In the past, when the islands were isolated economically, local companies could remain small and plentiful, said Ramsour, who is now an independent consultant in Texas. Hawaii firms could charge high prices that were driven more by the expensive costs of rent and labor than by the cost of material goods. Hawaii is such a little market that it was passed over during the early days of globalization in the late 1970s, Ramsour said. When big box retailers -- Costco, Home Depot, Wal-Mart, Sports Authority, CompUSA, Kmart -- finally began arriving here, local mom-and-pop shops were not big enough to be efficient economically. In a global market, size matters. The same logic applies to other industries, including the banks and airlines, he said.

Given modern Internet technology, it's easy for major national banks to reach into local communities and provide intense competition for local banks, Ramsour said. Ultimately, he would expect Bank of Hawaii to be purchased.

Ramsour would also not be surprised if a large mainland carrier bought the combined Aloha-Hawaiian company in five years or so. The bottom line is consolidation will continue, Ramsour said.

"It's a survival strategy basically," Pai said.

Better sold than bankrupt

Other firms weren't fortunate enough this year to have an exit strategy. Kona biotech company Aquasearch Inc. is in Chapter 11 bankruptcy, and so is the Chicago firm that used to operate the S.S. Independence and the ms Patriot in Hawaii waters. Creditors sued to force Aquasearch into bankruptcy reorganization. The cruise company, American Classic Voyages Co., was hit by the Sept. 11 blow to tourism. The firm ceased operations and canceled a plan to bring two more ships to Hawaii.

Chun Kim Chow Ltd., the 93-year-old Honolulu company that owns Ethel's and other local retail stores, is shutting down, firing 238 employees. House of Music at Ala Moana Center may also close, along with three other music stores in Hawaii, if no one buys the leases from their bankrupt parent in Carnegie, Pa.

Hawaii's handful of tech firms shrunk in the dot-com bust. WorldPoint Interactive Inc. closed offices after the state sued over an unpaid government loan. Adtech's president quit out of protest shortly before the firm moved its assembly unit to California, affecting 60 positions. Ohana Foundation, a nonprofit digital video disk firm connected with a California for-profit chipmaker, closed shop, firing 90 workers.

Not all bad news

On the other hand, Bank of Hawaii had a remarkable comeback this year with a 49 percent increase in value for shareholders of Honolulu parent Pacific Century Financial Corp. The firm's new chairman, chief executive and minority owner, Michael O'Neill, announced aggressive plans to retrench Bankoh's assets to Hawaii. Income for the first nine months of the year rose 12.8 percent to $91.5 million from $81.1 million last year.

Macy's made a publicity splash in Hawaii, but it won't hog the limelight for long. In November, Seattle fashion retailer Nordstrom Inc. said it plans to open a 150,000-square-foot department store at Victoria Ward by 2005.

The story that wasn't

Perhaps the award for the year's biggest nonstory goes to the annual conference of the Asian Development Bank, held in May at the Hawaii Convention Center. Following anti-globalization riots in Seattle, the Honolulu Police Department spent $3 million and 10 months to get ready for the meeting. State agencies reported paying $846,094 for security and related expenses. The news media braced itself. But all the measures must have had their desired effect, because nothing bad happened.

Loose ends

Finally, the year was punctuated by new chapters in continuing sagas. These breaking stories didn't generate as much excitement as the ADB or the Liberty House sale, but each gave an answer to the question "Whatever happened to?"

>> Eric Gill edged out Tony Rutledge for leadership of the Local 5 of the Hotel Employees & Restaurant Employees union, again. The controversy stems back to early 1998, when Gill was not allowed to run in elections and Rutledge easily won. A federal judge threw out the result. Gill won the next election by a thin margin, but was forced to face Rutledge again after Gill was removed by the union's international parent. Twenty years earlier, a similar scenario played out when Richard A.T. "Dick" Tam unseated Rutledge and his late father from a 40-year reign.

>> After tangling with federal authorities over charges surrounding his 1998 bankruptcy petition and leadership of Bank of Honolulu, Indonesian businessman Sukamto Sia made a deal and plead guilty to bankruptcy fraud and wire fraud. The former Honolulu developer faces between 20 months and 40 months in prison when he is sentenced next year, plus more than $2 million in restitution.

>> Consumer bankruptcy is back in style, with 5,025 new filings in the islands this year, following a similar trend on the mainland. Although the number isn't close to the all-time high of 5,813 filings in 1998, it's an 11 percent jump from last year's 4,527 cases.

>> Outrigger Enterprises Inc. announced a $300 million redevelopment for the Lewers Street area, starting in 2003, but the city's plan to spur the project by forcing property owners to sell their holdings has drawn controversy.

>> The state has outlined pieces of its $2 billion anti-trust lawsuit against Hawaii's major oil companies, filed shortly before the 1998 gubernatorial election. In summary judgment hearings, the firms sought to convince senior U.S. District Judge Samuel King the state doesn't have enough evidence to go to trial. In rebuttal, the state pointed out the firms frequently shared local wholesale prices. King's decision is expected early next year.