Merge and Purge

2001 was a landmark year of mergers and acquistions for Island businesses.

August, 2002

Without a doubt, Sept. 11 was the biggest business story of 2001. The aftereffects of the world’s most harrowing terrorist attacks rippled throughout the state, disrupting every industry, from retail to real estate. In this year’s list of Top 250 companies, more than half of the 21 industry sectors posted negative sales in 2001, compared with 2000 figures.

Tourism took a dive. The 33 companies that comprise the Top 250’s tourism sector had combined gross annual sales of $4.7 billion in 2001, down 7.9 percent from 2000. While a 7.9 percent decrease may not seem too steep, consider the tourism industry’s past performance: a sales gain of 6.7 percent in 2000 and a gain of 5.8 percent in 1999. Furthermore, statewide hotel occupancy in 2001 was 71.9 percent, down from 77.9 percent the year prior, according to local research firm PKF Worldwide. Other industries that suffered negative sales include: energy (-33 percent); leisure and recreation (-25.9 percent); wholesaling and distribution (-23.2 percent); and retailing (-19.6 percent).

All in all, Hawaii’s Top 250 companies finished the year with $31.95 billion in sales, down 5.9 percent from 2000. It’s the only other time in eight years that Hawaii’s Top 250 companies reported an overall decrease in sales, the other was a 15 percent sales drop in 1997. Chief executives and key managers in Hawaii, however, say the poor performance should not be attributed exclusively to the events of Sept. 11.

“We tend to forget that, even before Sept. 11, the American economy last year was slumping,” says John Adams, chairman, president and chief executive officer of Hawaiian Airlines Inc. Indeed, following a banner year of economic growth in 2000, the state began to fall into an economic malaise early in 2001, as the Asian economy continued its downward slide and the Mainland economy slowed to a crawl. That slump, combined with the enduring effects of Sept. 11, forced the state into survival mode, and in true Darwinian fashion, Hawaii’s business climate became one of survival of the fittest.

Only The Strong Survive
Only the strong survive. The rest sink, merge or are bought out – as the business-related events of 2001 led many to believe. Whether or not the aftermaths were direct results of Sept. 11, the year 2001 was a landmark for mergers and acquisitions. Coincidentally, the majority of the movement occurred at the top of the list, with at least six of the top 20 companies either completing or pending mergers or acquisitions.

Honolulu-based Schuler Homes Inc. last October announced its merger with Texas-based D.R. Horton Inc. The move formed the largest homebuilder in the United States. Schuler, which earned $1.6 billion, ranked third on the Top 250 for the second year in a row. Also in October, after positioning itself as an attractive and lucrative franchise, Cheap Tickets Inc. was purchased by New York-based Cendant Corp. Cheap Tickets generated gross annual sales of $691.4 million in 2001, a 3.9 percent increase over the year prior.

“There’s a national consolidation going on in the online travel business, and I’m sure that when you get into the national competition, the amount of money you’ve got to put into computerization just gets to be higher and higher,” says Walter Dods, chairman and chief executive officer of BancWest Corp., of the $280 million acquisition of Cheap Tickets.

BancWest in December 2001 completed its second acquisition in five years, when French banking giant BNP Paribas bought its operations, along with its subsidiaries, First Hawaiian Bank and Bank of the West – a deal worth $2.5 billion, the largest in Hawaii history. Last year, BancWest had gross annual sales of $1.63 billion, earning the No. 2 position on the list. Dods says consolidations and acquisitions are “the natural evolution of business,” and Hawaii should expect to see more of them as the state evolves into part of a worldwide marketplace. “Our transaction is significant in that it was the largest one in the history of Hawaii, by maybe 10 times the average transaction, besides our prior one when Bank of the West and First Hawaiian got together – that was just short of a billion-dollar deal,” he says. “I don’t see it shaking up the community so much as it being just a natural part of Hawaii becoming part of a national and global economy.”

Other companies that were not gobbled up by large foreign- and Mainland-based parent companies with deep pockets were forced to consolidate. It was a move that helped to tighten up the marketplace. The newly formed Hawaii Pacific Health, (a merger of three former Top 250 companies, Kapiolani Health, Straub Clinic and Hospital and Wilcox Health Systems), is making its first appearance on the Top 250 this year with 2001 gross annual sales of $490 million. Hawaii Pacific Health ranked No. 14 on the list.

Roger Drue, president and chief executive officer of Hawaii Pacific Health, says that while he is not expecting any revenue changes in fiscal year 2002 (which began on June 30), he is forecasting about 4 percent growth for 2003 – an unlikely increase, had the three health systems not merged. “The ability of the health care delivery system in Hawaii to remain as a fragmented, almost ‘cottage’ industry is over,” says Drue. “The demands on hospitals and physicians are enormous, and to meet those expectations and demands requires expertise and resources typically found only in consolidation.”

His words ring true for other industries as well. The December announcement of a proposed merger between Aloha Airlines Inc. and Hawaiian Airlines Inc. sent a ripple of anxiety through the community as airline executives admitted the industry wasn’t big enough for two carriers. And even though plans for the merger came to a screeching halt in March, those same executives still voice concern about the dicey future of interisland travel.

“One thing you can count on is that the days of inexpensive coupons good for flying anytime, with no restrictions are numbered. That is a business model that does not work,” says Aloha Airlines President and Chief Executive Officer Glenn Zander. He hopes that aggressive expansion into new markets will make up for the lack in inter-island travel. “No airline ever successfully shrank itself to profitability, therefore, growth is perhaps more important now, given the structural shrinkage in the interisland numbers.” Aloha’s parent company, Aloha Airgroup Inc., ranks No. 20 on the list, a jump up from No. 24 last year.

Hawaiian Air’s Adams agrees that the market is far from stable. “One or more major airlines is likely to go through bankruptcy reorganization, or even go out of business,” he says. Hawaiian Air ranked No. 10 with $611.5 million in gross annual sales, a 0.7 percent jump over the previous year. “New and smaller airlines are emerging and becoming successful through the implementation of new-age technology to control costs.” Both Zander and Adams are expecting increases in sales for 2002 as a result of aggressive route expansion.

The Contenders
The remaining Top 250 companies that weren’t involved in some form of merger or acquisition also went through a shakedown of sorts. Thirty-two companies were displaced from the Top 250 list this year, a 31 percent increase over the total number of displaced companies the year prior. The displacements reflect both an increase in significant sales drops, as well as a reluctance to share closely held proprietary information from nosy competitors in these dismal times. A big portion of the displaced companies is concentrated in the retail, distribution and tourism industries.

On the bright side, the increase in displaced companies made room for the 17 returnees and 14 newcomers to the Top 250 list. More than a few companies crept up from Best of the Rest last year to the Top 250 this year, including Fresenius Medical Care, Sen Plex Corp. and Yukimura’s Inc.

So it wasn’t gloom and doom all across the board. In fact, several Top 250 companies in a variety of industries managed to post healthy increases in gross annual sales in 2001, despite the turbulent economy. Big Island-based Isemoto Contracting Co. Ltd. had a 38.8 percent increase in sales last year, bumping it up from No. 167 on last year’s list to No. 122 this year. “Because the tourism market went down after 9-11, the state turned to the construction industry to help stabilize the economy,” says Leslie Isemoto, president of Isemoto Contracting. “When they raised the [non-bid contract] ceiling limit from $25,000 to $250,000 for smaller-size repair and maintenance projects, they really increased the work volume for contractors tremendously.”

The three Top 250 agriculture companies all reported sales gains as well, for a combined increase of 33.1 percent over 2000 sales. Due to an oversupply of canned fruit, Maui Land & Pineapple Co. Inc. was able to increase sales 22 percent last year, closing 2001 with $172.6 million. “Even though it’s an extremely competitive marketplace, there is a demand for whole and cut fresh fruit, and it’s growing rapidly,” says Doug Schenk, president of Maui Pineapple Co. Ltd., a subsidiary of Maui Land & Pine.

According to retail analyst Doug Smoyer, there’s even hope for semi-immediate recovery in the retail industry, which took a -19.6 percent hit in overall sales last year. “There’s no question that there was a reduction in business as a result of 9-11 that has not come back to its normal capacity yet,” says Smoyer, owner of consulting firm Retail Strategies. “But we certainly see a turnaround in terms of the attitude of customers and retailers. Especially Mainland retailers who are showing faith in the Hawaii retail environment by opening branches here.”

Finally, the banking industry also seems to be holding its own amid the current economic crunch. Financial institutions topping the list of largest net income in 2001 were: BancWest Corp.; Bank of Hawaii Corp.; American Savings Bank’s parent company, Hawaiian Electric Industries Inc.; and CPB Inc.

This year’s No. 2 company, BancWest, leads the group with 2001 annual profits of $254.8 million, 33 percent more than the No. 1 Top 250 company, Hawaiian Electric Industries Inc. “HEI may always top the list in terms of revenues, but the real measurement of success is profitability and market capitalization. You can’t measure market cap for us anymore because we’re private, but when we were public, our market cap was way higher than Hawaiian Electric,” says Dods. “But by the end of this year, we’ll probably even have more revenues than HEI. We might be second on the Top 250 this year, but we’ll probably be first next year.”

Dods says that overall, the resiliency of the banking industry paints a telling picture of what’s ahead for the state. “Economists may be predicting a long, drawn-out recovery, but we are seeing tremendous increases in deposits, we’re seeing delinquencies go down, we’re seeing loan volume starting to pick up,” Dods says. “And now Mainland arrivals are up 100 percent over pre-9-11 levels, and Japan – while it’s not up there yet – is starting to get back there. These are all really good signs. So I think the economy is recovering faster than the economists think it is, and I think it’s safe to be a little more optimistic than they are.”

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Jacy L. Youn