Deals of the Year.

How 1999 Reflected Evolution of Local Economy

L.A. crackled with deals in 1999.

The number of mergers and acquisitions involving L.A. companies more than doubled. Venture-capital investment exploded to an estimated $1.2 billion. And proceeds from L.A.'s initial public offerings were almost four times as much as in the prior year.

But two deals last year truly epitomized the changing nature of L.A.'s economy.

In one, eToys Inc., an Internet company that didn't even exist three years ago, went public and immediately raised hundereds of millions of dollars from dot-com-crazed investors. In the other, Atlantic Richfield Corp., one of the city's last corporate giants; agreed to be taken over by U.K. oil, giant BP Amoco, heralding the end of Arco as a major local force.

The two deals highlight the stark contrast between L.A. as a major corporate center and an entrepreneurial hotbed.

And investors are opening their wallets wide to finance L.A.-area companies in those sectors.

"Arco is leaving, but these are the industries of the past, not future," said Lloyd Greif, president of L.A. investment bank Greif & Co. "What's driving the L.A. economy is entertainment and media"

An estimated $1.2 billion in venture capital poured into the greater Los Angeles area last year, according to PriceWaterhouseCoopers. (That includes deals in Ventura and Santa Barbara counties but the vast majority of the money went to L.A. County.) That is double the $527 million invested in 1998.

One company alone Culver City-based CarsDirect.com. got $280 million. That one deal exceeded the entire $274 million that venture capitalists invested in the L.A. area in all of 1997.

"I've been preaching for years that L.A. is the place to be," said Massoud Entekhabi, a partner in PriceWaterhouseCoopers' global technology group. "This is the third most-funded place on the planet, after Silicon Valley and all of New England. Companies are not only saying that L.A. is a good place to do business, (but) this is clearly an economy where people are used to dealing with economic change."

Of course, not all change is good. Los Angeles suffered its share of deals that either went sour or left the region poorer last year.

When Steven Spielberg, Jeffrey Katzenberg and David Geffen in 1998 announced plans to build a $250 million studio and headquarters for DreamWorks SKG at Playa Vista near Marina del Rey, it was heralded as a massive shot in the arm for Los Angeles. City officials tripped over themselves to offer financial incentives to the studio, and development plans were given the fast-track treatment.

But last year, the dream deal collapsed when the entertainment company pulled the plug. Playa Vista's owners are going ahead with the residential portion of the project, and there are plans to develop sound stages where DreamWorks would have been. But nagging questions remain on whether the development as a whole will ever pencil out.

The L.A. deal that probably got more local and national media attention than any other also ended in disappointment. That involved the National Football League awarding Los Angeles its 32nd team, contingent on a viable financing plan being submitted by Sept. 15. But the long and often contradictory mating dance among L.A. investors, elected officials and the NFL ended with the new football team being awarded to Houston.

Then too, L.A.'s efforts to position itself as a major Internet hub weren't helped when two of its most prominent new-media companies moved their headquarters elsewhere. Marina del Rey-based GeoCities was bought by Santa Clara-based Yahoo Inc., while EarthLink Network Inc. merged with MindSpring Enterprises and moved its home base to Atlanta.

M&A, IPO action

But overall, buyers continued to outnumber sellers in 1999 mergers and acquisitions involving local companies. Of the 585 L.A. transactions in 1999, 315 involved buyers while only 270 involved sellers, according to Mergerstat, a division of L.A. investment bank Houlihan Lokey Howard & Zukin.

Perhaps more significant was the overall increase in M&A activity last year. The 585 L.A. deals was more than double the 255 transacted in 1998.

Action was especially explosive on the IPO front. While only 14 companies floated initial public offerings last year, barely up from the 12 of a year earlier, LA. IPOs in 1999 raised almost $2 billion, up from the $540 million raised in 1998.

The new year should see continued -- perhaps even more accelerated -- dealmaking, especially with local incubators like Idealab and eCompanies gaining momentum and more venture capitalists stoking L.A. startups toward IPOs. Many of those deals likely will be financed with stock, which has become the source of clout for highflying Internet startups with huge market caps. For example, GeoCities fetched $4 billion in its all-stock buyout by Yahoo.

Likewise, L.A. Internet companies that go public in the years ahead will be able to leverage their market caps to acquire other companies -- especially ones with hard assets and actual profits. It's even conceivable that the major players in Hollywood could find themselves takeover targets of Web companies.

"The studios are faced with a bigger challenge than any time in their past," said Dave Davis, an analyst at Houlihan Lokey Howard & Zukin. "If the stock for tech or Internet companies like Yahoo keeps growing, their market cap will be so large that they'll be able to swallow up the studios so they can have tangible assets. The studios that embrace new media are the ones that are going to benefit the most."

New source for jobs

That's why he finds Walt Disney Co.'s purchase last year of Sunnyvale-based Infoseek Corp. significant (even though it didn't do much for Disney's stock). The entertainment giant has spent well over $1 billion in establishing its Go.com network as part of a long-term strategy, putting it ahead of any other studio in its Internet presence.

As other entertainment companies explore the possibilities of providing content to the Internet, Davis thinks all sorts of jobs will be created in Hollywood, more than offsetting the employment lost to so-called "runaway production."

How far-reaching the Internet can be as a source of entertainment, however, will likely depend on the pace in providing more households with high-speed Internet access, whether through cable or DSL phone lines.

Much of the year was spent with AT&T Corp. haggling with local officials and Internet service providers over whether cable lines should be made available to ISPs instead of being limited to just the cable operators. The L.A. City Council continues to study the issue with no resolution in sight.

There were other, more encouraging developments for the city -- such as getting the Democratic National Convention and the successful culmination of a three-year effort to reform the city's charter. Even the loss of pro football was, in some circles, considered a victory because it illustrated a public steadfastness not to use public money for sports ventures.

Be it the 1984 Olympics, last year's Women's World Cup soccer final, or the glistening debut of Staples Center, local sports deals have been transacted mostly through private financing. The fact that all the above proved to be financially successful was something that apparently didn't occur to the NFL owners, or at least didn't impress them.

Dealing with schools

At the governmental level, the most widely followed dealmaking was -- and remains -- with the Los Angeles Unified School District.

The school board's decision to remove Superintendent Ruben Zacarias of his administrative powers led to a showdown with outraged Latino leaders. That showdown ultimately wasn't resolved until the board agreed to buy out Zacarias' contract for $750,000.

The school district also has been struggling to cut real estate deals so that more schools can be built and overcrowding eased. But in an area as dense as Los Angeles, it's been an uphill struggle -- made evident by the controversy over whether to proceed with the Belmont and South Gate projects that are on environmentally questionable land.

Even with an ongoing restructuring of the badly mangled district, board President Genethia Hayes said it would be several years before the city's schools improve in any quantifiable way. And that doesn't bode well for L.A.'s ability to maintain or advance its place in the new economy.

"There are a lot of skilled jobs, for skilled workers," said Mark Drayse, research director for the Economic Roundtable, a local think tank. "If L.A. doesn't have a good educational system, it can't create those workers."

Sports deals

The opening of Staples Center was hailed as another piece in the long-sought renaissance of downtown, although it remains unclear how activity at the new arena will feed into the overall area. The sports arena has been the center of some unwarranted attention, from questions over the elitist nature of the layout, to the revelation that the Los Angeles Times agreed to split revenue from a Sunday magazine issue with Staples Center.

Other parties were generally applauded for their sports deals in 1999.

Among those were Jerry Buss, who hired ex-Chicago Bulls coach Phil Jackson to lead the Lakers, and former Warner Bros. head Bob Daly, who bought a stake in the Dodgers and became the team's managing partner.

"It is significant and perhaps ironic that the biggest news in the L.A. sports world (last) year was all about the front office," said David Simon, president of the Los Angeles Sports Council. "It wasn't 'Lakers win the title,' or 'Gretzky comes to L.A.'"