Taking stock of corporate troubles: Diversity softens L.A. fallout.

Entire floors of downtown offices are being abandoned. Vendors looking to get paid are now stuck in bankruptcy court. Investors face stunning losses from failed companies. Customers are jumping ship, or at least considering it.

In ways large and small, Los Angeles is slowly feeling the effects of the nation's corporate scandals, even though none of the companies being investigated are actually headquartered here.

For now, the overall impact on the local economy appears to be limited. Stunning as the troubles have been at WorldCom Inc., Global Crossing Ltd., Andersen, Enron Corp., Adelphia Communications Corp., and Qwest Communications International, L.A. is too large and diverse to see substantive changes in the standard measuring sticks of job growth, personal income or retail sales.

"The impact in L.A. is less than the impact, say, in New York or the Midwest," said Steven Cochrane, senior economist at research firm economy.com. "The L.A. economy is driven more by consumers rather than investments."

In some cases, newfound opportunities are being created for competitors of the troubled firms that seemed improbable just a few months ago. Much of Andersen's staff and client base, for example, have been divvied up by area offices of the major accounting firms. Cable giant Adelphia, which last month filed for Chapter 11 bankruptcy protection, is expected to sell off its franchises throughout L.A. County -- and the winning bidder will lay claim to one of the nation's most lucrative cable properties.

But there's plenty of bad news amid the dislocations -- and more is likely as the ripple effects reach Southern California. Laid off by Global Crossing last November, Sheryl Grossman, a former director of information services, found her former employer's reputation affected salary negotiations. Companies interested in hiring her were under the impression that the telecom company inflated executives' salaries, and it took her longer to find a position at a commensurate level.

"Having worked for Global Crossing didn't affect my job search initially, but I was interviewing with one company for months, and their impressions of the company played a factor in the hiring process," she said.

Cochrane is especially concerned over the psychological fallout of the scandals, along with the stock market declines. "If consumers decide they should start saving, that's when L.A. is going to get hit."

The Business Journal examines several key sectors to determine the impact thus far and what could be in store.

Investors

Worldwide, Enron's investors lost $80 billion from its stock-market peak. Shareholders of WorldCom lost nearly $120 billion from mid-1999, when its stock was at its highest. WorldCom's bond investors stand to lose up to another $30 billion.

Add to the mix the collapse of Global Crossing and other telecommunications firms and the losses mount even further. How much of that pain is being felt in L.A.?

At just one locally based money management firm, the losses from a minor player in the meltdown -- Tulsa, Okla.-based Williams Communications Group -- caused portfolio losses appearing to total more than $300 million from peak value.

According to filings with the Securities and Exchange Commission, two units of L.A.-based Capital Group Cos., one of the nation's largest investment management firms, through March held a total of 5.4 million Williams Communications shares, which once sold for $60 each. They now trade for pennies.

Capital Group officials declined to comment.

Williams Communications' April bankruptcy filing has led to a pitched battle between some of its other shareholders and the company's creditors.

Victor A. Sahn, a partner with the downtown law firm of Sulmeyer, Kupetz, Baumann & Rothman represents Williams Communications shareholders who are seeking to establish a shareholder's committee at federal Bankruptcy Court. (Capital Group, which sold nearly all its shares, isn't participating.)

Shareholders, who stand to receive nothing in the pre-bankruptcy deal that Williams Communications reached with its creditors, want a chance to examine the company's assets. Sahn believes there might be some value left for shareholders, who get paid in bankruptcy cases only after creditor claims are settled. Williams Communications has about $5.2 billion in debt.

Generally, the string of accounting fiascoes has further dampened an already-depressed environment for mergers and acquisitions, said Doug Burke, managing director of Digital Coast Partners LLC, a Santa Monica investment bank focused on technology.

Venture capitalists are sitting on piles of money, but they continue to be selective. Corporations are afraid to make strategic investments because they can affect the investor's income statement while showing up initially as a capital investment. "It's not that strategic investment is an inherently bad thing, it's just much harder to get done in this environment," Burke said.

Investors who have been busiest recently are those who specialize in distressed assets, especially technology.

Los Angeles is home to a number of these firms, including Gores Technology Group and Platinum Equity, headed by brothers Alec and Tom Gores, respectively. The Gores brothers are preparing competing bids in the Global Crossing bankruptcy auction. Representatives from both companies declined comment.

Tom Gores has been using acquisitions to assemble a worldwide company, NextiraOne, that provides network services to large corporate clients, and he's made rumblings about targeting assets in the entertainment field next.

Oaktree Capital Management, along with Apollo Group, have been named as bidders for the telephone directory assets of Qwest Communications, another troubled telecom firm. Oaktree officials didn't return calls seeking comment.

Chanin Capital Partners, a Westside investment bank that specializes in distressed situations, recently has been involved in the bankruptcy cases of telecom firms McLeod USA and ITC Deltacom, and is involved in efforts to sell the international unit of Nextel as well as Global Crossing's auction.

Already, the WorldCom disaster is causing potential buyers of distressed telecom assets to question their value, said Chanin vice president Douglas Martin. If WorldCom were to begin unloading assets in earnest, though, the impact could be even greater. "It's going to flood the market," he said. "Can the telecom market really afford to have WorldCom get broken up? It's such a big player."

Suppliers

The pain ranges from the largest business partners of these now-hobbled firms to the companies that water the plants in buildings that no longer are being occupied.

Look no further than Andersen, the firm that once audited the books of WorldCom, Global Crossing and Enron, to see signs of local fallout.

Competitors have divvied up the local spoils. The entertainment practice was swallowed up by competitor Ernst & Young, which also took over Andersen's Woodland Hills-based mid-market practice. The firm's entire Orange County office moved over to PricewaterhouseCoopers, while Deloitte & Touche picked up the lion's share of Andersen's tax practice.

Another large vendor to be affected was El Segundo-based Computer Sciences Corp. In November, CSC announced a long-term agreement to provide computer outsourcing services to Global Crossing for $400 million. The deal was never signed, and Computer Sciences no longer does work for Global Crossing -- although it buys network capacity from its would-be client.

"They won (the contract) and thought they would have it and it didn't appear, so they're affected by all this," said Stephen T. McClellan, first vice president with Merrill Lynch Global Securities.

In the last six months, Computer Sciences also had to renegotiate a 7-year, $3.3 billion outsourcing contract with Nortel Networks, a telecom-equipment maker that's cut its employee count by half.

"(Computer Sciences) completely redid the contract, basically cut it in half, and started over," McClellan said. He added that because of lower costs, CSC is actually making money on the smaller contract, while it was originally losing money.

Last week, CSC shares fell in tandem with shares of competitor Electronic Data Systems Corp., whose close ties to WorldCom have become a millstone. CSC shares lost 15 percent of their value on July 1 and 2, amid analyst earnings revisions and investors fretting over the industry's further exposure to bad accounts.

Real estate

While large amounts of space are coming onto the market, they are spread across the county. Unlike the tech meltdown that buried the Westside, this spate of bad news is mitigated by geographic diversity.

The center of activity is downtown, where Andersen will give up the remaining five years on its 160,000-square-foot lease at Library Tower. The firm still occupies the space and is current on its rent, but landlord Maguire Partners approached Andersen about marketing the space shortly after it bought controlling interest of the 1.3 million-square-foot tower from Daiichi Mutual Life in March.

"Their future was in jeopardy, so it was smart for us to start thinking of marketing that space," said Peggy Moretti, vice president at Maguire Partners, who expects the space to be filled "within the next three months."

Downtown had a second quarter vacancy rate of 14.5 percent on a base of 30.8 million square feet, according to CB Richard Ellis. The addition of 160,000 square feet, even temporarily, would boost the vacancy rate to 15 percent and reverse a downward trend in recent quarters.

In Beverly Hills, where the second quarter vacancy rate stood at 12.8 percent on a base of 3.5 million square feet, Global Crossing's collapse will have a greater impact.

The company has vacated its 100,000-square-foot headquarters at 360 N. Crescent Drive and the space is being marketed at $4.25 a foot.

"The whole complex was completely renovated after the previous owner left (in 1998)," said Mike DeSantis, senior director at Cushman & Wakefield and listing agent on the building. "It's a museum quality property."

Still, with an asking rent nearly $1.25 a foot greater than the market average, it might be hard space to move. Returning 100,000 square feet to the submarket will bump the Beverly Hills vacancy rate to 15.9 percent.

As the problems at WorldCom continue to unravel, space at Arden Realty Inc.'s Howard Hughes Center and Warner Center Properties in Woodland Hills could become available in the near future. The amount of space WorldCom has at the Hughes Center, at 6601 Center Dr. West, could not be confirmed. According to CoStar Realty Information the company leases about 23,000 square feet in two buildings at Warner Center.

"We haven't talked to them, and don't plan to until they quit paying rent," said Bill Inglis, senior vice president at CB Richard Ellis.

Enron's largest remaining Southern California presence is in Long Beach, where Enron Oil & Trading continues to pay rent on a long-term lease for 8,500 square feet in the Landmark Square building at 111 W. Ocean Blvd., according to Beth Sydow, leasing manager for landlord Trizec Properties Inc.

Sydow added that Enron had put some space up for sublease, though she didn't know how much.

Customers

Even bureaucracies like the Los Angeles Unified School District and California State University system, both Enron customers, moved to make arrangements for alternative sources of power.

LAUSD made the adjustment in March, switching the 120 schools and facilities that had been using Enron to power supplied by the City of Corona, with Southern California Edison providing transmission and distribution services (its other 800 sites use Los Angeles Department of Water and Power).

CSU, too, had made the switch in March, going with Phoenix-based APS Energy Services for 19 of its 23 campuses, including L.A. County's Cal State Dominguez Hills, Cal State Long Beach and Cal Poly Pomona.

With cities like Burbank and Glendale also severing their relationships with Enron since the end of last year, one of the last institutional users of Enron appears to be Kaiser Permanente, whose 31 L.A. County sites continue to use Enron. Kaiser's contract runs through April 2004.

While the number of WorldCom users in Los Angeles County has not been disclosed, one of the larger local companies using its services is Toyota Motor Sales USA Inc. in Torrance.

The company brought in WorldCom last September to build an Intranet for its 1,000-plus Toyota and Lexus dealerships throughout the country. The company has not made plans to find an alternate communications provider, according to spokeswoman Cindy Knight.

"We just recently got all of our Toyota dealerships connected, and we're just beginning to install at Lexus," said Knight.

Staff reporters Conor Dougherty and Samantha Lee contributed to this story.