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Market's Uncertainty Gives Southland Firms Growing Pains


The freeze is in--and it doesn't bode well for Southern California's long-term economic future, as many of the region's once-fast-growing companies are now unable to raise the money they were counting on to add jobs, expand into new space or introduce products.

Stock market turmoil is shutting out companies that once hoped to raise capital by selling stock or bonds this year. During the three months ended Sept. 30, California companies raised about half the amount of money raised during the same period last year.

"This is not a happy time for rapidly growing small and medium-sized businesses here at all," said Jack Kyser, chief economist for the Los Angeles Economic Development Corp. "It can have some deadly consequences."

Kyser notes that most companies raising money are doing so to expand by adding people, products or office space. He says he is hearing reports of Southern California companies pulling back on hiring and hesitating to sign new leases. If they cannot expand, some companies could go bankrupt or be acquired, Kyser said.

Of course, a market comeback could quickly change things.

"There is no model you can use for how long this is going to last," Kyser said. "How soon is it going to be before the capital markets get back their sense of confidence?"

During the third quarter, California companies raised $5.4 billion in equity and debt sales, compared with $10.2 billion in the same period of 1997 and $11.2 billion in the second quarter of 1998.

"We've had a significant correction in the marketplace that many would say is overdue and not unexpected," said John Jackson, senior vice president of Bowne in Los Angeles, which tracks deal activity.

The number of initial public offerings by California-based firms during the quarter dropped by more than half, and dollar volume dropped nearly 30% statewide. There were 46 debt deals for the quarter, off 46% from the same time last year, and only 70 offerings of all kinds, including IPOs.

Many local companies that had expected to sell stock for the first time have delayed or abandoned those plans.

One company that has shelved plans to go public, at least temporarily, is Korn/Ferry International, the world's largest executive search firm. The Los Angeles-based firm had hoped to raise $230 million in an IPO this month to fund its Internet-based search outfit, FutureStep. The company is likely to revive the offering later this year or early next, analysts said.

Another firm left in the lurch is Skechers USA, the Manhattan Beach-based maker of trendy shoes, which had planned to go public Oct. 12. Money from the stock sale was earmarked for store openings, hiring and product expansion, Skechers had said.

The company said Friday it is indefinitely postponing those plans.

"We are waiting for market conditions to improve substantially before going public," said Chairman Robert Greenberg. "The company is doing very well, and there is no reason to go public before market conditions suit us."

Looking at the bigger picture for raising capital from July through September, Bowne found that Southern California fared better than Northern California, in part because it doesn't rely heavily on any one industry.

Compared with the same period last year, stock and debt activity by Southern California companies dropped 36%, to $2.8 billion from $4.4 billion. Activity by Northern California companies dropped 53%, to $2.4 billion from $5.1 billion, as many technology companies were hit especially hard by market declines.

But more Northern California companies were able to go public through first-time stock offerings, with nine companies issuing IPOs, compared with five from Southern California firms, Bowne said.

One key geographic difference: Stock deals made up the bulk of capital-raising in Northern California, while debt deals were more prevalent in Southern California.


Dwindling Deals

Stock market turmoil in recent months has virtually shut out most California companies planning to raise capital either by selling stock or through debt deals. In fact, only about half as much was raised during the third quarter of 1998 as in the third quarter of 1997.

Amounts raised, in billions:

Third-quarter 1998: $5.4 billion

Number of deals: Third-quarter 1998: 70 deals

Source: Bowne of Los Angeles


Debora Vrana covers investment banking and the securities industry for The Times. She can be reached by e-mail at; by phone at (213) 237-5918; or by mail at Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.

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