2001: Trouble and triumph
Isle firms fair game in year of megadeals

By John Duchemin
Advertiser Staff Writer

Billionnaires, bankers and multinational conglomerates played grab-bag with some of Hawai'i's top companies in 2001, a year that will go down as one of the most active and tumultuous in the state's corporate history.

From left, Glenn Zander of Aloha Airlines, Greg Brenneman of TurnWorks and Paul Casey of Hawaiian Airlines discuss the merger of Aloha and Hawaiian airlines with members of media on Dec. 19. Advertiser library photo • Dec. 19, 2001

Later on, massive New York-based conglomerate Cendant Corp. bought Honolulu discount ticket company Cheap Tickets, and Texas-based home-builder D.R. Horton decided to buy Hawai'i developer Schuler Homes Inc.

To cap the year, mainland consulting firm TurnWorks helped the state's two major interisland carriers, Aloha and Hawaiian airlines, plan a merger, and is helping itself to a one-fifth ownership stake in the combined company.

Beyond these deals were several major land transactions that bring new, well-heeled investors to Hawai'i shores as owners of prime commercial high-rises.

All told, billions of dollars changed hands in some of the most active wheeling and dealing since the Japanese investment boom of the early 1990s. And like those earlier transactions, the 2001 mega-deals could have monumental, unsettling side effects, observers said — such as a decline in corporate-level management jobs in Hawai'i or higher plane fares from the airline merger.

But on another level, the very presence of these deals is a positive sign, observers say. Even though the economy appears to be declining now, each of the 2001 blockbuster deals could help in the long run by creating stronger companies and thus fostering economic growth, said Gregg Robertson, an investment banker and longtime Honolulu businessman.

"There's no question, all of these companies should be in much stronger hands," Robertson said. "There will be a general upgrading of these businesses in their financial stability and staying power."

The deals also brought cash — much of which could stay in the state.

Hundreds of millions of dollars in BNP money is now in the hands of Hawai'i residents and businesses who got $35 each for BancWest stock that was trading at around $20 per share before the acquisition. Major beneficiaries include Honolulu corporation Alexander & Baldwin, which expects to reap about $120 million in cash and plans to spend some of it in Hawai'i transactions; and The Estate of Samuel Damon, which owned 15.8 million shares of BancWest.

Also, D.R. Horton paid $1.2 billion for Schuler and Cendant paid $425 million for Cheap Tickets, much of which went to corporate officers including Schuler co-founder James Schuler and Cheap Tickets founder Michael Hartley.

"These deals bring liquidity to the market and to local investors, and that's only good for our economy," said Gabriel Lee, senior vice president of business banking at American Savings Bank.

Despite the financial windfalls, some say it is distressing to watch flagship companies get subsumed by national giants.

Robertson observes that Hawai'i-based public companies have shrunk to a handful, some of which are penny stocks; gone are Dillingham Construction, Pacific Corp., Theo Davies and many other local public companies of past decades.

Offshore companies have far less incentive to base management jobs in Hawai'i, Robertson said. The long-term decline in professional and financial services jobs in Hawai'i may have its roots in the disappearance of Hawai'i public companies, he said.

"There were a lot of high-quality jobs in Hawai'i because of those public companies, but as soon as they go off the landscape in Hawai'i, those jobs seem to go away," he said.

The recent deals have already led to some job cuts as Cheap Tickets has axed 80 workers from its corporate staff. And more layoffs and executive buyouts are expected next year from the proposed Aloha-Hawaiian merger.

New players

But some say these negatives are countered by what the new players bring to the table — either shoring up companies that wouldn't have survived otherwise, or adding clout to top performers.

Many of the new investors do have impeccable pedigrees.

John Anderson, who has agreed to buy Amfac Center for $90 million, is a Los Angeles businessman whose name adorns the UCLA business school. Greg Brenneman, founder and president of TurnWorks, made his name as the turnaround guy at Continental Airlines. D.R. Horton is one of the nation's largest residential developers. Cendant owns top brands including Avis, Century 21 and Ramada. And BNP is a bank holding company with more than $700 billion in assets.

Observers said the investors are coming to Hawai'i for the same main reason: They see value here.

Federated, for example, bought Liberty House when it was fresh out of bankruptcy court, gaining a foothold in Hawai'i and an anchor location at Ala Moana Center. TurnWorks is participating in the Aloha-Hawaiian combination with hopes of shoring up performance and creating a vastly improved single airline — with a stock price that would make good on its investment.

The real estate investors — Anderson and others, including MW Group, which bought downtown's Pioneer Plaza in September for $42 million — bought because the market seemed to be bottoming out, said Christine Camp, president of Avalon Development Corp., a Honolulu development consulting firm.

They are banking on increased economic growth in several years that could lead to higher rents and higher resale value, she said.

"If you can afford to wait a few years, Hawai'i could be a very good play," Camp said.

More to come

And the wave of such deals could just be starting, Camp and others said.

Mergers and consolidations are expected in the hard-hit tourism industry — especially among local retailers or hotels that are hurting because of post-Sept. 11 declines in business.

"I think the trend will continue — companies doing business with Japanese visitors were really shaken up by the drop in arrivals, and I'd guess the owners will be unloading those for cheap," said Steve Sombrero, senior vice president for real estate firm Chaney Brooks. "There's a whole infrastructure laid out to handle the Japanese market, and a big adjustment will have to be made there."

Also desperate are many of the Japanese property owners who still own sizeable chunks of real estate purchased at premium prices in the early 1990s, Sombrero said.

These properties have gradually been sold off to value investors at a fraction of the purchase price — and many more top-dollar deals should take place in coming years, he said.

Also in the picture is cash-heavy Alexander & Baldwin, which has indicated it wants to spend some of its BancWest windfall money here, possibly on real estate acquisitions.

And Victoria Ward Ltd., owner of much of Kaka'ako and the Ward shopping complex, has retained a consulting firm to formally solicit interest from possible buyers.

With these factors in mind, 2002 and 2003 could have as many momentous business deals as 2001, if not more, Robertson said.

Many of the deals could hinge on a weak economy keeping things cheap — so big-time investors can come in and get a major asset relatively inexpensively.

"Distress deals are going to be the theme here for the next year or two," he said.