After a rollercoaster 2008, Orange County businesses are adjusting their operations to survive and even thrive during the recession. Business Journal reporters asked executives from a variety of industries what they are doing to hang on through the expected climbs and dips in 2009. The following is their edited responses.
H.K. Desai
chief executive, QLogic Corp.
If you look at the data from a lot of our customers, 2009 is going to be a challenging year for everybody. What we can do about it is limited, since we don’t know what the growth rate will be. What we are doing is making sure that we can control the costs and control the spending. We are very careful about discretionary spending so that we can still invest in our research and positioning of our products. Our strategy is to wait and see for 2009.
Jim McCluney
chief executive, Emulex Corp.
Though the state of the economy is challenging, Emulex,and the storage industry,is in a good position to continue to grow. Many industry analysts predict the continuous growth of data due to new corporate transactions, corporate data replication for business continuity and regulatory reasons. Beyond the business demand for storage, consumers keep generating content at an exponential pace on Web sites such as YouTube, Flickr, MySpace, Facebook and MSN.
While the economy is uncertain and technology spending may decline for the next few years, storage spending should remain a key part of the IT budget. In fact, spending in our sector could well rise as enterprises and their data centers drive toward converged networks, helping IT save money. Bottom line: Business demand for more storage, more connectivity and more consolidation means our products will be more necessary than ever, resulting in continuing revenue opportunities for Emulex.
Beyond the growth of storage, we are optimistic about our prospects for the future because of our roadmap, investments in innovative new products for emerging markets, such as virtualization, data security and data management, and our ability to execute with speed, focus and determination.
We know businesses want virtualization, which is driving server consolidation and networked storage. Enterprises also want to shrink the footprint of their data centers while increasing computing power. We are enabling these technology shifts for our customers, solving their biggest pain points.
Scott Connella
market president, Union Bank of California
It’s a precarious environment. There are still a lot of unknowns. Most companies probably won’t have strong fourth quarters. It might not be until April when we see those results. I don’t think we’ve hit a bottom, and I wouldn’t want to predict when it might happen.
The government injecting capital doesn’t guarantee lending, especially when regulators haven’t eased up on demands. We are likely going to see a continuation of banks consolidating. At some point, things are going to turn around,then we’ll see a steady increase in demand. Smaller businesses are a good leading indicator. We see it first on revenue, and most of them have already cut costs. It’s often easier to tell more from them than it is from larger companies with complex balance sheets that can be manipulated for a couple of quarters.
We’re still lending,we stay pretty consistent,but we’re very cognizant of how companies are doing in this environment. We’re going to be more sensitive to trends. Some of the industries that should hold up better are healthcare, defense and food and beverage.
We’re seeing less demand from corporate borrowers as they need less money to support working capital, and as they have reduced capital expenditures. There’s also a slowdown in mergers and acquisitions. Less of a supply of credit is also a factor for new loans. At this point many institutional investors that got into the senior lending market over the past four or five years have disappeared.
Murray Rudin
partner, Riordan, Lewis & Haden
It’s an exceptionally hard time to predict the economy. I believe that we will see improvement by late 2009, but it could be very difficult for the next six months. The stock market tends to be ahead of economic performance by six to nine months, so we can watch it as an early indicator of a turnaround. The political climate will also influence the timing of recovery. The new administration and Congress are talking about increasing government intervention in the economy, which could affect both specific industries and the nation as a whole.
For OC, the main hits to the local economy are old news. The volatile real estate, construction and subprime lending sectors have taken their lumps. What remains is a diversified OC economy that should perform in line with the rest of the country. One possible area where we remain overexposed locally is commercial real estate.
There was excessive debt in every corner of the economy: domestic and foreign, consumer and corporate, real estate and hedge funds. Now, everyone is being forced to deleverage at the same time. The best outcome would be to get it all over with fairly quickly. Once all of the unwinding of debt is over, after some time passes, confidence, lending and consumer purchasing will recover. Lowering interest rates won’t help bank lending much, because the problem is not interest payment size, but fear that borrowers won’t be able pay back principal.
JP Gough
chief executive, Orange County Business Bank
Income from banks will be weak next year. Low interest rates brought on by the Fed-eral Reserve will make the spreads between interest charged on loans and the interest paid on deposits not high enough to pay for both the banks’ general costs of operations and the banks’ compliance costs.
Falling property prices will also cause banks to add to their loan loss reserves, even when the tenants of borrowers are making 100% of their payments. The added expense will cut into profits.
There will be no local mergers. New accounting rules are going to undercut the government’s efforts to find banks to buy problem banks. The Financial Accounting Standards Board, a private Connecticut not-for-profit that determines accounting standards, has come up with horrendous ways of treating mergers and acquisitions. Their new requirements make many possible mergers too prohibitive for banks if they’re under a size of about $20 billion. Over 90% of more than 8,000 banks in the country are under
$1 billion.
But probably the worst thing is that as the biggest banks become even bigger. We will have even more that cannot fail. So the nation will roll from bailing out one crisis to another crisis, as the accountability for failure disappears because of “too big to fail.”
Hezy Shaked
chief executive, Tilly’s Inc.
It looks like the first quarter of ’09 might even slow more than the fourth quarter of ’08. We anticipate unemployment to go up and consumer spending to slow even further. As a company, we are doing well since we put extra measures to maintain the right inventory levels.
Knute Kurtz
managing partner, PricewaterhouseCoopers LLP
Companies need to address the critical short-term risks of liquidity and financing while also preparing for the longer-term challenges of the economic slowdown. Well-capitalized companies can find opportunities to achieve strategic objectives such as acquiring weakened competitors to increase market share, adding new product lines or expanding into new geographies.
Companies can address the critical short term risks of liquidity and financing by: developing or maintaining a robust financial forecast, identifying key forecast risks and developing appropriate responses, ensuring adequate sources of liquidity, driving efficiency in working capital processes and reviewing global cash tax positions and minimization options.
Finally, it is necessary for companies to prepare for a possible extended economic downturn by aggressively managing costs, exercising discipline in capital investments, assessing and monitoring credit exposures throughout the value chain and aligning business objectives with talent priorities.
Jeffrey Reeves
copartner in charge, Gibson, Dunn & Crutcher LLP
Inevitable cost-cutting by clients will slow the demand for traditional corporate and litigation services during the near term. However, the need for legal services won’t disappear. With pressure in the credit markets and the increase in bankruptcy filings, lawyers will need to be even more creative in finding new solutions to current problems.
Government bailouts target certain business sectors, while others are left to their own devices. Therefore, new types of financing arrangements will be required and new business combinations will result. The commercial real estate sector has yet to suffer the market adjustment already suffered by others; however, tech businesses may es-cape some of the negative effects of this downturn.
The demand for quality intellectual property litigators will remain strong, as OC continues to be a hot-bed for IP litigation. Financial pressures will cause bankruptcy and restructuring specialists to remain in high demand, and acquisition opportunities at bargain prices should cause a resurgence in transactional work in late 2009. Addition-ally, specialists in financial institutions as well as securities law will be active in advising clients required to respond to an expected wave of increased regulation and reporting. Firms able to adapt and equipped to handle these areas should do well.
Steven Plochocki
chief executive, Quality Systems Inc.
The healthcare IT sector in which Quality Systems participates is poised for growth in 2009. If healthcare entities and providers could be linked electronically, patients could experience better quality of care and practices would operate more efficiently.
With the many political changes on the horizon next year, it is expected that the economic stimulus package currently planned for 2009 could offer incentives for healthcare IT adoption. This translates into more dollars being earmarked to enhance adoptions of (healthcare IT) efforts across the board.
These political incentives could prompt hospitals to purchase and/or implement healthcare IT systems and more physician offices to incorporate electronic medical records software into their practices. This would streamline processes and reduce costs while improving patient care.
Michael Mussallem
chief executive, Edwards Lifesciences Corp.
The business climate may be impacted by a number of variables in 2009, namely the economy and new leadership in the White House and at the helm of key government agencies.
Similar to other industries, medical device companies are monitoring the events occurring in the financial markets and analyzing the direct impact on companies as we approach the new year. Many hospitals that rely on endowments and elective procedures are feeling the squeeze and are taking steps to control expenses.
Due to the devices and technologies that the industry develops, our business can be characterized as less discretionary in nature; however, it would be na & #271;ve to think that the economic turmoil may not impact our sector. Areas that have the potential to be impacted include procedure timing, hospital customers and privately insured patients.
Edwards Lifesciences is focused on treating cardiovascular disease and our products are generally used in surgeries that are not elective such as heart valve surgery or in the monitoring of patients in the intensive care unit with critical care products. Therefore, we don’t expect to see them as impacted by the economy as other products. That being said, some patients can and do delay heart valve procedures and can influence the timing of their surgeries.
Tim Blett
president, W.B. Doner & Co.
It’s going to be a very difficult year for many of the advertising agencies who depended on the big spenders. The financial services, retail and automotive sectors, who in the past have had large advertising budgets, have trimmed back a lot this year and it would be overly optimistic to say it’s going to bounce back soon. It doesn’t matter what category it is, everyone is being challenged by this shift and will (continue to be challenged) into 2009. Everyone is quite uncertain as to what the landscape will be in the next nine to 10 months.
In the near term, we’re going to see more advertising agencies getting more aggressive in the marketplace. When I say aggressive, that doesn’t mean they will be spending more, because I don’t think anyone has that option. Aggressive means being smarter, cleverer and doing more with less. Agencies will be forced to make some tough choices and seek out the right channels to advertise with a more efficient advertising model.
The one bright spot in the industry will be interactive and online advertising. More companies are going to start relying on interactive advertising for results because it is more measureable than the traditional ad-vertising formats in terms of returns on investments.
Daryl McCullough
chief executive, PainePR Inc.
The PR industry has shown steady growth over the last decade. However, this is one of the most serious recessions in our nation’s history and the impact will be felt here in OC, as well as in all of California and beyond. Nevertheless, we believe leaders in the PR industry have some reason to be optimistic, because of PR’s leadership role in helping organizations navigate the new and rapidly changing landscape of Internet-based media and using PR to leverage social media and other online strategies to communicate directly with key audiences.
We also believe that public relations and reputational management are even more important in times of change. Many clients will need to reassure and protect their reputations among key audiences as competitors react to market challenges and government regulators change the playing field. In OC, we believe the need for public education and awareness will increase in healthcare and financial services. Similarly, some government PR contracts, which may have been stalled in the recent past, may grow again due to President-elect Obama’s expressed plans to invest in the economy through infrastructure and public works projects.
Harold Rapoza
general manager, Hilton Anaheim
Obviously there is a lot of uncertainty in the hotel industry and the trends that we have been seeing during the past 60 to 90 days are very concerning as far as drops in group pickups and a decrease in leisure demand. Many experts have a rough outline for what the next four quarters are going to look like. From all accounts, the first quarter is going to be hit hard, and second quarter is still going to be down, but not as much as the first quarter. In the third quarter, everyone expects things to start evening out, and by the fourth quarter, everyone is hoping to see some type of stabilization or even an upswing. I think that’s very optimistic (and that it will be) sometime in 2010 before we see any kind of rebound in the hotel industry.
The Hilton Anaheim is in a different situation because we’re coming off of a huge renovation where we had displaced rooms and some rooms are out of order. Due to the renovation, we’ve lost business, but our group position is good next year. On paper, we’re up 20%. Even though we look good on paper, we are very cautious about that. With what’s happening with the economy, we’re not sure if these groups are going to pick up to their contracted commitments. As for January, group commitments are already below what they were originally planned.
William Halford
chief executive, Bixby Land Co.
Real estate fundamentals, including rental rates and occupancy levels, are softening as the overall economy continues to decline. What’s more, the current illiquidity of traditional real estate funding sources is causing deleveraging,the forced sale of assets bought with borrowed money,across the entire industry.
The bond market has been turned on its ear. The market for commercial mortgage-backed securities, which represented 75% of all debt origination in 2007, is now non-existent. Balance sheet lenders, such as banks and insurance companies, can’t meet the pending debt demands of the real estate industry.
These issues are all compounded by the fact that most real estate equity sources are in retreat. They’re all either focusing on fixing existing portfolio investments or acquiring stressed debt.
What does that mean for 2009? More than anything, real estate companies that are heavily leveraged (at 70% or more levels) or companies with a concentration of debt requiring refinancing in 2009 (or even 2010) will be severely challenged. Provided that the economy continues to decline, and if debt markets fail to return in volume, commercial real estate property values will fall in the near term, creating opportunities to invest at what could be historically low per square foot prices.
