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SOURCE:   Portland Tribune

No one likes a Hollywood ending. Insiders predict economic shockwaves from complicated video store merger
By Jeanie Senior     Issue date: Fri, Feb 18, 2005

    Whatever the outcome of the buyout battle now raging over Wilsonville-based video rental chain Hollywood Entertainment Corp., one fact already is clear: Oregon is about to lose another corporate headquarters.
   After a failed attempt to take the company private, Hollywood signed a $900 million merger agreement in January with Movie Gallery Inc. Early in February, industry giant Blockbuster Inc. said it was launching a hostile takeover of the company, with a $985 million offer.
   Hollywood and its Game Crazy stores have 28,000 employees and about 2,600 stores in 47 states and the District of Columbia. It is the second-largest video company in the United States; Dothan, Ala.-based Movie Gallery, with 2,200 stores and 18,500 employees, is the third biggest.
   Blockbuster, based in Dallas, Texas, is the global video leader; it has 19,300 employees and some 8,900 stores worldwide.
   If Movie Gallery wins in its bid for Hollywood, the company would keep the offices in Wilsonville and run Hollywood as a separate division from its Alabama headquarters, said Thomas Johnson, the company’s senior vice president of corporate finance and business development.
   Blockbuster hasn’t announced its plans for the Wilsonville offices, should it gain control of Hollywood.
   “We haven’t gotten into that level of detail,” said Blockbuster spokesman Randy Hargrove of a potential merger with Hollywood.
   Hollywood founder and former Chief Executive Officer Mark Wattles, who resigned his post from the 27-year-old company Feb. 2, the day after Blockbuster’s hostile takeover announcement, already has moved on to other endeavors.
   Tuesday, the board of Colorado-based Ultimate Electronics Inc. named Wattles CEO of the electronics chain, which is restructuring under Chapter 11 bankruptcy protection. Wattles recently purchased 31 percent of the company’s stock.
   A statement from Ultimate said seven other executives who had worked with Wattles, presumably at Hollywood, would be joining the Colorado company.
   That could be just the beginning of the exodus of talent — who may leave either by choice or through possible cutbacks — depending on the new owner.
   Some 500 people now work at Hollywood’s corporate offices in Wilsonville, which are housed in Rite Aid Corp.’s former office building. Hollywood, which moved to Wilsonville in 1996, also owns two warehouses there.
   Corporate déjà vu
   Former Willamette Industries Inc. CEO Duane McDougall was at the helm of the Portland-based wood products company when it was swallowed by Federal Way, Wash.-based Weyerhaeuser Co. in 2002 after a lengthy and bitter takeover fight. He has been watching the Hollywood drama unfold.
   “You can imagine my feelings about something like that,” he said. “I think it’s tough for the city and the region to be losing a corporate headquarters because it’s a substantial number of people who make significant contributions in the community, besides just paying lots of taxes.”
   He added, “You count up all the income taxes, TriMet taxes, contributions to charities — its something that’s not easily replaced.”
   At least two other companies, Louisiana-Pacific Corp. and Crown Pacific Partners LLC, have departed from Portland in the last year. “The trend is the wrong way,” McDougall said. “You can read into that what you want, but it’s not good.”
   There is not enough appreciation for the presence of a corporate headquarters here, he said. “People tend to look at a corporation as some big monolith, but it’s made up of people who live in the community. If they don’t have jobs, they go somewhere else, and it’s usually a long time before you can replace those kinds of jobs.”

   Portland investment manager Bill Parish called the Hollywood Video situation “the same old sad story, in which Portland is going to lose a really important headquarters and the quality of jobs that go along with it.”
   “Locally based businesses should be cherished,” he said. “Here’s the governor going to China and California to try to bring in new businesses, and not enough is being done to protect existing businesses.”
   There’s another bonus to having a corporate headquarters, he said. “Companies like that groom executives who go out and start their own businesses.” And when they leave, “it’s another loss in the pool of executives.”

   Wilsonville is a city of 16,000 residents that’s awash in corporate headquarters, from G.I. Joe’s Inc. to Mentor Graphics Corp. to InFocus Corp. These businesses generate 18,000 jobs, and the city’s public and government affairs director, Danielle Cowan, said she hoped Hollywood would not leave town.
   “But those are business decisions that ultimately the surviving company will make — we won’t have an option in that,” she said. “They have been a great corporate presence and partner in Wilsonville and we would be sad to see them leave.”
   Closing shop?
   If Movie Gallery wins its bid for Hollywood, it would provide the Alabama company with the urban presence it now lacks, because most of its 2,500 stores are located in rural areas and small towns in the United States and Canada.
   “I would say two-thirds of our stores are in more rural markets, one-third in urban areas,” Movie Gallery’s Johnson said. Few of them, he said, are in locations where they compete head-on with Blockbuster or Hollywood outlets.
   Because of Wattles’ development strategy when he was building Hollywood, however, there’s far more overlap with Blockbuster. If Blockbuster triumphs it could mean a round of store closings.
   Media analyst Dennis McAlpine of Scarsdale, N.Y.-based McAlpine Associates said Hollywood deliberately opened stores in close proximity to Blockbuster stores to draw traffic away from its competitor.
   That overlap, and its potential effect on competition if one company owned all the stores, is one reason that McAlpine is predicting Blockbuster’s bid could run into antitrust problems with the Federal Trade Commission. The situation is tense enough, McAlpine said, that “if I were a shareholder of Hollywood, I would run, not walk to the nearest broker and sell it immediately.”

Bill Parish
Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, OR  97223
Tel:  503-643-6999  Fax: 503-221-3161

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