Corporate merger and acquisition
(M&A) activity has risen dramatically in the U.S. over the past three years. According to Mergerstat.com, U.S.
and U.S. cross-border M&A transactions
have increased 37 percent from just over
24,000 transactions in 2001 to 2003 to over
33,000 transactions in 2004 to 2006. The
value of the transactions more than doubled, from $1.6 billion in 2001 to 2003 to
$3.5 billion in 2004 to 2006.
“In Cincinnati, our leading locally headquartered companies have not been sitting
on the sidelines,” says Brad Meyer, director
of CB Richard Ellis Global Corporate
Services. “Those companies participating
in significant acquisition activities in the
past three years include Federated with
their acquisition of May Department
Stores, Fifth Third Bank with their acquisitions of First National Bank of Florida and
R-G Crown Bank, and Procter & Gamble’s
recent acquisition of Gillette.”
Smart Business spoke with Meyer about
M&A activities as they relate to the management of corporate real estate.
What is driving the increase in corporate
M&A activity, and how does real estate enter
the picture?
The primary driver is the efficiency and
speed of acquiring/integrating competition
versus the more expensive and longer time
frame associated with growing organically.
Many critical activities are necessary to
ensure successful integration of companies acquired, including transition/retention of leadership and key employees, efficient communications with customers, and
sharing of a joint culture and vision.
Equally important is realizing the efficiencies and value of the newly combined real
estate portfolio, which was a key value
driver for several acquisitions, including
Federated/May and SuperValu’s acquisition
of Albertson’s Inc.
How should a company rationalize a newly
combined property portfolio?
First, it is important to mention that the
corporate real estate (CRE) function should be part of the process to provide
advice and expertise as early in the evaluation phase as possible. With active CRE
involvement throughout the M&A analysis
and transaction, maximum value can be
realized in post-acquisition integration.
The process is fairly simple, but two common mistakes we witness are companies
skipping steps or taking them out of order
and not involving outside advisers, both of
which tend to result in value left in the
newly combined portfolio.
Portfolio rationalization can be broken
down as follows: 1) thorough collection
and documentation of all significant properties; 2) assessment of facilities’ market
values, highest-best-use, redundancy in the
portfolio, and individual efficiencies or
lack thereof; 3) external value rationalization of each integration opportunity; 4)
internal strategy development in sync with
growth and operations plans; and 5) execution of the integration plan.
What are the easiest ways to realize portfolio
integration savings?
First, it is important to identify redundant
operations — back office, retail stores or
supply chain inefficiencies. With careful analysis and execution, consolidation and
disposition of nonessential assets can be
fairly quick sources of significant savings.
Secondly, identify all owned properties
that will not be occupied long term and
execute a sale/leaseback transaction coterminous with the anticipated date to vacate.
As long as qualified properties are validated with input from senior corporate management, this strategy can generate immediate significant capital to fund growth initiatives with very low risk.
The third step involves ‘right sizing’ rental
expenses of existing properties that may
not have received the regular attention
they deserve. In most corporate portfolios,
our experience has proven that an average
rental gap of 10 to 15 percent exists between contract commitments and current
market rents. Without proactive evaluation, leases will naturally be renewed near
the end of the term at the weakest point of
leverage and just continue to ride the over-valued wave of the market.
How can more value be revealed by digging
a bit deeper?
By engaging in a disposition of special
purpose assets. While this can be more
challenging as compared to disposal of a
corporate office or distribution center,
there is a tremendous upside if resources,
both advisory and capital, are employed to
uncover the maximum value of each asset.
In some cases, a highest and best-use
study will validate that the current special
purpose use will maximize value without
significant property modifications, but in
many cases, outlining alternative higher
value uses based on market-achievable
uses, legally permissible and politically feasible uses are the value creation catalyst.
Ultimately, the valuation only indicates a
theoretical value of a special purpose property, so care must be taken to engage brokerage resources with access to the wide
range of potential buyers to ensure projected values are achieved or exceeded.
BRAD MEYER is director of CB Richard Ellis Global Corporate
Services. Reach him at [email protected] or (513) 369-1333.