M&A real estate value Featured

8:00pm EDT September 25, 2007

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 brad.meyer@cbre.com or (513) 369-1333.