M&A Due Diligence Is Key in Today's Competitive Housing Market | John Burns Real Estate Consulting

M&A Due Diligence Is Key in Today’s Competitive Housing Market


During the last housing downturn, our national Consulting team helped restructure billions of dollars in bad debt. Since then, we have been busy using the same market feasibility and financial analysis skills to help builders, developers, and building product manufacturers grow or reposition assets. We just held our annual client-only Summit conference in June. Each year we witness new relationships forming among buyers, sellers, and potential capital sources.

By last count, we had assisted:

  • 25 builders/developers acquire portfolios of assets or entire companies by assisting with market feasibility and valuation efforts on deals valued at more than $5 billion
  • 16 builders prepare to successfully market and sell their companies by conveying an unbiased market outlook and communicating the builders’ history
  • 9 building product companies and investors underwrite M&A deals valued at more than $3 billion, with more to be announced

Along the way, we learned three big ideas worth sharing:

  1. Buyers will pay up for new capabilities. A new geographic footprint, increased market share, or the benefit of a strong local management team tends to determine the winning bidder.
    • Builder/developer M&A. Acquirers entering new geographies will generally outbid those who already have a presence in a market, paying a premium for the management talent and geographic diversity.
    • Building product M&A. Acquirers adding synergistic product lines will generally outbid those who already have a presence in a product, paying a premium for the management talent and new product line.
  1. Debt access drives the price. Acquirer capital sources matter significantly too.
    • Builder/developer M&A. Today’s home builder M&A is often a battle between private companies with patient, long-term capital and public companies with less patient, short-term capital. Both sources seem to be able to access long-term debt at very low interest rates, but publicly traded companies need to show the benefits immediately, while the privately held companies can take longer to show a return. Beyond the dollars and cents, cultural fit should also be a key consideration when analyzing acquisition opportunities.
    • Building product M&A. Today’s building product M&A seems to be a battle between industry bellwethers flush with cash and private equity firms utilizing leverage. Building product distributors, with variable cost structures, are getting purchased by buyers using more leverage than ever.
  1. Uncertainty is a catalyst to sell. While several companies have been sold because their private equity owners were nearing the end of their funds’ investment horizons, other sellers seem to be motivated by retirement or the desire to avoid the next recession. For them, the certainty of “cash in hand” trumps the uncertainty of running a business in 2018 and beyond. The acquirers, however, see an industry with tremendous upside potential thanks to an aging housing stock and single-family construction that remains below 1993 levels.

In short, we expect M&A to continue, fueled by willing sellers, growth-minded buyers, and low-cost debt available from a variety of sources. The competition for efficient building platforms or companies with great assets is strong.

Conducting the proper diligence on market factors, cost and labor trends, financial analysis, and cultural integration pays dividends in the long run. Our team has years of experience running home building, land development, and building product companies and conducting new home feasibility studies. We love these assignments and can complete M&A assignments in less than three weeks. We can see the nearly immediate impact and value we bring to our clients in their due diligence efforts.

For further information or questions on M&A or evaluation of portfolios of assets, please contact Don Walker, President and CFO, or Todd Tomalak, SVP of Building Products Research.

 


Don Walker If you have any questions, please contact Don Walker, Managing Principal and CFO at (858) 281-7211 or by email.

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