Make the Most of Mergers and Acquisitions
November 26, 2018
In case you’ve been living under a rock for the past decade, here’s a news flash. Home building companies are consolidating. In fact, M&A activity in the home building industry has occurred at a frenetic pace in recent years and shows no signs of letting up.
The growth prospects and investment strategies that lead to mergers and acquisitions within the home building industry are varied, but most analysts agree that target companies usually possess a perfect combination of market penetration and exceptional land holdings. The latter is the single biggest determining factor since home builder profits live and die based on the ability to manage land. Building houses is really just a way to move lots and ultimately realize profit on land holdings.
Perhaps it seems odd to be reading an M&A blog on an architecture firm’s website. But if mergers are really all about selling more land, we’ve got a thing or two to say about that. After all, the best way to sell lots is to build awesome houses on them.
NEWLY FORMED TEAMS MUST UNDERSTAND REGIONAL MARKET NUANCES
Home builders are essentially land owners who build houses. And to best leverage the value of the land they own, home builders need to build market-sensitive homes that sell quickly. After a merger, acquiring companies should harvest the vast institutional knowledge of target company employees and their preferred consultants. They know a lot about the markets where they live, work and play.
Sometimes market differences are simple. For example, here in Iowa a single-story home is a “ranch” (whether there’s cattle out back or not). In our Minnesota office, these same single-story homes are called “ramblers”. But market differences go much deeper than terminology alone, especially when plan design is considered.
NATIONAL BUILDERS WILL BENEFIT FROM LOCAL “BOOTS ON THE GROUND” ARCHITECTS IN NEW MARKETS
Design differences among regions vary greatly throughout the country. Even if national builders possess their own in-house design staff, they should consider partnering with a local architectural firm to ensure new plan designs are in line with market trends so they can most easily capitalize on consumer preferences. Conceptual design ideas from a local, experienced architect will help position the target company for continued growth. Also, outside design expertise creates immediate synergies.
National builders often have huge plan portfolios. Acquired companies have their own proven plans. An outside architect can marry the two, eliminating redundancies by removing or reworking duplicate plans. Any new plans that are created will benefit from regional design influence that will garner more buyers in the local market.
LOCAL BUILDERS BRING REGIONAL EXPERTISE TO NEW PRODUCT DEVELOPMENT TEAMS
Local employees from target companies can offer amazing insight. National builders should resist the urge to dismiss these opinions. Instead, include target company employees on newly formed product development teams.
In a 2017 Builder magazine article, contributor Joe Bousquin noted that “all the large public home builders do is allocate capital to their subsidiaries. It’s the local talent that makes it happen.” This is true for newly acquired companies, too. In essence, they become the newest branch on the tree.
Many national builders already utilize a subsidiary structure with local control managed by regional-based leadership. It makes sense to allow target company employees to play an immediate role in this structure. Their contributions can be invaluable.
CONSULTANTS EASILY NAVIGATE CODES AND REGULATIONS IN THEIR HOMETOWN MUNICIPALITIES
Builders know that the biggest obstacle to cycle time is regulation. Permitting, approvals, code revisions and reviews all slow down construction and reduce profit margin. Sure, national partners know your business, work your product and probably offer terrific rates. But you can mitigate a lot of headaches by using local consultants.
The local guys have intimate knowledge of the municipal processes in their jurisdictions. Let them navigate codes and regulations and you’ll realize shorter time frames that expedite construction and cycle times. And the more they work with you, the better they’ll understand your company vision and product. It truly is a win-win.
Mergers and acquisitions have become status quo for the home building industry. Acquiring companies who leverage the existing talent of target companies and who work with local architectural experts and consultants will separate themselves from the pack and put their newly acquired division on a rapid growth trajectory.