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Corporate metamorphosis - mergers, buyouts, or sales.

In the volatility of the current real estate market, the only constant is change. Almost overnight new companies emerge and established players vanish. A 1990 survey by Dun and Bradstreet found that business failures among finance, insurance, and real estate companies rose by 32. percent over 1989, the largest increase in any category surveyed.

Clients add another element to the volatile mix, playing management musical chairs in an effort to wring another dollar out of the bottom line.

In the midst of all these unplanned changes, some companies are recognizing that carefully orchestrated change is essential for future prosperity. That through a calculated metamorphosis--be it sale, purchase, or merger--a company may emerge better equipped to meet tomorrow's challenges.

Why change?

Before considering any company metamorphosis, however slight, ask yourself if this merger will benefit you and your company.

"Don't take a buying or merger opportunity just because it presents itself," advises Mike Packard, CPM [R], president of Packard and Loomis, a California specialist in business brokerage. "The question to ask yourself is will this company put anything to the bottom line.

"And certainly do not sell or merge your business when you area in financial difficulty, at least not if you have a choice," continues Packard. "You will lose most of your |sweet equity.'"

Mac Bates, CPM, president of Harrison and Bates in Richmond, concurs. "Don't just go into a merger or acquisition because the opportunity presents itself," he questions. "Be sure that the strengths and weaknesses of the other company complement your own."

In this book, The New Merger Game (Amacom, 1987), Don Gussow gives several reasons to consider a merger:

* Personal security. Mergers give entrepreneurs the chance to get money out of the companies they have worked to build.

* Desire to grow. Mergers provide capital for expansion and add new resources to increase market share.

* Boredom. A new company presents new challenges to those who feel they have reached a plateau.

* Wanting out. Retirement or illness are often reasons for selling a business.

* Illness. Physical causes may also prompt an owner to sell.

Among the property managers surveyed for this article, the desire to grow and serve new clients combined with the increased availability of companies for sales were major factors influencing recent merger decisions.

"You always see a certain number of companies coming on the market because of retirement or burnout," says Mike Packard, whose firm handles business brokerage. "However, in the last year, the volume has increased."

Ray Wirta, president of the Koll Company in Newport Beach, California, also feels that it is a buyer's market for property management firms. "If the management arm is part of a larger, profitable entity, its inefficiencies may not be apparent," explains Wirta. "But as the larger entity begins to suffer, the developer cannot afford to continue management."

Another common reason for mergers is to be larger enough to compete for institutional and RTC contracts. "A small company is going to have great difficulty convincing an institution that it can provide an adequate level of service, no matter what its abilities," says Packard.

One company that expanded its operations for better client response was Parnegg Miller Management, Inc. in Albuquerque. "Our company had always specialized in larger properties," relates Don Miller, CPM, president of the firm. "But when the RTC and the FDIC became big employers in the Southwest, they wanted managers capable of handling entire portfolios, not just |cherry-picking' the better, larger properties off the top."

Miller addressed this need for a full range of management experience by merging with the property management arm of a full-service real estate firm, which was losing money. Miller spent the next year revamping the small-property operating systems and replacing staff, but in the end, he was able to attract REO business.

Merging to become a bigger player in a market or submarket is perhaps the most common reason for a merger. When Mac Bates's company, Harrison and Bates, decided to merge with the commercial real estate division of Bowers, Nelms & Fonville in 1990, they were a major force in downtown office, retail, and industrial management and leasing, but much less dominant in suburban office properties.

"The year before our merger, our company had worked to develop a five-year strategic plan," revealed Bates. "We felt that suburban office represented a potential area for us and set our sights on spending the next five years expanding our staff and portfolio in that sub-market.

"But because our new partner' principal strength is in suburban office leasing and management, we have been able to achieve our five-year plan in a year and a half." Clearly this is one merge that has paid off.

Another variation on the compatible-strengths equation is the combination of the operations person and the high-profile rainmaker achieved by the merger of Dallas's Kelley-Lundeen-Crawford Management "Both my partner and I realized to continue expanding, we needed a partner with a high community profile," says Howard Lundeen, CPM, COO of the firm. One of the firm's competitors is the Staubach Company, headed by football great Roger Staubach. "Let's face it," says Lundeen, "his autographed footballs are a lot more in demand than mine."

To achieve higher community awareness, the company chose John Crawford, incoming president of the Dallas Chamber of Commerce and potential candidate for mayor. The Fall 1990 merger of the two firms has already paid off. "When the Queen of England was in Dallas," relates Lundeen, "John Crawford was on television every night, showing the Queen the city. You cannot buy publicity like that."

Financial considerations

Certainly the first place to look in evaluating a company as a potential partner or addition is its financial condition. In Valuing a Property Management Business, author Shannon Pratt concluded that a "typical property management company would sell at approximately 55 percent of annual revenues in a cash equivalency transaction." However, Pratt continued, "no company is typical."

A 1988 study by the Institute of Real Estate Management Foundation found that most property management business sales or mergers are made at a variable price based on contingencies rather than a fixed amount. This arrangement, which is uncommon in many other industries, reflects the tenuousness of manager/client relations.

"In Arizona, real estate management contracts are cancelable on 30 days notice," says Ken Goodacre, CPM, president of Ventura Management in Phoenix. "With that little guarantee, it's difficult to know what you have to sell."

Howard Lundeen advises that new partners lay the spade work early with important clients. "Explain the benefits of the merger to your clients as soon as you have agreed on the deal," suggests Lundeen. "If you can't convince them of the merger's value, it probably isn't the right decision."

Careful due diligence with financial statements and assets is also vital. Look beyond the bottom line for signs of potential trouble.

In his book, Gussow suggests that a buyer review the following:

* Financials. Try matching the company's five- or ten-year record against your own. Also review budgeting and accounting procedures.

* Growth patterns. Determine if the growth was due to industry expansion or a company's own aggressiveness.

* Market position. Decide if the company's position could be maintained or improved.

* Growth potential. Assess if the company has the creativity to expand.

"It isn't enough to just look at income," advises Howard Lundeen, "you need to know where the real income of the company is coming from. You also need to look for skeletons in the closet."

Lundeen recalls an "almost" merger that fell through when lenders started foreclosing on the potential partner's properties shortly before the papers were to be signed.

"We thought we had done our homework," says Lundeen. "We interviewed vendors and bankers and found no real complaints. Sometimes you are just not told the entire truth."

Although Lundeen pulled out of the merger in time, his company had to make good on vendor bills for the properties they were already managing for the potential partner. "It made us gun shy about considering a merger for several years," say Lundeen.

One warning signal of undisclosed trouble may be erratic business performance. "Be very cautious of dramatic swings in income," cautions Mike Packard. "Swings in client contracts or in personnel may also indicate problems."

Price Pritchett, author of After the Merger (Dow-Jones Irwin, 1985), suggests that buyers be on the look out for changes in inflation, economic downturns, and sudden fluctuations of either the buyer or the seller's business.

The financial picture may also improve after a merger. Larger companies may benefit from economies of scale in both buyer power and personnel requirements. "Property management is a business based on volume," says Michael Herzberg. "It takes almost the same number of home-office people to manage 5 million square feet as 1 million. The more assets you have under management, the more profitable you are."

Mac Bates also agrees that savings can be realized after a merger, especially in administrative and middle management positions. Bates suggests doing a preliminary budget for the new entity to help pinpoint potential economies.

Human compatibility

Of equal importance with financial considerations in assessing a potential partner is a compatibility of corporate cultures. "Any competent accountant can work the numbers," states Mike Packard. "Assessing the human compatibility of two companies is much more difficult."

"More acquisitions do not work because of human differences than financial ones," concurs Michael Herzberg. Companies with the same operating philosophy, the same work ethic, and similar compensation and benefits packages are much more likely to succeed as merger partners.

Corporate culture indicators can range from evaluations of the company by vendors and clients, through the quality of the personnel manual, to whether the employees call the president "Bill" or "Mr. Smith."

Assessing the corporate culture can begin with a walk through the office on some pretext. Listen to the way the receptionist answers the phone; whether employees look stressed out or happy. "A merger or acquisition is a marriage," confides Mike Packard. "If you aren't compatible, it won't last."

So important was compatibility to Howard Lundeen that when he contemplated a merger with partner Kelley in 1981, he opted to "live together before we got married."

"Although Kelley and I had worked on deals together, we didn't really know each other," recalls Lundeen. "So before we reached a legal agreement, he moved his staff of four into our office, and we worked together for one year."

Lundeen's concern over compatibility also prompted him and his potential partners to take personality profile tests. The analysis revealed that the partners were exact opposites, but that their skills were complementary.

"Kelley was a intellectual, a creative tactician," says Lundeen. "I was the organizer, the one able to do detailed follow through." The partners used this information to divide the new business responsibility--Kelley became the corporate strategic planner and Lundeen administered the firm's operations.


In the end, the question of what makes a good corporate partner is as personal as what makes a good spouse. However, the planning for a successful merger does not stop when the papers are signed. In fact, it just gets started.

"There are so many details to starting a new business," recalls Michael McCreary, vice president of the newly formed McCreary Realty Management in Atlanta. The firm, which had formally operated as the property management arm of Jackson and King, had been planning the split for two years, but tax considerations required the actual implementation in 60 days.

"We had to produce everything, from business cards and stationery to computer systems and insurance," says McCreary. "We had budgeted $30,000 for the divestiture, and we came fairly close to that figure. But I think we could have gotten some items--especially insurance--at a better price if we had had more time."

Mac Bates and his new partners spent "two solid months" planning the implementation of its merger before it was announced. One issue that needed an immediate decision was the office location. Harrison and Bates was a downtown firm, while its new partner had been selected mostly for its suburban office market share. Where should the new firm be located?

"We finally decided to move everyone into our downtown office," says Bates. "While we were concerned with maintaining a suburban presence, we felt that keeping two offices would foster a |them and us' mentality. We wanted to build one team."

After this decision was reached, the companies worked through extensive preplanning--allocating office space, reviewing organization charts, and preparing equipment. "I think our high degree of preplanning made the merger much more successful," admits Bates, "but even with all our efforts, there is always something overlooked."

On the first day of the new firm's business every leasing broker had a telephone. But because the trunk lines were overloaded, it was almost impossible to call in or out. "We had some pretty unhappy brokers for the two weeks it took to get the new lines in," recalls Bates. "After all, these people work on commission, and if they can't call out,they can't make a living."

Planning to keep key employees happy with the firm is another vital part of implementation. "When you buy a management firm you are really buying people and management contracts," says Michael Herzberg. "And as the management contracts can be canceled in 30 days, if you lose your best people, you have nothing."

Writing in the Wall Street Journal, Peter Drucker estimated that more than half of the top management of an acquired company will leave within one year.

Good communication is a key element in retaining good employees. While most managers advise against telling employees before the merger is signed, they should be the first to know after the event. "One thing you cannot do is overcommunicate," says Price Pritchett. "Top management should never assume that the benefits of the merger are understood by people not privy to the negotiations."

Mac Bates puts it more simply. "Tell employees how this change will help them earn money," he advises.

Pritchett suggests that new management take several key steps immediately to create a positive image for the new management.

* Use an employee survey to solicit ideas and increase involvement.

* Make some small, popular decision such as painting the offices.

* Provide a sense of direction rather than waiting around for things to "get back to normal."

* Nail down responsibilities and relationships.

How to acquaint the business community with the new firm is another implementation issue that takes extensive preplanning. Michael McCreary devoted a large share of his implementation budget to publicity; in fact, it was the one area that went over budget. "We were concerned that we would lose name recognition with the name change," reveals McCreary. "So we devoted significant time and effort to a company brochure, publicity release, and other promotion. But it has paid off; we haven't lost any business."

Harrison and Bates also staged a comprehensive, three-month campaign to promote its new merger. "We tried to build as much momentum as possible," says Mac Bates. "We promoted it to all the papers, talked it up on the street. We wanted the business community and the employees to be excited."

But after three months, all the publicity stopped. "We felt at that point that the blending was complete," says Bates. "We turned our attention to promoting current deals, not the merger. We wanted to be perceived as one company not continue to be remembered as two"


Even with the best planning, only about half of all mergers and acquisitions succeed, according to a study by Acquisitions Horizons. A similar study by Fortune found that 10 years after a merger, half of the companies had a negative balance sheet and only 20 percent were in in better financial positions than before the merger.

In the end, a merger or acquisition is successful because the sum of the parts makes a more efficient, more competitive, stronger entity than either of the two companies apart. To achieve this goal requires careful financial and market analysis, a sensitivity to personal and corporate philosophies, and a great deal of preplanning.

But if you succeed, your effort will be rewarded. In the words of Howard Lundeen, "One and one make three."

Why Merge?

* Provide regionalized coverage

for clients * Expand the size of your portfolio

or your services * Add quality people * Gain economies of size * Accelerate long-term and

short-term growth * Compete more effectively against

national brokerage companies

and regional developers

Items of Consider during the Due Diligence

* Examine portfolios of both firms

for conflicts and complements * Interview the employees * Audit financials * Compare corporate cultures * Compare organizational structures

and their duplications * Discuss titles, positions, and

responsibilities of principals * Discuss shareholder percentages * Evaluate name alternatives * Discuss compensation structures * Evaluate office locations

and equipment * Evaluate impact on existing

clients and contracts * Explore legal and tax consequences * Research reputations and references Mariwyn Evans is the managing editor of the Journal of Property Management.
COPYRIGHT 1991 National Association of Realtors
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes article on legal and tax issues
Author:Evans, Mariwyn
Publication:Journal of Property Management
Date:Jul 1, 1991
Previous Article:Strategic planning: revamping your company.
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