By Gary Reece. In this era of consolidation and growth in our industry, M.D.C. Holdings is actively pursuing opportunities to acquire the businesses of smaller home builders. While we have always been open to opportunities in our existing markets, in the past year we have expanded our scope to most growth markets in the country.
In considering an acquisition, we seek to attain an appropriate balance between risk and reward. Although any home building investment has attendant risk, our disciplined business practices enable us to identify and evaluate the risks, and then mitigate them to the extent possible.
An important consideration is the structure of the acquisition as a purchase of assets or as a purchase of the target company's stock. While we have succeeded under both structures, asset purchases provide preferable results (our recent acquisitions of WL Homes' assets in Utah, Nevada, and Northern Virginia are good examples). Despite fierce competition for attractive acquisition candidates, the transaction structure generally hasn't limited our opportunities. Most sellers are willing to go either way.
The primary benefit of an asset purchase for a buyer is that it provides a distinct cutoff point with regard to product and other liability associated with the business. This transaction structure, in most cases, holds both buyer and seller responsible for only the results of their actions during their respective "watches."
A common fallacy from the seller's perspective is that a stock sale, relative to an asset sale, is easier to execute, is more tax-efficient, and absolves him of liability for past practices since he no longer owns the company. What we try to explain to sellers is that (1) no large transaction is easy or uncomplicated; (2) gains on sales of certain assets, such as a trade name or goodwill, also receive capital gains treatment for the seller; and (3) disciplined corporations today require representations and indemnities from the seller in stock sale contracts. These provisions actually can allocate more risk to a seller from a liability standpoint because the seller of stock can be left "naked," while the seller of assets may still have the corporate shield of the selling company. Either way, sellers never fully escape potential responsibility for liabilities. Our firm's home closing volume has grown at a steady 10-percent compounded annual rate over the past five years. Most of this growth has been organic. To achieve our goal of doubling the company's size in less than five years, we will need to be more active in our pursuit of significant acquisitions in our existing and future markets. Would we consider well-structured stock transactions to get the right strategic fit and operator? Absolutely. However, we firmly believe an asset purchase can just as easily be structured as a win-win proposition for both buyer and seller.
Published in BIG BUILDER Magazine, October 2002