By Roberta Maynard. If there were any doubt about the likelihood of continued consolidation in home building, this year's merger activity should have dispelled it. A dozen or so noteworthy deals have come to pass thus far, half of them involving one Builder 100 company buying another. In fact, as I write this, KB Home just announced its acquisition of Orlando builder American Heritage, which ranks 74th.
There will be more. As the third quarter comes to a close, there's ample evidence of a healthy appetite for deal-making — on both sides of the equation. Michael Cortney, president of Standard Pacific Corp., gets at least a call a week from a prospective seller. Based on what he's told, three factors are driving those companies: continued pressure on the smaller local builders for capital; increasing difficulty acquiring land, primarily because of growth restrictions; and — the newest threat — availability and cost of liability insurance.
"You start analyzing all that," says Cortney, "and there's a lot of motivation not to stay in business... . The smaller builder looks around him and says: 'My world is getting more complicated and more risky.' " That realization will clearly benefit big builders.
UBS Warburg analyst John Stanley agrees that the landscape has changed. "Prior to this [current] environment," he told me, "there weren't the kind of pressures driving acquisition activity... . There are barriers that you didn't have 10 or 20 years ago."
Get-Togethers in 2002
|Centex||The Jones Company|
|David Weekley||Coastland Homes|
|D.R. Horton||Schuler Homes|
|KB Home||American Heritage|
|K. Hovnanian||Forecast Homes|
|Lennar||B. Andrews & Co|
|Lennar||Pacific Century Homes, Cambridge Homes|
|Lennar||Concord and Summit|
|Standard Pacific||Westbrooke Homes|
|Standard Pacific||Colony Homes|
|Standard Pacific||Westfield Homes|
|Taylor Woodrow||Journey Homes|
There's another driver as well, believes Stuart Miller, Lennar's CEO: The long-touted benefits of size are beginning to materialize, he says, and that's extremely appealing to successful, smaller builders who want to stay in business. "The larger builders are seeing real and tangible benefits," he says. "As we do combinations, we're able to add $5,000 per home to the bottom line, thanks to such factors as our mortgage company or regional purchasing." The smaller companies are attracted to the resources they can tap as part of a bigger operation as well as the ability to cash out and get "off the debt hook," Miller points out.
For big builders, one factor hasn't changed: market opportunity. With the top ten builders owning less than 25 percent of the single-family market, there's plenty of room for growth. Stanley says the top 10 builders' market share in the metro single-family market will be "north of 40 percent, probably within five years." Finally, the biggest builders have the wherewithal to close deals. Ara Hovnanian's company had $100 million in excess cash at the end of September, and he expects to have twice that amount by the end of the year.
What a perfect backdrop for our special valuation guide. Sorting out a private company's value is what the guide is all about. Accompanying the main article, you'll find the industry's first financial services directory, which includes M&A consultants, analysts, and others who are expert at putting together deals. So, use it, enjoy it, and expect more merger news.
Published in BIG BUILDER Magazine, October 2002