WHEN TECHNICAL OLYMPIC S.A., ONE of Greece's largest holding companies, decided in 1999 to diversify its capital into more developed and stable economies, the U.S. home building market had a certain obvious appeal. The Athens-based, family run conglomerate had its roots in the construction business; it also found success expanding into Romania, Germany, and the United Kingdom. Research convinced founder, chairman, and managing director Konstantinos Stengos, now age 67, that the home building business in the U.S. provided the right combination of growth and fit.
Eager to begin, Technical Olympic moved quickly to establish a U.S. affiliate, Technical Olympic USA (TOUSA), and began searching for a place to invest. It didn't take long. By December of 1999, TOUSA purchased 80 percent of the outstanding common stock of Newmark Home Corp., based in Sugar Land, Texas, for $86 million. Then, in 2000, TOUSA set its sites on Boca Raton, Fla.-based Engle Homes, which was being aggressively marketed for sale. Engle provided geographic diversity as well as attractive mortgage and title businesses. By November, TOUSA closed the deal, acquiring 98 percent of Engle's common stock. While both companies continued to operate as independent entities, the directors from Newmark, including Newmark's founder Lonnie Fredrick, and their new Greek partners began planning a merger in 2001. The Greeks' goal was clearly to expand its U.S. operations, but underlying challenges quickly became apparent.
While both companies performed well on their own, each had financial underpinnings that couldn't easily be unwound or combined to support the large-scale business Technical Olympic planned to create. The companies' operating cultures, meanwhile, were practically polar opposites: Engle embraced decentralized operations as much as Newmark embodied centralized controls. Hobbled by incompatible systems, it became obvious that any further expansion would have to wait until these issues were addressed
Recognizing their shortcomings, the board of directors sought strategic advice. Through investment banker connections came the name of a consultant who had a unique mix of experience in home building, finance, investment management, and the venture capital markets: Antonio (Tony) Mon. Mon had a reputation for knowing how to create returns for investors. And as founder of Pacific Greystone (which later merged with Lennar), senior vice president of The Ryland Group, and president of Ryland Ventures Inc., Mon also had a wealth of experience with new business initiatives, corporate strategy, and national operations of publicly held builders.
In 2001, Mon was busily immersed in several projects in and outside of the building industry; so busy in fact, that he dismissed initial offers to consult with TOUSA's board. But the board's persistence and TOUSA's distinct situation eventually piqued his interest and he agreed to take on TOUSA as a client. Little did he know that he was about to embark on an incredible two-year journey that would include completely rebuilding the company into a powerful force poised to become a top 10 U.S. home builder and eventually become TOUSA's president and CEO.
Extreme Makeover It didn't take long for Mon to diagnose TOUSA's troubles. Financial restructuring was paramount: With a 70 percent debt-to-capital ratio, the company's finances needed a complete overhaul. The companies' product mix and purchasing processes also needed to be streamlined and realigned. And while the shock of combining two extreme cultures into one business was certainly the soft part of a merger, Mon knew it was perhaps one of the most critical to ensure a successful future.
Mon also knew it would all require an investment of both time and money—and a leap of faith by the board. As a publicly traded company, Technical Olympic would have to contend with investors who might not be so forgiving about a likely contraction in the U.S. subsidiary's earnings. But his confident proposal and successful track record sold the board on the bold initiative, and the steps toward an extreme makeover were put in motion.
The first order of business was to address the financial challenges surrounding the two companies. “The minute you made changes, the financing just blew up,” recalls Mon. “We couldn't merge without refinancing and we couldn't refinance without a merger.” It was here that Mon's credibility and experience with investors and analysts paid off. Going into the capital markets, Mon took apart the acquired companies' existing capital structures and rebuilt them from scratch, replacing the secured and unsecured financing and project loans with $350 million in permanent debt and creating a large credit facility led by CitiGroup. By paying off the existing debt for Engle and Newmark, and securing a new debt structure, the companies were able to merge, setting the stage for a stock-swap deal that allowed TOUSA to join the list of publicly traded builders in June 2002.
Coinciding with the merger was the appointment of Mon as president and CEO of TOUSA, responsible for overseeing TOUSA Homes as well as operations of the Universal Land Title and Preferred Home Mortgage entities. The merger's top executives embraced Mon's appointment. “We are in the people business and our product is secondary,” says Harry Engelstein, senior executive vice president of TOUSA Homes and former owner of Engle Homes. “In the end, the brick is still laid the same way—it's management and technology that will take us to a new level.”
“The building blocks were solid,” says Mon of his decision to abandon consulting for the full-time challenge of rebuilding the company. “Nothing was broken. And the two businesses had outstanding people throughout.”
Technology Overhaul Immediately following the merger and acquisitions, TOUSA confronted a new set of operating hurdles: how to deal with seven distinct technology platforms, which made getting information on any kind of common basis an everyday challenge. “We had definition problems galore,” recalls Mon. “Everyone was talking a different language.” To fully support their growth objectives, management recognized the need to do more than patch bandages on their legacy systems.
With advice from consultants, Rick Robideau led the charge to develop and embed a customized enterprise-wide system. Tasked with the need to enhance its internal, financial, and operational reporting, Robideau was also careful to develop a platform that would accommodate the company's anticipated growth. “Emerging as a top 12 builder, moving into the top 10, we had to ensure that we reported our numbers accurately,” says Hunter Blankenbaker, director of communications. “That's where Tony's reputation lies and the data [are] pretty thick.”
By June of this year, a seamless and readily expandable system was in place to track customers from their first visit through the warranty process—all within the same database. Although it is designed to be supported centrally, it is flexible enough to be adapted locally. Construction scheduling drives an automated payment process, a point-of-sale system is in place, and there is a Web-enabled bid collection process for vendors.
Robideau did well to consider the capacity. “Our current system is capable of running a company three times our size,” says Mon. But all that technology came at a price. At the end of fiscal 2003, TOUSA reported a $1.2 million increase in non-capitalized information expenses consisting primarily of consulting fees, systems training, and other expenses. “The process has been expensive and painful, but finally, the real heavy lifting is behind us,” says Mon.
Culture Clash Going into the merger, Mon knew that blending the distinct cultures of each company was as imperative as addressing the financial, strategic, and technological issues—and in some ways more difficult. “You can't force it,” recalls Mon. “You have to let it evolve.” While it was obvious that Engle and Newmark had fundamentally different styles and business models, both had been successful using their own platforms. The challenge was to meld the two cultures into one company without breaking them. “We made the decision to move toward the middle of both. We wanted to transition the cultures while preserving what made each of those businesses strong and successful.”
While staffing TOUSA's new corporate center in Hollywood, Fla., executives sought out a diverse group of senior managers. In addition to integrating personnel from Newmark and Engle, people from other large builders and corporate businesses outside the industry were hired. Ed Wohlwender was brought in from Sara Lee and Ernst & Young to apply his supply chain management experience as senior vice president. Patricia Petersen came in as senior vice president and general council from Corning. For financial talent, “we raided Ernst & Young,” says Mon, referring to Randy Kotler, the vice president and chief accounting officer. And to apply new perspectives in human resources, Clint Ooten was brought in from GE. Already, those efforts are paying off: “What we have now is a nice blend of skills and perspectives,” says Blankenbaker.
Today, the company culture is based on operational decentralization. “We do not dictate product, pricing, start-levels, and the like,” says Mon. “We let the divisions do what they think is right for the local conditions.” The company does remain centralized financially in order to take full advantage of scale, efficiencies, and the proper capital allocation. While clear goals to manage earnings and asset levels are set for the divisions, the corporate level provides a strategic orientation. “After all, we are running one large complicated company,” says Mon. “But we run it as a big business that's locally focused. We're really a collection of small local businesses and we can't forget that.”
Management Makeover As a finishing touch designed to support strategic initiatives, a restructuring of upper management was announced in May—with David J. Keller being named senior vice president, CFO, and treasurer of TOUSA. Mon describes Keller as a mature executive with diverse experiences to bring to the company. “That's really what we need to take us to the next level,” says Mon. “He's done a lot of the things that a fast-growing company needs to do to grow into a big, national home builder.” Keller was CFO of CitiFinancial, a subsidiary of CitiGroup, and prior to that, he spent eight years as CFO of D.R. Horton during a period of rapid growth.
At the same time, Tommy McAden, who has served as vice president and CFO since June of 2002, was named senior vice president of strategy and operations of Technical Olympic USA and executive vice president of operations for TOUSA Homes. “Tommy will be setting strategies, looking at acquisition opportunities, and helping our businesses work better,” says Mon.
Watch Dogs With TOUSA's primary focus on people, processes, and systems, and secondary focus on earnings, Mon admits that spending has penalized the company's returns (which have been flat, although sales volume has increased). “But that's an investment that's rapidly coming to an end,” he says.
Analysts have been waiting patiently and watching silently as the company has made huge internal investments. Several debt offerings have followed the initial merger and last year the company entered the equity market as well. “We've been pretty busy on the financial front,” says Mon. “Today, I think we are financed right alongside the other major builders.” It's a testament to Mon's direct communication style and persuasive vision that, throughout it all, Wall Street has assumed an uncharacteristically neutral position.
“I'm pleased the analysts have been neutral,” remarks Mon. “Neutral means good in their world. The analyst community likes our strategy and they know our management. Now they are waiting for us to prove that we can deliver the earnings.”
If second quarter 2004 earnings are an indication, they won't have to wait long. TOUSA has reaffirmed its 2004 objectives to deliver total revenue and net income growth of 21 percent and 35 percent, respectively, on 8,000 home closings (up from 6,135 in 2003). And at the second quarter's end, TOUSA reported a 68 percent increase in net new sales contracts and 87 percent increase in sales backlog on a dollar volume basis, excluding joint ventures.
“It is important to keep in mind that Technical is at an inflection point, as the company will be benefiting from a significant community ramp up and as the restructuring costs draw to a close in 2004,” says Margaret Whelan of UBS. Stephen Kim from Citigroup-Smith Barney says he believes, “TOUSA benefits from particularly rapid growth prospects, attractive land position, and respectable drivers across price points and geographies.”
This all comes as good news to TOUSA's Greek owners. Recognizing that they were investing in a business culture and a country foreign to their expertise, they have maintained a “hands-off” management style. “It has been trust at its basic element,” remarks Mon of their involvement. But with 73 percent of TOUSA owned by the parent company, Technical Olympic S.A., (which, in turn, is 46 percent family owned) the stakes are high for the Stengos family and their legacy. Mon appreciates, “Having a family as a major shareholder has been a very good thing. They can take the long view and they have been very supportive.”
Poised And Ready Although their swift transformation into the nation's 12th largest home builder has been challenging on many levels, it's clear Mon's leadership and vision has inspired support from management, employees, and investors. Although he is quick to point out that “no company is just one person,” it helps that Mon knows his way around both the financial markets and home building. “I've never seen a complete integration happen as fast as Engle and Newmark,” says Engelstein. “We're not stopping this train for anything,” he says. “If there is a glitch along the way, it gets fixed and the train keeps moving.”
Today, with strategic markets in place, key people at the ready, and an arsenal of technology at hand, TOUSA is positioned for growth. And, unlike many other top builders who continue to expand geographically, TOUSA's fundamental strategy is to become a major player within its current markets. As a top five builder in only two of its 14 markets, there is plenty of room to grow. “Today, there is no reason to expand [into new markets],” says Mon. “We're growing a lot faster than the guys in the top five. We have been honest with Wall Street, and we have positioned ourselves with over 48,000 lots [up from 12,000 in 2002]. I really think we're going to be the growth story in the industry over the next few years.”
And that's exactly what Konstantinos Stengos had in mind.