Acquisition Season

But some builders are not as sure. Centex CEO Tim Eller says that while the market is still adjusting, which it is, acquisitions can be too risky.

“Land prices still haven't adjusted yet this cycle and until they do, and we have some confidence around where land values are going to be, it would be difficult to acquire companies because we won't know how to asses the value of their land,” Eller says.

As housing and home building markets continue south through 2007, the high prices some builders have placed on themselves could come down, creating conditions conducive to acquisition, says John Burns, president of John Burns Real Estate Consulting. Burns attributes high asking prices to optimism in the industry, a sentiment that “is going to go away,” he says.

CAPITAL GAINS: Not surprisingly, Main Street Homes and The Enterprise Cos. lead the list of big revenue gainers. Bill Clark Homes is the only BUILDER 100 company to make this list the last two years—in 2006 it checked in with 71% revenue growth.

But where many see the most likely acquirers coming from the ranks of the BUILDER 100, Burns sees a world economy flush with capital, primarily from Asia and the Middle East, and named foreign companies as the most likely acquirers. Such a deal would not be a first: In June 2006, Dubai-based real estate company Emaar Properties paid $1.05 billion for John Laing Homes, based in Newport Beach, Calif., by far the largest deal of the year.

Burns says well-capitalized private builders looking to gain geographic diversification also are among the most likely to be active.

Despite BFC's push to buy Levitt, Burns thinks the likelihood of a big private-equity group buying a major builder is slim.

“More and more of that equity is going to learn that this is likely to be a prolonged downturn instead of a short-term downturn and probably won't make that investment,” Burns says. “The capital that is bullish on our industry is going to pull back over the next 12 months.”

But even many smaller builders are well-capitalized at this point, and have the ability to chase targets if they see a good fit, say builders and analysts.

Las Vegas–based builder Astoria Homes, which fell from 80 on the BUILDER 100 to 113 on the Next 100, considered buying a builder to expand into Phoenix in 2006, but resisted, says company president Tom McCormick. While Astoria plans to focus internally in 2007 and start a luxury division, the same volatile market that kept Astoria from buying in Phoenix could well keep other builders from being as active as many industry experts are predicting in 2007.

“I don't think these national companies have decided to sit still [or] that they're happy with their size,” McCormick says. “Eventually the market will shake it out, and there will be stronger players and some weaker ones. But nobody really knows where the bottom is in valuations, and everyone's waiting to see who the right buy-out targets are.”

And the fundamentals of making a deal still make sense. In spite of taking on more land, acquisitions may be one of the few ways large builders will be able to continue growing in a faltering market, says UBS's Whelan.

“Say that you're KB Home and you're the biggest builder in Vegas. Instead of adding 20 new communities because we already have a supply/demand imbalance, instead of compounding that issue, buy out a smaller private guy,” Whelan says. “The [buyer] gets the growth. [The seller] get to cash out. And the buyer controls more volume and more pricing as the market turns around again.”