If you ask one of home building's most experienced and successful mergers and acquisitions advisors how many m&a deals we're likely to see during the 2014 calendar year, he won't skip a beat before he's counted nearly 30 pretty strong possibilities in his mind.
Ask another well-informed market analyst in the business his opinion on the ultimate year-end tally, and he'll answer, "I would go with 15-30. More than 30 are talking about it but I don't have a sense of how many deals we will see."
Yet another player with impressive home builder m&a credentials, San Francisco-based Builder Advisor Group principal Tony Avila and his team project the number for 2014 to be 15.
Our own estimate at the beginning of this year was 20, as you can read here.
Clearly, the continuum of opportunity and risk has shifted priorities, motivations, strategic moves, and access to money, and 2014 is setting up for different kinds of challenges and glimmers of light than last year.
So to review home building seller motivations:
- Need for cash infusion to buy and develop new lot pipeline
- Need for operating cash to ensure that vertical programs get fed with labor, materials, and manufactured products on a timely basis
-Competition for land is stiffer, as big cash-flush publics can write checks for parcels on the spot, and squeeze out smaller builders from the profit-making lots
-Succession planning ... many privately held companies have senior leadership that is multi-cycle experience, i.e. older, tireder, and less keen on fighting through another upward haul.
Let's take a look, too, at what's currently driving home builder buyers, keeping in mind some macro shifts going on in land appetites, as Metrostudy chief economist and director of consulting Brad Hunter points out in this post, Land Strategies Have Shifted Radically.
Brad's estimate of m&a activity for this year is the most conservative of all, probably recognizing the difficulty and unpredictability getting these deals to close:
“We expect 2014 to be a busy year for M&A, with as many as ten builder acquisitions on the horizon. There could easily be another eight or nine next year. We are experiencing demand for our M&A/builder-portfolio studies right now as large builders strive to grow their community count within proven submarkets. Adding community count through organic growth is hard, particularly in the best neighborhoods, and acquisition represents a quicker route to large numbers of lots, often in ‘A’ neighborhoods.”
- Buyers are not buying "everything," and they're also not counter-bidding on every parcel of land, but they're eyeing and jumping at what they can get to drive incremental, achievable volume and pace in 2014 and 2015.
- Too, buyers, as is clear from AV Homes strategy, have moved from merely buying land assets to acquiring talent, which is a hot commodity in a capacity-constrained environment.
-Buyers, as always, are buying programs that fit in their strategic manifest destiny, as, again AV Homes purchase of Royal Oak is a strategic-core thrust into segments and positions beyond the active adult area that it had focused on.
-Lastly, and importantly, buyers are purchasing dominance, looking to crowd out competitors for lots, materials, labor, and home buyers, market by market, improving their odds of having their way with pricing and scale vs. existing homes alone.
Not every m&a discussion will lead to a deal. We've recently seen a combination or three founder on the issue of price. This occurs partly as the home builder buyer community becomes more discriminating as to what truly fits their program, and partly as smaller builders attain options as regional and national lenders awaken and look to reenter project financing in a bigger way.
As we mentioned, recovery is a continuum. Ambiguity for some is opportunity and clarity for others. When was the last deal you heard of that the buyer didn't overpay? That's just the way home building recoveries seem to work.