During the next few weeks, we expect word to come down on at least one if not more builder acquisition deals that will continue to weave need and opportunity into the ever smaller world of home builders.
For buyers (big companies with cash wherewithal and the ability to issue debt on favorable terms), the motivation to acquire might be a need for predictable incremental volume growth, perhaps increasing share, and an opportunity to absorb more overhead costs through greater volume.
For sellers, the decisions may trace to a range of considerations, from personal, or age, to financial. Land is the big issue. The fact is, being small as a builder means signing up for more complexity and greater risk to one's personal financial well-being. Banks may be sending out signals that they're more willing to do business with builders on the acquisition, development & construction front, but that doesn't mean there aren't more strings and more downside possibilities for builders that come along with access to this kind of credit.
What's changed too is that in the past big players were relatively uninterested in small tracts, closer in, where the lift is heavier in terms of community buy-in, municipal permitting, and local development challenges. Now, though, it's nothing for a big builder to pick up a 12-lot parcel in the inner rings, and engineer it into a highly profitable, higher-end community.
Part of what's driving that is technology. It used to take boots on the ground in every locality to understand where those parcels were and how to gain access to them before they ever came to market. Yes, relationships are still critical in local markets, and it's probably the organizations with the best disciplines, the best process, and the best talent in creating those relationships that will rise above the rest in landing off-market land deals.
This is another force contributing to consolidation. A private home builder is not simply--except in sheer financial valuation metrics--a current inventory of owned land assets. In many cases, the home building operator has validated a forward-looking value that suggests the capability to keep extending the lot pipeline into the future in an iterative manner.
So, while technology has begun to save time and expense on some of the tasks involved in bringing homes to market--procurement, CRM, scheduling, construction management, etc., and has also begun to map more viable land parcels to fit a big builder program, relationships are still critical.
So, some of the consolidation conversations, and the valuations you'll see, will center not only on the current assets, but the back-pocket ability of some of the sellers to get lots into the pipeline that jive with a bigger builder's program for volume growth and margin preservation.
The big-time mergers and acquisitions environment remains favorable to theoretical combinations among home builders. A big negative through the past couple of decades has been the size of some of the egos who run the big publics. Soon, though, investors will start moving their dollars among the peers with greater selectivity, leaving some of them with a diminished capital base.
So, a couple of those big egos may have to right-size themselves if they don't want to see their organizations weaken on their watch.
Our guess is that, even as cash and land strategies inflect into more cash generation and more discriminating commitments on land, we'll see as many as 15 company acquisition deals take place, not just for the lots but for the talent to get more lots in a more fiercely competitive arena. As well, we would not doubt the strong possibility that we'll see at least one more public to public acquisition, although not one of the Ryland-Standard Pacific magnitude.
Segmentation strategies, the ability to take out costs, and the ability to strengthen marketshare advantages in select new-geography-of-jobs operating arenas are the big impetus.
So, hang on to your hats for a fun ride to Dec. 31, 2015!