Aging owners and the current economic downturn, plus large cash portfolios and resurgent stock prices, equals mergers. By Daniel Walker Guido

With $824 million in cash and an untapped $1 billion revolver, Lennar is cocked and ready to complete the next major acquisition in the home building industry, say Wall Street investment bankers.

"Who will they buy? Well, it's no secret all the top five have been looking hard at medium-sized regional leaders in the Northeast to increase, or in a couple of cases create a presence there," says one home building analyst who requested anonymity on such a speculative topic. "Everyone knew Lennar was searching, so it was no surprise when they bought Patriot Homes of Baltimore. The same is true for Centex, KB Home, Beazer, D.R. Horton, and to a lesser extent, Pulte. All see the Northeast as a fairly stable, growing place where they each want to dominate in selected markets."

As we start the year, the consensus on Wall Street is we'll see a half-dozen or more mergers between the top 20 builders and smaller, regional leaders this year. Some on Wall Street expect this year to see a mega merger between two of the top five builders, like Lennar and Centex.

"I have been called routinely in the past by brokers representing national builders that are looking for companies like mine and trying to figure out what my appetite is in regard to selling," says Stephan Porten, CEO of Porten Homes, a medium-sized builder in the Washington metro area.

Neal Aspinall/Conrad Represents

With replacement lot problems increasing because of slow approval times for new developments in many metropolitan areas, big builders are interested in buying medium-sized builders to get their lot inventory, management, subcontractors, and market share. "The only way to increase shareholder's investment in publicly traded home builders, being that most pay no dividends, is to increase the share price," says Florida-based Michael T. Kahn, a prominent broker of home building company mergers. "The Street wants builders to increase their business 10 percent annually. As long as they can get enough land, most publicly traded builders can do that. But the larger they are, the harder it is to grow 10 percent a year without making acquisitions. With builders expecting 2002 to be another banner year on the whole, we'll see many more mergers. I am working on two right now."

In addition to Lennar's purchase of Patriot Homes, mergers concluded last year include: Lennar buying Fortress Home's North and South Carolina divisions; Hovnanian buying Forecast Homes and Washington Homes; D.R. Horton buying the Jacksonville, Fla., division of Fortress Homes, Houston-based Emerald Builders, and Honolulu-based Schuler Homes; KB Homes buying Trademarks Homes in Jacksonville; and Pulte merging with Del Webb.