Andrew Hede knows what it takes to get struggling builders back on their feet.

During the last housing recession, his company, the New York-based turnaround and interim management specialist Alvarez & Marsal, was one of the go-to counsels that builders sought when their businesses were plummeting downhill or had already hit bottom. Hede, a managing director with Alvarez & Marsal, served as chief restructuring officer for a number of builders that reorganized under Chapter 11 bankruptcy protection, Kimball Hill Homes being one of the more prominent.

Looking back at those chaotic times, Hede now wonders why there wasn’t more consolidation in the housing sector. With merger and acquisition activity picking up again, Hede has some advice for builders interested in selling their businesses about how they can become more attractive to prospective buyers.

First Things First
“The first thing you need to do,” he says, “is look at the underlying asset and how it compares to other companies in that asset class.” That introspection should help builders identify toxic assets that Hede advises need to be “quarantined” so they don’t bring down the value of the company in a sale. Separating toxic assets from the rest of the company might require a bankruptcy or corporate reorganization, he says.

Hede says the relative strength of a seller’s balance sheet will inexorably drive most deals. But don’t start making wholesale changes or cuts in your personnel, he advises, because buyers aren’t really all that interested in the workers they’d inherit in a purchase. (And if history is any guide, buyers often clean house after a deal anyway.)

Mergers, acquisitions, and initial public offerings are more prevalent again, says Hede, because “there’s more capital coming into the market. Housing is having a fairly good run, and people are believing in the industry again and see a future.”

While the conventional wisdom sees buyers seeking sellers with robust finished-lot and land positions, Hede cautions that private equity and real estate have never been natural fits, primarily because investors’ “hold times,” which are usually five to seven years, make it tougher to achieve substantive appreciation on land “because it’s so boom and bust,” says Hede.

As the housing industry continues to recover, Hede says he’s keeping his eye on rising mortgage interest rates and what impact they are having on people’s ability to purchase homes. Rising interest rates might also deter some future merger and acquisition deals, he says.

John Caulfield is senior editor for Builder.