Great Western Homes had plenty to be proud of entering its 10th year in business in 2003. The Mesa, Ariz.-based company had grown to become Arizona's 14th-largest home builder, building more than 700 houses in 2002 and generating $95 million in revenue. It also had control over 3,500 lots. But its owner and president, Scott Smith, was growing increasingly concerned. Great Western had grown about as large as its resources would allow and was losing traction in the highly competitive Phoenix-area market, where 41 builders -- including eight of the industry's 10 largest -- are active.
"I felt we were in a holding pattern," said the 47-year-old Smith, a lawyer and CPA who, as a consultant, helped Great Western get off the ground in 1993 and then bought the company three and a half years ago.
Then an unexpected phone call in April altered Great Western's fortunes. Ara Hovnanian, president and CEO of New Jersey-based Hovnanian Enterprises, was on the line. He wanted to buy Smith's company. Using a pitch that has been remarkably effective in persuading builders in other markets to sell, Hovnanian offered Smith a pipeline to expansion capital with few corporate strings attached. Four months later, on August 6, Smith agreed to accept an undisclosed amount of cash for his operations, and Great Western became Hovnanian Enterprises' 11th acquisition since 1998.
"We weren't looking to sell," said Smith. "But," he admitted, "I always thought that if Hovnanian ever wanted to come to this market, we'd be willing to listen." Smith, who says he had met Ara Hovnanian a few years earlier, kept watch as Hovnanian Enterprises marched into new markets across the country.
In an industry where success is often measured by size, and big builders are pouncing on growth opportunities, Ara Hovnanian makes it his business to know which companies -- in which markets -- might be receptive to a buyout offer. But unlike competitors that have acquired other builders only to remake them in their own image, a signature component of Hovnanian Enterprises' strategy has been to sustain the entrepreneurial foundations that made its acquisition targets attractive in the first place. Inherent in that strategy is Hovnanian's predisposition to keep intact the management teams of the companies the builder acquires, encouraging those managers to run their operations as they see fit with little corporate interference.
"We're at great pains to get the heck out of the way and let them do their thing," said 47-year-old Ara Hovnanian, whose company has paid out $1 billion in cash and stock over the past five years and has expanded its home building activities into 13 states. "The last thing we want to do is to take a successful company and turn it topsy turvy."
That approach to acquisitions has been convincing. Hovnanian Enterprises, now the country's ninth-largest home builder based on closings, has successfully outmaneuvered a number of competitors that were bidding for the same companies Hovnanian pursued and ultimately corralled. In fact, Hovnanian, with 11 acquisitions deals since January 1998, ranks second after Lennar (with 15 deals) for the most industry M&A deals over that time frame -- ahead of Centex and KB Home (with seven deals apiece) and Standard Pacific and Technical Olympic USA (each with five deals), according to FactSet Mergerstat.
Forecast Homes was one of those companies that had a choice of acquirers but decided to sell to Hovnanian. When the owners of Forecast Homes, a $600 million, 3,500-unit builder based in Rancho Cucamonga, Calif., put the company up for sale in late 2001, interest was immediate and widespread. "We spoke with all of the majors," recalled Forecast's president Frank Glankler. "It was our opinion that other builders would have wanted to make way more changes and that Hovnanian would be a better cultural fit for us. They valued the prospect of our team helping them improve their market presence in the West."
Such overtures often go by the wayside in many mergers, but Glankler notes that since Hovnanian acquired Forecast Homes in January 2002, all 16 of Forecast's senior-level managers have stayed with the company.
David Orlando, president of Brighton Homes in Houston, which Hovnanian acquired in January, shares Glanker's perspective. He recalled one meeting prior to the acquisition where Ara Hovnanian showed as much interest in Brighton's organizational chart as its balance sheet. For Hovnanian, a company's management strength is as much an asset as the land and inventory it controls. What Hovnanian finds in most cases are strong management teams simply needing greater capital resources.
That promise of virtual autonomy for Great Western Homes certainly helped Smith make up his mind. "Other companies wanted to buy our lots, but we weren't interested. We have a good team here, and I was concerned about preserving that," he said.
Hovnanian's acquisition strategy has certainly been paying off financially. Since 1998, its revenues have nearly tripled, its profits have increased fivefold, and the number of homes it delivers annually has doubled. Stephen Kim, an analyst with Salomon Smith Barney, estimated that Hovnanian's sales in fiscal 2003 (which ends Oct. 31) would be just shy of $3 billion, its earnings would jump more than twofold, to $237 million, and the homes it delivers would increase to more than 11,000 units. Ara Hovnanian predicts Hovnanian Enterprises would crack into the Fortune 500 this year, and that its sales would rise to $3.8 billion in fiscal 2004. The company has set its sites on doubling last year's sales by the year 2006.
How well the company's decentralized operational structure can fully support and sustain that growth may soon be put to the test. Hovnanian's reliance on decentralized management is reflected in the relatively adaptive structure of the company. Some of its acquisitions, like Forecast, and Matzel & Mumford in New Jersey, operate as virtually separate entities. Others, such as Dallas-based Goodman Family of Homes, which Hovnanian acquired in 1999, and Landover, Md.-based Washington Homes, which it bought in January 2001, evolved into regional operating groups with multiple divisions.
|August 6, 2003|
|Great Western Homes||Mesa, Ariz.|
|Homes built (2002):||700+|
|Avg. selling price:||$85,000-$200,000|
|April 9, 2003|
|Summit Homes||Canton, Ohio|
|Homes built (2002):||500+|
|Avg. selling price:||$128,000|
|January 6, 2003|
|Brighton Homes||Houston, Texas|
|Homes built (2002):||750|
|Avg. selling price:||$208,000|
|Acquisition price:||(see Parkside)*|
|November 8, 2002|
|Parkside Homes||Houston, Texas|
|Homes built (2002):||300|
|Avg. selling price:||$118,000|
|Acquisition price:||$100 million (combined for Brighton and Parkside)*|
|January 10, 2002|
|Forecast Homes||Rancho Cucamonga, Calif.|
|Homes built (2002):||3,500|
|Acquisition price:||$131 in cash plus $45.5 million in common stock, with the option to purchase $49 million in lots over three years. It also refinanced Forecast's outstanding debt.|
|January 23, 2001|
|Washington Homes||Landover, Md.|
|Acquisition price:||$87.4 million; $38.5 million was paid in cash and the rest in common stock.|
*Purchase price for each not broken out
Altogether, the business is organized into four large operating groups. As of mid-August, those groups were developing 256 active communities with 300 more in planning stages. Hovnanian's field generals confirm that the corporation allows them free rein to run their own shows under their own banners with ample financial support to achieve the company's goal of increasing annual sales by at least 15 percent.
But the corporate office is clearly making broader strategic moves. Last year, Hovnanian liquidated nearly all of its operations in Tennessee, Alabama, and Mississippi in favor of homing in on markets with greater potential, like Phoenix and Denver. And it is moving resolutely to standardize support functions. In particular, Hovnanian will integrate elements of its various businesses through a single enterprise computer system it plans to roll out within 18 months and a national branding campaign that's in the works.
However, any attempts at homogenizing its operations are being confined to what Joe Riggs, president of Hovnanian's four-state Northeast Group, calls "support infrastructure": accounting, financial reporting, budgeting, employee benefits, warranties, human resources, and purchasing through its national accounts program (see "Give and Take").
"We're systematizing the back-office drudgery with good, tight procedures and manuals that all of the divisions can use efficiently," explained Hovnanian.
But don't expect the builder to add another layer of corporate management to orchestrate its expansion. On the day before it announced the Great Western deal, Hovnanian Enterprises broke ground along the banks of the Navesink River in Red Bank, N.J., for a three-story, 62,500-square-foot corporate headquarters it will move into next fall. The new building clearly is not being erected as a monument to consolidation and centralized control. If anything, Ara Hovnanian said that he intends to lean even more on the individual talents of each acquired company's management team.
The high-flying builder that Hovnanian Enterprises has become bears only a passing resemblance to the regional builder whose expansion efforts in the 1980s and 1990s proved to be a series of detours and dead ends. It pulled out of New England and Florida after those regions' housing markets tanked. The international ambitions of founder Kevork Hovnanian -- who, at 79, remains its chairman -- never went beyond a community it built in Poland.
Whether the company's more centralized management structure back then stunted its expansion moves can be debated. "Ten years ago, we micromanaged everything," reflected Larry Sorsby, the company's CFO. Ara Hovnanian admits he wasn't a big fan of delegating: "But you cede a little control in pricing, then you let someone do a small land deal, and it grows from there." Hovnanian clearly took note.
Once he became CEO in July 1997, Hovnanian activated a plan to free Hovnanian Enterprises from its geographic pen in the Northeast, where it had built 57 percent of the homes it delivered that fiscal year. That compares to 22 percent in fiscal 2002. The centerpiece of his plan, then and now, is to buy profitable companies with solid land holdings, keep their management in place, and inject the financing needed to capture a bigger share of their local markets through acquisition of land assets or another builder. What often separates Ara Hovnanian's offers from competitive deals are contractual incentives designed to keep management on board and focused on growing the business. "If two years after we sign a deal, a company's president resigns, I would consider that deal a failure," said Hovnanian.
Providing the Means
From the public's viewpoint, when Hovnanian Enterprises acquires a builder, the only visible manifestation of its local presence is a tagline that identifies that builder as "A K. Hovnanian Company." But Hovnanian's influence becomes apparent in the way its financial clout elevates its divisions onto another competitive plane and sometimes pushes them beyond their own perceived capabilities, as has been the case with Brighton Homes, said Orlando.
"We were pretty aggressive, but having Hovnanian's financial backing has allowed us to jump into stuff quicker than before," said Bobby Ray, who ran Goodman Homes and is now president of Hovnanian's Texas Group, whose divisions should deliver about 2,800 homes this year.
Having that kind of leverage was clearly attractive to Scott Smith, who predicts that Great Western could now go after properties "we never would have considered before. Everything's on the table."
That was certainly the case for Parkside Homes. After four and a half years in business, Parkside Homes had become one of Houston's fastest-growing companies and was building 250 homes annually. But its president, Mark Kaufman, realized he was spending too much time chasing expansion capital. "Ara told me he could change all that," recalled Kaufman, who agreed to sell his business to Hovnanian Enterprises in November of 2002, only three months after their first meeting.
Once that transaction was inked, Newmark Homes suddenly got interested again in partnering with Parkside on the purchase of a 510-acre parcel of land in northeast Houston. Parkside will build 750 homes on 104 acres of that parcel. "That deal wouldn't have happened if we weren't with Hovnanian," said Kaufman, who said he expects Parkside to be constructing 1,000 homes annually by 2005.
The outcome of Hovnanian Enterprises' acquisition strategy so far is a collection of companies whose product and pricing diversity -- ranging from starter homes selling to million-dollar mansions -- could turn out to be one of its strongest competitive advantages.
And it's clear the company isn't finished rounding out its collection.
Its March 2003 acquisition of Ohio-based Summit Homes positioned Hovnanian Enterprises for the first time into the "on your lot" home building arena that Ara Hovnanian said his company may now go after in other markets. Summit operates a distribution center which Sorsby thinks other divisions might experiment with.
That kind of experimentation is part of a broader cross-fertilization of ideas within the company. Already, divisions in Texas and North Carolina have exchanged home design ideas, and Goodman Homes wants to get into active-adult communities, one of Hovnanian's specialties. Ara Hovnanian said he is particularly excited about expanding Brighton Homes' neotraditional designs to other markets and using designs that have worked in densely populated areas to expand to infill building activities in urban areas.
The corporation is supporting those initiatives in several ways. The company plans to open design galleries in each division; it currently operates six. Hovnanian is also migrating toward a divisional subcontractor scheduling model that would help superintendents focus on production quality and consistency. Lou Csabay, Hovnanian's vice president of human resources, noted that all divisions should benefit from the corporate launch of a college recruitment program, a refinement of its "Knowledge, Attitudes, Skills, and Habit" training program, and the upgrading of its commission system.
Recruitment, training, and retention are what Glankler, of Forecast Homes, believes will sustain Hovnanian Enterprises' decentralized business model. Ara Hovnanian cited one other factor: discipline.
When it bought Great Western, Hovnanian Enterprises disclosed that it had more than $100 million in cash and $590 million in revolving credit, making it a financially solid acquisition. Hovnanian said he looks at one or two prospects per week, but he's not interested in building homes in every state, nor in growth for its own sake.
"Our goal is to become the best home builder in the country in the eyes of our customers, our employees, our partners, and our shareholders," said Hovnanian. "If we're doing our job, size will be a byproduct."
Source: Hovnanian Enterprises
|Going Up: Hovnanian Enterprises' rapid growth shows no signs of letting up. For the nine months ended July 31, the latest period reported, the company's sales rose 25.4 percent to $2.16 billion, its net income grew 99.5 percent to $166 million, it had 244 active communities, and its average home sold for $267,099.|