By Iris Richmond. Five years ago, home builders were so small, relative to public companies in other industries, that few Wall Street firms saw the potential to make money, either through debt and equity offerings or mergers and acquisitions deals. That was then. The story is different now.
With the biggest builders bulking up, and mergers on the rise, more and more investment banks want a piece of the action. Jolson Merchant Partners and A.G. Edwards, for instance, recently arrived on the scene, joining the ranks of industry veterans, such as Salomon Smith Barney, UBS Warburg, and Credit Suisse First Boston. And non-traditional sources -- including Credit Lyonnais Securities, Fleet National Bank, and Bank One -- are trying to get in the door as well.
"Today, there are more people trying to get involved in the party, if you will," notes deal-making veteran Rick Beckwitt, former president of D.R. Horton, now president and CEO of EVP.
Why the interest? Money, of course. "Market size has grown so the fees have gotten bigger," explains Larry Seay, CFO of Meritage Corp. That has increased the banks' competitive zeal. "They are hungry for business." Case in point: Standard Pacific's $3.5 million equity offering in April, which drew five investment bankers instead of the usual one or two.
"There have been very few equity offerings by the home building sector in the last six years," responds Standard Pacific CFO Andrew Parnes. "It was an opportunity to compensate a number of supportive investment bankers who have given us exposure on Wall Street, and who are out there talking not only about the Standard Pacific story but the home building story as well."
A wider net
Seay sees the advantage to sharing the wealth. Companies that want banks to come to them with potential acquisitions may want to network with as many as possible. "If a firm has a client that's assigned them to sell a company," says Seay, "builders looking to buy want to be sure they're on that list being called."
Other builders dismiss that motive. Investment bankers aren't the main source of deals for builders such as D.R. Horton and Lennar Corp. "We are in a fortunate position by virtue of the fact that we're a logical buyer for just about anything," says Beckwitt. "It's important to us to maintain dialogues with investment bankers, but we're on anyone's list at the get-go. Rather than use an army, we have a swat team approach."
Bruce Gross, CFO at Lennar, concurs: "We rely more on our own analysis and research than Wall Street."
Cutting the slices
So far, distribution of fees from a home building deal -- they can run into the millions -- has been free of contentiousness, which is rare in the investment banking world. Nonetheless, banks compete aggressively for the title of lead underwriter. They also want to finish as high as possible on lists that rank them by how much home builder debt and equity they've issued.
"It's a trade off," says Seay. "Firms are willing to take a smaller [fee] in order to get revenue and stature." They are also willing to divvy up fees to maintain relations with more firms, he says.
Standard Pacific based its decision for lead bookrunner on execution abilities and number of investor relationships, says Parnes. Salomon Smith Barney and Credit Suisse First Boston shared the title -- and a bigger slice of the reward. The lead firms performed the lion's share of the work -- preparing the offerings and taking the company on the road to meet with investors. Three co-managers -- Banc of America Securities, Deutsche Bank Securities, and UBS Warburg -- supported the bookrunners and sold securities.
"By limiting yourself to one or two firms, you could be limiting the number of investors you reach," says Parnes, whose company would have paid the same fee regardless of the number of firms involved. "There's plenty for everyone to do, and firms recognize that any percentage of the economics is better than no percentage."
Mixed signals
Another element that's unique to home building, says Beckwitt, is that fees on large deals are negotiated up front. But in home building, as in other industries, investment banks sometimes try to sell deals when they aren't authorized to do so.
"Unfortunately," he says, "the industry does have people who are trying to sell companies they don't have the mandate to sell, which, from the acquirer's standpoint, wastes time in evaluating the company and could create ill will on the part of the 'seller'."
Notwithstanding potential pitfalls on the Mamp;A side, Beckwitt credits investment bankers with providing objective opinions on larger transactions, especially public-to-public deals, a contribution he says that is essential to protecting the best interests of stockholders.
"It's also very difficult for principals of a company to negotiate the terms of a deal from start to finish without some type of intermediary," affirms Salomon Smith Barney analyst Rich Moriarty, who with his team facilitated such sales as Del Webb to Pulte Homes and Forecast Group to K. Hovnanian Enterprises.
Unlike the debt and equity offering side of the industry, the number of investment bankers needed to handle a merger hasn't increased and isn't expected to any time soon. "It's still one or two firms representing the buyer and the same for the seller," says Seay. "The firms may have as many as a dozen people on their teams, but companies' management teams are so strong that they have all of their own people in place to contribute."
Published in BIG BUILDER Magazine, July 2002
