Every time there's a big deal in home building, there are plenty of us who'll claim that we'd predicted it would happen.
So, now that Standard Pacific Corp. and the Ryland Group have announced their mega-merger, many of us will say we'd foreseen it as inevitable, and not only that, predict that a rush of me-too deals will follow the "early-mover."
Our brains can hardly help this type of cognitive "hindsight bias," where we claim the ability to perceive a future event after it has occurred, and claim that since that event was inevitable, that more such events would be precipitated by similar or identical forces.
So, let's do a thought experiment and run some ideas around this notion that a Standard Pacific-Ryland merger is just the first of a series of mega consolidation moves among home builders. Who would be a buyer? A seller? What would motivate each? And what would add urgency to those motivations?
What we have to acknowledge at base is the fact that mergers and acquisitions have a habit of not working out as designed, for many reasons. Some of them can be explained academically, and many of the reasons that big merger deals have gone less well than expected have to do with the failure of the separate respective cultures to integrate, align, get a unified sense of mission, and move forward decisively and passionately.
One of our experts in the area of large mergers and acquisitions--Jamie Pirrello, president of the American New Homes Group--has this to say about the complexities and "hardness" of pulling off a successful combination in home building.
"The ultimate success of this transaction hinges on the effective integration of the two companies into one; it's an incredible amount of work. Unfortunately, the majority of transactions are considered failures; the major reason for this reality is poor integration."
Vital to the success of the Standard Pacific-Ryland combination is the delicate matter of the nine markets in which both companies have operations. In those markets, and among others in the national footprint, people who are in important positions today, from a day-to-day mission critical standpoint, are in a kind of limbo. They're on notice now that they may or may not fit into the longer term plans of the combined company. That may put some risk and stresses into a system that needs to preserve as much pace and profitability as it can as it moves toward the ultimate integration--which is pegged to achieve $50 to $70 million in "synergies and savings" in the next 12 months or so.
Assuming that our housing recovery has hit the "middle innings" stretch that Standard Pacific CEO Scott Stowell, who'll take on the role as Executive Chairman of the new combined company, has marked as the moment that's "not too early, not too late" to make the big play, other builders are either going to be doing the same thing, or deciding that they're not constrained enough by their capital structures to make a go of working through the cycle on their current plan.
Whomever might be looking at the next 24 to 48 months and sees a gap in the land and improved lot pipeline that causes a question to emerge in the model for turning inventory into cash would have to be considering acquisitions--either at the local or regional level that we've been seeing, or at the big-play level we see here. The timing becomes more "urgent" if we imagine it may get costlier to access capital as the Federal Reserve shifts to an interest rate graduation period amid broader economic improvements, particularly impacting employment levels and wages.
The issue now is which builders may be out there trolling for targets and why.
We believe that Standard Pacific and Ryland are now out of the picture, having secured operating outposts in a combined 40-something markets, in 17 states, across 500-plus neighborhoods. They're going to focus on margin improvement that can be gained from scale, market-by-market, and clout that that scale yields them in access to more lots, securing labor and materials, and greater sway with local customer universes.
So, who else would be a buyer, and who may be a target?
We'd go back to some of the players who were in the running for some of the big deals in the past couple of years, for the Shapell Industries mega deal that Toll Brothers landed, and the Weyerhaeuser five-pack that TRI Pointe won. There were several powerful companies who would have liked to have put those two crown-jewel opportunities into their systems, and there's no reason to think they'd be less aggressive now as buyers. They only issue constraining them might be a question of whether their balance sheets could "swallow the whale," as may be the case if any builders other than D.R. Horton, Lennar, or Pulte Group do the buying.
We know, for instance, that Pulte has done relatively well at ingesting the Centex acquisition of 2009, and may be ripe to add what it strategically has coveted for some time now, which is a higher-end, luxury home building brand to add to its portfolio.
Horton and Lennar are acquisitive for any and all opportunities that may dovetail with their real estate strategies, so either of them may be a natural suitor, either for market share scale, or for strategic reach.
We'd also see keen big-play efforts on the part of Meritage, Brookfield Residential, and NVR, each of whom put up impressive bids for the big prizes of the past couple of years, and come up empty-handed. Taylor Morrison has been doing well, and signaled it too wants access to growth in market opportunity and sub-market positioning and strength as it builds out its plan. Up-and-comer companies like LGI, Century and UPC may find themselves squeezed if they don't make a big-time buy soon, but they would be among the surprises if they were to acquire a bigger player.
Companies more constrained by their capital structure might be getting a lot of calls these days. Hovnanian, KB Home, Beazer, and M/I Homes, William Lyon Homes, and WCI might be among those acquirers are courting at various levels through channels or on a friendly-chat basis among chief executives.
We're guessing that when one or two more big, public-to-public deals actually do come down in the next few months, many of us will say they were inevitable, and that we'd predicted it.