When top 10 builders Pulte and Centex merged nearly two years ago, the conjoined company became a behemoth. It was quickly labeled the largest home builder in America and said to be better able to survive and thrive in the housing depression. The whole, company leadership opined, would be greater than the sum of its parts. “Combining these two industry leaders with proud legacies into one company puts us in an excellent position to navigate through the current housing downturn, poised to accelerate our return to profitability,” Pulte president and CEO Richard J. Dugas Jr. said at the time.
But the evidence suggests that the merger may have put the PulteGroup in a worse position to steer through the downturn. While the combined company did well in closings and revenue in 2010 compared to 2009, its sales performance over the two years since the merger has lagged its peers.
The dynamic is especially evident when Pulte’s performance is measured against the other 13 large publics. While home building revenue for the group fell by a third in 2010 from 2008, PulteGroup’s tumbled 60 percent. And, while public home builder closings dropped by more than a third, PulteGroup’s fell by more than half.
The marriage seemed to look good on paper. Combined, Pulte and Centex sold 39,000 homes in 2008, pulling in more than $11 billion in revenue. As a couple, they had $3.4 billion of cash in the bank. But by 2010 PulteGroup’s balance sheet looked almost as though there had been no merger, other than having more land in more markets.
In 2010 PulteGroup delivered 17,095 homes, fewer than the 21,022 Pulte alone closed pre-merger in 2008. Its revenue, too, at $4.6 billion, was smaller than the $6.3 billion it grossed in 2008. Its cash on hand at $1.4 billion was less than the $1.7 billion Pulte had before the merger, but its debt was about the same.
What happened?
Simply put, and at the risk of stating the obvious, the company sold a lot fewer homes. It’s difficult to get industry watchers to talk on the record about why Pulte’s sales performance fell behind the rest of the industry. But a general consensus is that the company took its focus off selling as its divisions worked to digest the Centex meal, to get a handle on the combined holdings, and to decide what to build and how to market it.
Centex’s assets were many and far flung, and, even though Pulte had been considering the merger for two years, the formal due diligence period when Pulte could look at the company’s books was only about three days.
One problem that cropped up almost immediately was that a large number of Centex’s neighborhoods were nearing the end of their lives, when sales typically slow and margins can suffer because the best lots are gone. Pulte officials have acknowledged the drag from that situation in conference calls.
While Pulte was busy absorbing Centex, its competitors were focused on how to beat the declining market. They were out buying finished lots at distressed prices, and turning them quickly to boost sales and cash flow. Pulte, which even before the merger had outsized land holdings, couldn’t take advantage of those opportunities. In email answers to Builder’s questions regarding the merger, Dugas says buying small subdivisions of distressed lots is a short-term play that has since played out. Pulte, he says, is more concerned with the long run.
Dugas also says he is pleased with the results of the merger, that the integration of the two companies went better than expected, and that it netted cost savings of more than $500 million, also better than expected.
He adds that there were no “major surprises” and that having Centex’s first-time home buyer products to sell during the downturn helped sales, contributing 40 percent to the company’s closings in 2010, at a time when Pulte’s active adult Del Webb product was stuck in the mud. “The incremental closing volumes and other benefits from the merger helped get our business back to roughly breakeven in 2010, before adjusting for charges,” Dugas writes.
But charges, including major ones from the merger itself, have hit Pulte’s balance sheet hard. Within two months of the August 2009 closing, Pulte took a $973 million writedown on goodwill, defined as the value of the business beyond its tangible assets. A year later, it took another $656 million goodwill writedown, leaving PulteGroup with $228 million total in goodwill at the end of 2010. The two writedowns together equal more than the $1.5 billion that PulteGroup determined the Centex acquisition cost. But those are just paper writedowns, says Peter Tremulis, a principal with National Asset Management Group and a former Pulte vice president of acquisitions. In the end, it might not matter if Pulte bought Centex at the wrong time or paid too much for it.
“I don’t know that it’s that relevant,” says Tremulis. “As a public company it has the ability to write it down and get a third of the value back from the federal government in terms of a tax refund. There’s really no penalty for buying those assets.”
And the strategy of buying and holding land is consistent with Pulte’s long-term philosophy. Unlike other builders who operate on a land-light strategy, or who sold their land at a loss to net tax breaks, Pulte has chosen to hold on to its substantial land assets. Consistently, Dugas has said he believes it would cost more to buy the land later.
That strategy has paid off for Pulte during previous upswings, says Tremulis, when the company profited handsomely from land it had bought and held. Plus, other public builders are running out of land; bargains are harder to find these days. This could put Pulte in the position of being able to profit from the land it wants as well as what it doesn’t by selling to other builders in need, he says. Pulte may even earn higher margins than land bankers who can’t write down land on their balance sheets. Given the results, would Dugas have done the merger again? “Absolutely,” he says, though he admits the timing, with housing production continuing to decline, wasn’t optimal. “In retrospect, reported results would have been better if the industry hadn’t contracted another 15 percent, but the realized gains were still substantial,” he writes.
Timing mergers and acquisitions is tricky, Dugas said during a 2008 conference call. “I’d love to tell you that we would be aggressive at the exact perfect time, but it’s been my experience, and I think well known through this M&A landscape, that it doesn’t exactly work like that.”
