Michael P. Kahn is one of home building's most-active and--at age 83--most-senior, active senior statesmen. He has known most of the people who run America's big home building companies since they were kids.
They take his call. They return his call. Or they initiate contact with him when they're thinking about selling or buying a home building firm. They've been doing that for about as long as anybody can remember. His knowledge of what they do, what they care about, and fret about, and get really excited about dates back to his own days as a builder and developer in the early 1960s and spans, from then to now, across 125 home building firm mergers and acquisitions deals since 1988. That's an average of one closing every 90 days for the past 31 years.
And there are more in the pipeline.
"They keep calling me," says Kahn, whom Century Communities co-ceo Dale Fransescon has knighted "the dean of home building M&A," and who tried--unsuccessfully--to retire in 2011 as the Great Recession held the business in its tight grip. "We're working with three companies right now who are looking to sell, and I just got contacted to do some buy-side work for a public builder looking to acquire."
The reason they "keep calling" Mike, and the reason they keep returning his calls is pretty simple. Mike knows that good deals equate to value both buyer and seller get--beyond fair dollar market value for tangible real estate assets--and both buyers and sellers trust him and his process to deliver on expectations that particular combination sets. Deals that go well, Mike will tell you, do so not only on the back of KPIs, but human beings. Deals that don't often look great on paper but fail the people sniff test.
Today is tricky for M&A.
Seller motivation and urgency come from a pool of both shared and unique issues. Same with buyer goals. In one instance, an interested seller may be "of an age" where he or she wants an exit before the next down cycle, whenever that may be. In another, the goal may be tantamount to a deep-pocketed capital partner for a growth path into the next up cycle. Buyers may want deeper market scale, or greater exposure to customer segments, such as entry-level or 55+, or may want to thwart rivals in a market, or may want to establish a beachhead in a market new to their footprint.
At the same time, uncertainty, volatility, and an absence of predictability pronounce themselves as ever more material challenges for those who're trying to model growth, profits, and opportunity and risk.
As is always the case where people transact, highly motivated or time-constrained buyers will value the same assets higher than those whose urgency settings are in a longer-term frame. The same goes for sellers--keenness to close opens them to greater willingness to negotiate terms.
It's generally acknowledged that the pace of deals has slowed, but for Michael Kahn & Associates, the cadence has kept up. So, he's reached out to two long-time partners Peter Hazeloop and Joe Walsh, principals of Hazeloop-Walsh & Associates, to carry important parts of each process forward over the months buyers and sellers take to combine from this point forward. Kahn and his firm will partner with Hazeloop and Walsh's company in a joint venture, reuniting them for the research, due diligence, valuation, negotiation, and other disciplines they've mastered as match-makers for decades.
Michael, Joe, and Peter have outlined, exclusively for BUILDER, some of their take on the current drivers of M&A business activity, and where they're headed leading into 2020 and beyond. What follows is their co-authored perspectives on key dynamics motivating buyers and sellers in the late-stage recovery housing has entered:
Current State:
The height of post-recovery home building M&A activity spanned from 2013 to 2017, and it has cooled off somewhat since then. This is due in part because the number of quality candidates has fallen off as many have been acquired. By quality candidates, we mean builders with a three- to four-year land pipeline, a solid management team who will commit to staying on, profitability in the high-end of the range for their market and with a meaningful market share. Another reason for the fall-off is that, in many of the major markets, the large public builders have now re-established their market share since shuttering or shrinking their divisions during the downturn. Finally, the fear of a housing downturn as reported regularly by the media has some public builders in a holding pattern with regard to future acquisitions.
However, as the pool of quality private builders in the major markets is small, and as the publics still need to grow and feed the machine, those who remain are still in demand and can expect to be paid substantial premiums in a transaction. This also holds true for private builders in secondary markets as we have seen an increased level of interest in those markets.
What Motivates Sellers?
The factors that motivate private builders to sell haven’t change significantly over the years:
- No other viable exit strategy. If there’s not a solid succession plan in place, as owners age, selling becomes a very attractive alternative as winding down an operation successfully is rarely accomplished.
- Reduce risk and taking chips off the table in a potentially cooling market.
- As markets have improved, the capital needed to compete for land has increased significantly leaving smaller privates on the outside looking in.
- Getting off personal guarantees is also a motivator although perhaps not as significant as it was pre-downturn as for the most part, banks learned that pursuing guarantees is difficult and usually not successful.
What Motivates Buyers?
The factors that motivates buyers have changed somewhat since the recovery:
- Increasing their land pipeline and market share in existing markets can be expedited through an in-market acquisition. It also removes a competitor.
- Growth is always a motivator for public companies in any industry. Growth through acquisitions moves the needle faster than internal growth.
- The acquisition of a builder with homes under construction and a backlog of sales will generate cash flow for the buyer from day one, while it can take several years for a startup to do so.
- We are seeing builders looking to expand into secondary markets as they begin to max out market share in their primary markets. Entering new markets, whether primary or secondary, through an acquisition provides access to a land pipeline and management team that could take several years to achieve through a start-up. It also avoids the dumb tax.
What Does the Future Hold?
We believe that the time is now for builders who are considering a sale transaction as we expect that the M&A market will remain healthy through at least the end of 2020. Thereafter, our crystal ball gets very cloudy. What we do believe is that market consolidation will continue over the next few years, though perhaps at a slower rate. While acquisitions in “A” markets will continue, we expect that the pace of M&A activity in secondary markets will increase as the large publics look for growth as their existing “A” markets mature.
As a successful sale transaction takes eight months to a year from start to finish, and as the market is currently active and healthy and as the outlook after 2020 is unclear, we believe now is the time to begin the process.
What builders--at the single-market entrepreneurial level or the multi-regional and national corporate enterprise level--keep coming back to is that Mike Kahn and his team are in a category by themselves when it comes to generating real value on both sides of the deals he's involved in. That's why they keep his mobile phone number on speed-dial, and why they're apt to use it as times grow more uncertain.
