Check out what M&A meisters Michael Kahn, Joe Walsh, and Peter Hazeloop have to say about deal flow in a new period of growing uncertainty.
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:
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