By Robert J. M. Occhiogrossi, R.A., NCARB, LEED AP
managing director, IVI Assessment Services, a CBRE Company
Merger & Acquisition (M&A) volume has surged in 2015, reaching levels just shy of a record for the 21st century.
Through the end on the third quarter, $3.19 trillion in deals were announced, just 2 percent below 2007 levels, according to data from Thomson Reuters.
Mergers and acquisitions often involve a substantial amount of due diligence by the buyer. Before committing to the transaction, the buyer will want to ensure that it knows what it is buying and what obligations it is assuming, the nature and extent of the target company’s contingent liabilities, problematic contracts, litigation risks and intellectual property issues.
This is particularly true in private company acquisitions, where the target company has not been subject to the scrutiny of the public markets, and where the buyer has little (if any) ability to obtain the information it requires from public sources.
While it may not be the primary focus of an M&A, the real property that houses the target company’s business operations, products, employees and services is something that can have lasting effects on the success of a deal.
Real estate and facilities represent the second or third-largest expense on the average company’s balance sheet. How the real estate is handled prior to, during, and after a transaction can be critical to the success of the overall transaction.
One of the keys to help maximize shareholder value is to carefully evaluate the entire real estate portfolio — both owned and leased facilities — as early as possible.
Once ownership or lease structures are known, the properties should be reviewed to identify those assets that present inherent risk due to location, size, age, history, lease expirations, renewal requirements, etc.
Taking the initiative early when the potential transaction is still in the early stages will help you maximize the corporate real estate value opportunities that lie within a potential transaction.
It is essential to create and utilize tool sets that allow your team to effectively manage the transaction while at the same time positioning the real estate and facilities as a strategic resource and value-proposition for shareholders.
It is important to be prepared for almost anything at this stage. It is surprising how onerous many lease agreements are and how many companies do not keep good records of their real estate and facilities.
In addition to the fact that your access to the other company’s data at this stage is often very limited, often the real estate and facility data itself is scarce, lacking in consistency, and fragmented.
One very important point to emphasize at this phase is to bring in partners early. Often, companies wait until the last minute to bring in due diligence or portfolio advisors.
An early introduction gives these partners the time that they need to provide you with reliable data as you evaluate the pros and cons of any given transaction.
Having an external real estate team in place to perform research and make educated assumptions about missing information will be critical.
Your service provider will help you to identify your high-level opportunities, quantify your potential risks and problems, and perform summary property and portfolio reviews.
This analysis should provide you with a reasonably accurate assessment of the current portfolio, and identify lease expirations, approximate values, and current and potential asset utilization.
Once the transaction moves beyond the exploratory phase, property leases will need to be reviewed in detail, buildings physically inspected, property valuations completed, adaptability of facilities assessed, asset utilization and occupancy costs evaluated, leases benchmarked, and property records explored.
Whether one property or a portfolio, the approach to review must consider the speed of the overall M&A transaction, the collateral risk, and what inherent liabilities the leased or owned premises bring to the transaction.
Options for review arrange from a high level data tape evaluation of the property set all the way to deep dives and critical system evaluation across the portfolio.
This requires an understanding of how real estate management and operations are handled by the M&A purchasing entity — will it be outsourced, included in-house, be considered an operational or capital expense?
Obtaining computerized maintenance management system (CMMS) level data may be an alternative approach if a detailed review is desired. Representative observations across the portfolio might target the top 20% in terms of size, revenue generating potential, or other risk metric.
It is imperative to always consult your due diligence advisor early on in the M&A process to discover and mitigate liabilities within the real estate portfolio that might have a serious impact on the deal’s bottom line.