ING/Clarion and Gables. Colonial Properties Trust and Cornerstone. Camden and Summit Properties. With the smallest of these transactions valued at a cool $1.1 billion, these three easily qualify as the biggest multifamily deals completed this year.
But "bigger" doesn't translate into "better" in a merger or acquisition unless company executives pay attention to all the particulars in the transition process. "In any kind of merger, the integration is complex and detailed, and where people go astray is when they don't get down and reconcile the details," warns Richard J. Campo, Camden's chairman and CEO.
He knows whereof he speaks. Since 1997, Houston-based Camden has done $4 billion worth of mergers and acquisitions, blending the Paragon Group, Oasis Residential, and now Summit into its portfolio and operations. In the process, Camden has grown into one of the country's largest apartment firms with nearly 66,000 units under ownership and management.
Of course, in deals like these, the big stuff matters too. Executives must confront (or celebrate) the changing perception of their firm on Wall Street. They must quickly address the concerns of their workforce, who worry that they'll lose their job. And these leaders must assess the overlap and opportunities–in terms of people and properties–in the combined company and make decisions accordingly.
In this edition of Conference Call, David D. Fitch, president and CEO of Gables Residential, and Thomas H. Lowder, chairman, president, and CEO of Colonial Properties Trust, discuss the issues in their respective mergers and the challenges they encountered. Campo also shares his thoughts on page 36.
Tom, with the Cornerstone deal, you have upped Colonial's multi-family presence. How has theinvestment community reacted?
THOMAS H. LOWDER, COLONIAL PROPERTIES TRUST: What has changed is the perception of Colonial. There was a negative perception of the deal at first, and our stock was put in jail for six months before we executed [on the Cornerstone merger]. We had been telling our investors to expect 5.3 percent rent growth, but there was a lot of prejudice against the Texas markets, [and people were skeptical]. But our same-store growth was actually 7.2 percent as of June 30, after our first full quarter with the portfolio. So, the perception was that the Cornerstone merger was a challenging deal, but that has turned around. Now people think we bought at an aggressive cap rate.
How did this deal change the composition of your portfolio?
LOWDER: In 2004, our multifamily portfolio represented 29 percent of our net operating income. In 2005, 44 percent of our net operating income came from multifamily, and that includes Cornerstone for just three-fourths of the year. ... We're moving into larger, high-growth markets such as Atlanta and Charlotte. It's the perfect time to make investments in multifamily.
How will the ING/Clarion deal affect operations at Gables both for the short term and the long term?
DAVID D. FITCH, GABLES RESIDENTIAL: There are great benefits from both a short-term and long-term perspective. Being associated with both ING/ Clarion and Lehman Brothers provides instant exposure to the broad capital markets (domestic and international), extensive research capability, and significant experience in many markets we are currently not operating in. Our operations will be even more enhanced as we learn to utilize these assets effectively in executing our strategy. The change from being a public REIT to a private real estate company means we will can take advantage of a larger variety of opportunities, be more flexible in how we respond to market cycles, and employ financial engineering.
Virtually any big deal results in employee turnover at different levels. How did each of you approach this?
LOWDER: Our industry is different than any other industry. We need all the properties. We need all of the on-site people, so the first thing you do is work to keep the right employees at each property. People personalize things: "Will my salary change? Will my benefits change? What does this mean to me?" You need to get past these personal issues first.
FITCH: The more communication the better. It's better to say "We don't know that answer yet," than to have no answer at all. Our business is about the people, and guiding everybody through a transition like this is the most important thing we can do.
LOWDER: We had integration teams that were split 50-50 between Colonial and Cornerstone. There were six associates on each team, which deal with policy and procedures, vendors and purchasing. We learned that Cornerstone was doing a good job with training at the property level. For us, it was a matter of finding and deploying the best practices within the new organization.
What do you know now about doing a deal like this that you didn't know before?
LOWDER: Two things. One, we shook hands in September and officially closed the merger on April 1, so in December and January we were very involved at the properties, working with the integration teams and evaluating practices. Next time, we would shorten [that] period and speed the integration. Two, [the new accounting rule] tripped us up. We thought we could amortize the costs of the merger over a longer period of time, but we had to do 100 percent of that immediately, which was a hit of $800,000 to $900,000, or two pennies per share. That put some short-term pressure on us. ... [Also,] when it comes to technology, don't be too much of a change agent, because you want to have good numbers. Don't do a lot of changes immediately.
FITCH: Going from public to private is very complicated, and there are a tremendous number of moving parts.
I would say everybody involved underestimated the amount of complexity involved. At a different level, make sure property-level information is well organized for when due diligence starts. A tremendous effort is involved in underwriting a large portfolio of assets, and the time periods are short.
What was your greatest concern?
LOWDER: Not performing. You're dealing with investors–sophisticated investors. You're putting your company and your career on the line.
FITCH: Mergers are bold moves, and during the process, markets can move. The biggest concern is that the underlying conditions [might] shift from the time the wheels start turning to when the deal is consummated, such that the original decision is called into question. That fortunately did not happen in our case.
Reconcilable Differences
To Camden Property Trust's Richard J. Campo, integrating a merger or acquisition hinges on finding acceptable solutions to the conflicts that arise. "You have to reconcile the differences, from nomenclature and what people are called, to compensation programs and operating procedures," says Campo, who says the process benefits the dominant company just as much as the firm that is being acquired. "It gives you an opportunity to review your own operational procedures," he says. Here are a few of his thoughts on the challenges and benefits of post-merger integration efforts.
ON TECHNOLOGY: "We discovered our approach to technology and cable was off [after Camden began integrating Summit?s properties and practices into the Houston-based company]. We'd made a deal with a provider for a small revenue share. Summit had a high-quality satellite program and a high profit margin we couldn't believe."
ON EMPLOYEE ISSUES: "The biggest risk in a merger is that operations go sideways. You have to reassure employees and communicate immediately and effectively with them. They want to know, 'Do I have a job?' and 'What's in [this change] for me?' in terms of salary, benefits, and how they view their day-to-day jobs. Longer term, they want to know about the corporate culture. ... In a merger like this, there are going to be job losses at certain levels, because that's what creates efficiencies. You don't need two CEOs, two CFOs, two accounting managers. So you tell people as soon as possible, and you give them fair severance pay and fair job placement. Forty employees lost their jobs in the Camden/Summit merger, and some of them were offered jobs in Houston. Our expectation for turnover was exactly what happened. We lost very few on-site people."
On HAPPY surprises: "I learned that our ability to raise capital [after the Summit deal] was even greater than I thought."