“Unquestionably, the biggest home builders are acquiring well-positioned smaller companies in a bid to expand their market share, diversify into new markets, acquire management talent and gain land inventory,” Ahluwalia said.
However, based on preliminary results of the study, he concluded that “this is not happening quite so quickly or on as grand a scale as some had imagined.”
Mania in the Top 10
In fact, Ahluwalia said, merger-and-acquisitions mania has so far been largely confined to the top 10 U.S. building companies. Early survey findings indicate that only 5% of builders currently expect to be acquired by another company and 3% plan to merge with another builder to expand their market share.
Eschewing the consolidation frenzy, a full 82% of builders in the study are planning to grow their market share within existing markets, and builders are also considering diversification into different market segments, expansion into entirely new markets and shifting their focus to new segments as part of their future growth plans.
Those doing the acquiring are usually publicly traded national building companies, though some large, privately held builders may also be buyers. Those being acquired are mostly privately held producers of 250 or more units per year.
Lennar Is No. 1
According to Ahluwalia’s research, Lennar Corp. has acquired 19 companies over the past 10 years, a record for the industry. D.R. Horton, ranked No. 1 in the business in terms of closings last year, has completed 17 acquisitions. Beazer’s 12 acquisitions and KB Home’s and Centex’s 11 purchases each put them solidly in the top five, as well.
In establishing acquisition targets, the big builders pay particular attention to four key factors:
- The size of the company to be acquired, a minimum of 250 starts a year
- The size of the market, a minimum 5,000 permits a year
- The size of the company’s land inventory
- The availability of additional land in the market area
While other considerations are also important — including the builder’s profitability, its position in the market, the quality of its management team and systems in place and number of years it has been in business — the four key factors are usually “necessary” for a deal to go through, said Ahluwalia.
The Rise of a Mega-Builder?
Also, among the nation’s top national home builders, mergers are not an everyday occurrence, Ahluwalia pointed out. Two that have taken place fairly recently include Lennar’s takeover of U.S. Homes and Pulte’s takeover of Del Webb.
A “mega builder” constructing 100,000 units per year could emerge from the merger of two of today’s top five builders, Ahluwalia said.
A more likely scenario, however, is that the nation’s top 10 builders will gain control of 35%-40% of the for-sale marketplace over the next 10 years.
What does all this mean to the smaller builder? “Small and medium volume builders may be squeezed because of construction cost differentials — big builders’ ability to cut cycle time by up to one-third due to systems in place — and lack of land availability,” Ahluwalia said. As a result, to survive in the future, many may have to begin exploring “niche” markets such as infill development.
According to NAHB surveys, the most profitable additional avenues for small and medium-size builders are: custom home building/building on the owners’ lot, remodeling, light commercial building and diversification to other services, respectively.
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