Mergers & Fee-earners
The big UK real estate news in #Week6 was surely Barratt Developments’ takeover of fellow housebuilder Redrow, a £2.5 billion deal that will consolidate the newly-branded Barratt Redrow’s position as the UK’s biggest developer of new homes.
Redrow was acquired at a 27% premium to its closing share price on Tuesday – enough to tempt its wily founder Steve Morgan to throw his weight behind the deal – a level that the market was slightly sceptical of but not overly so. Barratt shares ticked down a couple of percent, while Redrow surged 14% to reflect the increased valuation.
As with many modern mergers and acquisitions, there was plenty of talk from Barratt and Redrow about the deal helping to “accelerate the delivery of the homes this country needs”, among other virtuous aims. Excuse Paperclip’s cynicism, but the enlarged group will develop as many homes as the market can support and no more; with a responsibility for driving shareholder returns, this is only right and proper.
No, this deal was about land holdings rather than accelerating delivery. By buying Redrow, Barratt increases the size of its landbank by roughly 25,000 plots. Assembling such a portfolio in the open market would not only take considerable time, but would be of a significant scale to move the market for housing land higher than it currently is. Looked at in this light, the acquisition makes perfect sense – even more so if the promised cost savings of £90 million can be achieved.
The land bank element offers tangible gains for Barratt (falling house prices and land values aside) that are not dependent on the retention of individuals. As with the recent merger between LXI REIT and LondonMetric, the deal is about priceable assets not intangible talent.
In the wider real estate industry – particularly the advisory sphere – such quantifiable deals are thinner on the ground. Look across the history of M&A in the agency world, and there are plenty of examples that haven’t lived up to their initial promise.
The benefits touted when a tie-up is announced are rather harder to realise when they rely on keeping hold of the ‘rainmaker’ fee earners that drive an advisor’s revenue. There are of course cost efficiencies to be made, but ultimately success is defined by whether the senior people can be enticed to stay once their workout period has expired. Losing the grand fromages – and their clients with them – can take an acquiring agency back to square one.
This is not to say that all such deals are failures (far from it), but professional service firms should learn from their investor/developer friends and secure not only flighty human capital but something tangible too – new technology and AI capabilities spring immediately to mind – when making a corporate move. As Barratt will tell you: don’t lose the plots.