Questions Linger Over Merger

What should we make of the announced merger between CB Richard Ellis and Insignia Financial Group? The widely publicized deal, valued at $415 million (see story on page 10), leaves many questions unanswered.

Does it say anything about the future of publicly traded brokerages? Probably not. The merger, which will eliminate Insignia's public float, may in fact be part of an exit strategy by Blum Capital Partners to eventually take CBRE public again, we hear. In July 2001, CBRE was taken private in an $800 million management buyout transaction led by Blum Capital.

At the time of the management buyout, Blum Capital made its intentions clear, says Peter Roberts, CEO of the Americas for Chicago-based Jones Lang LaSalle. “Their exit strategy was to either take it public again or sell it to a public company. To accomplish this, they wanted to double the revenue and get a lot bigger in New York.” The newly combined CBRE and Insignia entity will generate annual revenues of $1.8 billion.

The merger affects Jones Lang LaSalle and others in two ways: It eliminates a competitor while strengthening CBRE's overall platform, particularly in New York. In the short term, however, the merger likely will become a major distraction for CBRE and Insignia. “We know that mergers like this are time consuming, and they are hard,” says Roberts.

Will Marks, a real estate analyst with San Francisco-based JMP Securities, cautions against jumping to the conclusion that the merger is a harbinger of things to come. Most of the consolidation in this sector has already taken place, Marks believes. “In this case you have an anxious seller in Andrew Farkas (CEO of Insignia), and you have a buyer who thinks he can build a bigger and better company.”

A Brutal Revenue Climate

Publicly traded real estate brokerages continue to get hammered on Wall Street largely because revenues have been trending downward. The stock price of Jones Lang LaSalle (NYSE: JLL) closed slightly under $14 a share on Feb. 21, down about 45% from its 52-week high of $24.80. Despite reducing costs by more than $50 million in 2002, JLL's revenues for the year fell 7% to $840.4 million. In the fourth quarter of 2002, revenues fell 3% to $270.3 million. In January, JLL also announced that it would trim its workforce by 4%, or 300 workers, due to continued weakness in key global markets.

Trammell Crow Co. (NYSE: TCC) also is struggling. The Dallas-based real estate services giant is trading at just under $9 per share, down 45% from its 52-week high of $15.85 a share. Revenues totaled $173.8 million in the third quarter of 2002, down from $188.9 million a year earlier.

No brokerage giant has fallen harder than Grubb & Ellis Co. In October, the company was delisted from the New York Stock Exchange, and CEO Barry Barovick has publicly stated that the company is considering alternative ownership structures. Meanwhile, Insignia (NYSE: IFS) is trading at nearly $11 a share, only slightly below its 52-week high of $11.82. When the news broke about the merger, Insignia's stock price initially jumped 13%.

Roberts of JLL refutes the argument that because the business is seasonal the public model isn't well suited for brokerage companies. The retail industry serves as a good analogy, he believes. “Retail is a seasonable business with the majority of its profits coming at the end of the year, and you see a lot of publicly traded retailers,” Roberts says. “If you look at the life cycle of a public company, we're all just babies. Real estate services companies have only been public three, four or five years. As a sector we're just getting our feet settled and getting skilled at managing public companies.

“It's all about execution,” he continues. “If a company generates increasing value, you're going to invest in it.” It's simple. When the earnings come back, so will the stocks.

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