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Deal cogs grind slowly

The deal is won or lost after it's done." The observation, pithy and direct to the point, evolved from William Ferguson's experience on the front lines. The co-chairman of Chicago-based FPL Advisory Group does a lot of merger integration work for real estate companies. "Because corporate cultures inevitably collide," he says "handling the integration process can be the key to success or failure."

In the real estate world, there are two kinds of public companies: Those that own property such as real estate investment trusts (REITs), and service firms that own no property. Mergers among service companies tend to be more difficult because they combine two people-intensive businesses. On the other hand, REIT mergers inevitably come down to hard assets, but lack of preparation to assimilate new employees can prove costly.

Good planning is essential. And again as Ferguson stresses, while "good post-merger integration rarely makes a bad deal work, bad integration almost always wrecks [a merger] that might have had a shot."

Long term, Ferguson says, most mergers don't work. Forty-four percent of all acquisitions made between 1971 and 1982 were divested by 1989. Even those companies that acquire often and rapidly with seemingly few complications stay cautious through months and months of post-merger work.

Until last year, San Francisco-based CB Richard Ellis was known as CB Commercial. The name change came with a merger with Richard Ellis, which came after a similar transaction with Newport Beach, Calif.-based Koll Real Estate Services Co. and hard on the heels of the Hillier Parker acquisition.

To the outside world, all the mergers went smoothly, but Bill Rothe, head of research at CB Richard Ellis in San Francisco, frankly admits, "The school is still out on whether these [CB mergers] are successful. The progress is very good, but there is still another year or two to go."

There are two parts to every merger, Rothe says. The first is what he calls the "people" part or the merging of two cultures, and second, the "tactical" part or back-office integration. "Each of those has its own challenges and its own time sequences which takes time to get done," he says.

Stressed relations Sometimes even the most carefully planned mergers take time to sort out, especially those involving international organizations with headquarters around in the world. Last year, Chicago-based LaSalle Partners merged with Jones Lang Wootton, a London-based company. That merger followed LaSalle's acquisition of Atlanta-based COMPASS Management & Leasing.

These were well thought-out acquisitions. For example, in the Jones Lang Wootton merger, Stuart Scott, chairman and CEO of the new Jones Lang LaSalle, emphasized that this was to be a merger of equals - and not LaSalle dominating Jones Lang. Scott and William Sullivan (LaSalle's CFO) moved to London, and established an operations headquarters there instead of at the legal headquarters in Chicago. In addition, Jones Lang appears ahead of LaSalle in the new corporate moniker.

In July, despite all those considerations, Scott was forced to report expected adjusted pro forma results in the second quarter and full year 1999 were substantially below analyst's estimates. "Clearly," he said at the time, "we did not fully anticipate the distraction our mergers would have caused the organization as a whole." Indeed, in the first week of July, Jones Lang LaSalle's share price dropped 41.5%.

Scott adds that the merging process itself doesn't make any money. "The merger process takes people away from their normal jobs - managing people, calling clients and bringing in new business," he says. "All these people work 50 to 60 hours a week just to deliver results each year and there was some naivete on my part to think you could pull them off for enormous pieces of time to do work on two mergers and not have it impact their business."

The social issues Most deals do not get done, even when the economics make sense on both sides, because of people issues, observes Arthur Solomon, former head of real estate at Lazard Freres & Co. in New York. Under Solomon's stewardship, Lazard Freres was a top adviser on real estate merger and acquisition activity. "Social issues ultimately end up undermining a lot of deals that otherwise make sense strategically and financially," says Solomon.

According to Ferguson, any sound merger plan should include:

* Defined leadership. Managerial talent is lost when organizational responsibilities are not clearly defined.

* Well-conceived integration. Blended integration teams help relieve anxiety over which the company's culture will prevail.

* Adequate compensation. People will not work together if compensation plans are disparate.

Senior management is a key point in a successful merger. In many mergers, particularly among REITs, the acquired company will generally lose the top level of its senior staff. In a minority of mergers, the senior staff including CEO will make the transition, but it is always risky as the senior staff of the acquired company sometimes finds it difficult to adjust to a secondary role. Egos get banged up.

When Memphis, Tenn.-based Promus Hotel Corp. married Phoenix-based Doubletree, it looked like a perfect fit in terms of product and geographical distribution of hotels. The chief executives of Promus and Doubletree attempted to work togeth-er in the new company, but they end-ed up squabbling and former Doubletree execs left in a huff.

The big issues generally involve top management, says Solomon, because many redundancies tend to exist at that level. Obviously, one company doesn't need two CEOs, two CFOs and two COOs. "There are less redundancies at the property level because there you have leasing or management people on the ground," Solomon notes.

Peter Hall, president of Argonaut Search LLC, a San Francisco-based executive search and consulting firm, says real estate companies generally focus on hard assets and underestimate the "people side of it." This, he says, is where mergers begin to unravel.

Hall suggests the key attitude for the merging company is to be decisive. "Acquiring companies need to have a definite plan and when layoffs come, it should be done all at once instead of people worrying whether their job is at risk," he notes.

Mergers between REITs are mainly about hard assets as one company assumes the properties of another creating a larger portfolio. There is a theory that successful REIT acquirers can do without as many of the components of the other company's management team as possible. If, for example, a company boasts an existing apartment building management structure, more apartment buildings can be added without adding people.

Technically, it does not work like that. Those same apartment buildings need to be run by someone and, if they are good people, they will go over to the new company.

Some mergers have been less successful than initially thought because of people and cultural issues. "Certainly some of the early mergers in the REIT industry stumbled because there wasn't enough focus on these issues," says Dale Reiss, a managing partner at E&Y Kenneth Leventhal in New York.

While personnel and culture should be a consideration, they should not stop a transaction, says Reiss. Now companies are making sure it doesn't. "Prior to the merger, REITs recognize that business integration is a big issue," Reiss says. "We now have a whole group that deals with integration and we have been hired to help plan how cultural integration is going to happen as mergers go forward."

Right-thinking REITs One of the few major mergers this year combined Indianapolis-based Duke Realty Investments and Atlanta-based Weeks Corp. into one of the largest office/industrial real estate company in the United States with a market cap in excess of $5.5 billion. The new company, Duke-Weeks Realty Corp., is based in Indianapolis and represents more than 90 million sq. ft. of space.

By most counts, this Duke-Weeks integration went smoothly, primarily because everything except the price was decided before it went to the investment bankers, says Darell Zink, executive vice president CFO of the new company. "We spent months looking at Weeks, and they spent months looking at us."

Zink believes there were some 180 people working on the merger. "What we tried to do was bring it from the bottom up rather than forcing it from the top down," he says. "We got a lot of people involved which made them feel they were important to the decision-making process. Other than the positions that were redundant, we didn't lose a single person."

Equity Residential Properties Trust, an aggressive acquirer of multifamily properties located in Chicago, stepped out of its familiar box when it decided to merge with Lexford Residential Trust in July. Doug Crocker, Equity's president and CFO, knew immediately there would be cultural issues. "Lexford runs 65-unit, 85-unit, small properties and we run 300-unit or 500-unit properties," he says. "There were going to be different work habits and philosophies. Culturally, we were totally different."

Employees are the key, says Crocker. "If you don't have good employees then you are not going to be able to execute the business plan," he says. "Conversely, good employees are going to drive higher results from property levels and that translates into, among other things, a higher stock price." And higher stock prices make everyone happier, if not wealthier.

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