When rumors of a possible merger between service firms Jones Lang LaSalle (JLL) and Staubach first began swirling in late May, the brokerage industry could be forgiven for experiencing a sense of déjà vu.
Just a year and a half ago CB Richard Ellis — which ranks No. 1 on NREI's list of top brokerages with combined investment sales and leasing transactions totaling $264.2 billion globally in 2007 — merged with Trammell Crow Co. Months later, the Italian-based Agnelli family purchased Cushman & Wakefield, then Cushman promptly bought investment banker Sonnenblick-Goldman.
JLL's last major U.S. acquisition was in October 2007, when it bought Corporate Realty Advisors, a leading corporate advisory and tenant rep firm in North Carolina. The rumors became reality June 16 when JLL reached an agreement to acquire Staubach for $613 million. This merger is part of an ongoing consolidation trend. CB Richard Ellis has completed a total of 52 acquisitions totaling $474 million since 2005, while JLL has completed some 20 acquisitions since 2006.
Born out of necessity
Industry insiders expect more mergers to occur as public companies look for ways to prop up their sagging stock prices. Shares of CB Richard Ellis, which trades under the stock symbol CBG, were trading in mid-June some 50% under the 52-week high of $42.74. “We anticipate both CB Richard Ellis and Jones Lang LaSalle will continue to pursue strategic acquisitions as opposed to share buybacks,” says Brandon Dobell, analyst with William Blair & Co.
“Such deals can temporarily depress profit margins, but these transactions provide opportunities for companies to add expertise in a certain business segment or geography, ramp up talent for better productivity more quickly, or immediately seize market share,” adds Dobell.
Executives say that acquisitions are designed to enhance service capabilities over the long term, rather than stimulate a short-term pop in stock prices. “On a short-term basis they hurt earnings based on Generally Accepted Accounting Principles (GAAP), but I think the space should and will consolidate,” says Dobell.
Scale drives greater efficiencies, which generates more available cash flow to invest, Dobell emphasizes. “Customers want fewer vendors and global partners and yet every market is still very local, so to be successful firms need to have a presence in many markets. Acquisitions are a way to get there.”
Christopher Ludeman, president of U.S. brokerage for CB Richard Ellis, agrees. “Our clients are consolidating the vendors they use because they are forced like many of us to do more with less,” he says. “As that happens, we need to do more things on an end-to-end integrated basis in more places for our clients.”
For many brokerage firms, that means continued globalization of the business. “There are significant benefits from being a global player in this business,” explains David Gold, an analyst with Sidoti & Co., which tracks JLL. “Global players have a significant edge when dealing with multi-national clients. Domestically, there are also benefits from size and scale, but there will also always be room for smaller, market-specific boutique firms.”
Cushman & Wakefield, which ranks No. 3 on NREI's top brokerage rankings with investment sales and leasing transactions totaling $124 billion in 2007, historically has preferred to focus on “organic growth,” according to CEO Bruce Mosler.
Still, Cushman & Wakefield dipped its toe in the acquisition waters a year ago by acquiring real estate investment banking firm Sonnenblick-Goldman. “We have used acquisitive growth to be strategic. Sonnenblick-Goldman was a strategic acquisition because it broadened our ability in the capital markets arena,” says Mosler.
However, Mosler hints at some big-game hunting. “We've been patient, and we think the time is very ripe to get more serious about acquisitive growth. Businesses in the next six months will continue to reflect more or less normalized value propositions, and that's why for the first time we are looking at acquisition as more of a core approach to growth than we have in the past,” adds Mosler.
All major brokerages embrace the global concept. “There will be three, maybe four of the very large integrated globally capable firms at the very top of the food chain,” says Ludeman. “What we prognosticated years ago — that being in the middle is treacherous territory — remains truer today than ever before.”
|General Motors Building
|2 million sq. ft.
|Boston Properties/Goldman Sachs joint venture
|CB Richard Ellis
|2.6 million sq. ft.
|SL Green Realty Corp./SITQ Immobilier joint venture
|Cushman & Wakefield
|AXA Financial Center
|1.9 million sq. ft.
|Vornado Realty Trust
|Hudson Waterfront Assoc.
|CB Richard Ellis
|Source: Real Capital Analytics