Four M&A property pitfalls to avoid
With global M&A deals hitting record highs in 2015, plenty of high value assets are in the process of changing hands inc. extensive property portfolios.
While real estate can be a highly efficient way to maximise value from M&A, all too often, property is assessed in the latter stages of negotiation and this can present multiple problems when the ‘skeletons in the closet’ emerge.
According to JLL’s Successful M&A: capturing value through real estate report, one-in-five fail to take property into consideration until the agreement is signed which can lead to additional risk, unforeseen cost and strategic misalignment.
So what are the most common pitfalls to avoid?
The market value of an acquired real estate portfolio can differ wildly from the value on which the deal price was fixed, exposing the acquiring company to significant financial risk.
Remco van der Mije, Associate Director, JLL Netherlands, explains: “In the early stage of a merger or acquisition, companies need to be looking at expiring leases and rent reviews because they need to know the financial implications. What are the long-term costs attached to leases and how long are you locked into them?
“Do you know in which countries the tenant is held responsible for building maintenance, and in which countries it’s the owner’s cost? You don’t want to become the leaseholder of a property portfolio that is in a bad state, not realizing you’ll be paying for repairs.”
Exit penalties are another cost that can remain hidden unless the property team has time to do in-depth research.
Property portfolios can be very big and very complex, containing all sorts of risks, ranging from security risks to environmental issues.
Van der Mije says: “In a volatile country, exact location can affect value hugely. You can adjust a deal to prevent losing value, perhaps taking the riskier property assets out of the deal – but only if you assess security risks well in advance of the deal closure.”
Tom Carroll, Head of EMEA Corporate Research, adds: “A contaminated site has a direct impact on purchase price and may even break the deal if significant enough. For example, an insurance indemnification may be needed to protect you from future litigation so that any claims rest with the previous owner. Assessing risk early on in the M&A process gives you to time work out what action to take.”
Any newly acquired property must support the broader deal strategy. For instance, if the objective of a merger or acquisition rests on consolidating or streamlining real estate, a property portfolio must allow this.
For instance, discovering after closure that it’s very hard to sell these properties within a short timescale because they have little corporate or investment attraction could spell disaster.
Employees’ first thoughts when they hear about a merger or acquisition are whether they can still do the same job for the same money in the same place. If there’s a hint that their location may change, there’s a risk they may leave the company.
So, if a company has a highly skilled workforce, whose expertise is central to business continuity and the value of the organization, a property strategy should allow them to stay in the same location. If relocation is involved, create a property strategy that relocates those whose replacement would be detrimental to productivity.
“Property is of huge strategic importance in M&A,” concludes Carroll, “yet many companies have learnt this the hard way.”