Private Homebuilders Hold M&A Advantage Over Public Builders

The news about public home builders' financial results has been negative as of late. Some of you may be wondering about the large private builders who compete against the publics for land positions, talent and acquisitions of local home builders.

Among the largest home builders nationwide are a dozen or more private companies that could readily participate in the M&A arena. A handful of these have been repeat purchasers of small to mid-size companies.

Although reasons vary by time and location, large private home builders are motivated to increase their volume and geographic diversity, using a mix of acquisitions and greenfield start-ups. A significant factor is their desire to compete effectively with public builders, even as they state their preference for operating differently. As they aren't in every major market, most large private home builders have growing room. Some are regionally concentrated and feel the need to diversify geographically and want to enter new regions.

When considering acquisitions, the larger private home builders have some notable advantages over the publics. The biggest: they can offer new capital to fund growth and a release from personal liability, just like the publics, while offering the opportunity to remain private. Some potential sellers have no interest in working in a public environment, with its focus on quarterly performance and need to justify executive decisions.

Private buyers tend to be less concerned about land and lots that come with acquisitions and the impact on their balance sheet, although they may use third-party land bankers, like the publics, to maintain ratios and operate within covenants. Private buyers will be more concerned about finding the right management team in place to grow the acquired business within the chosen region.

While they don't have to answer to Wall Street analysts and shareholders, the large private home builders do need the support of their bankers. Private home builders have more flexibility to consider counter-cyclical opportunities to enter markets or acquire assets to position the companies for strong growth coming out of a housing slowdown. But these decisions have to be well thought out and credible. Large private home builders are not immune to sluggish sales rates, challenges in qualifying buyers for mortgages and continuing high inventory levels characterizing many markets.

Certainly, they are experiencing losses in some markets, but they are both better capitalized than local builders and under less pressure to absorb losses today than the publics. The large private home builders as a group were generally less aggressive purchasers of high priced land and maybe less aggressive in speculative starts and investor sales, given the lack of pressure to book volume by each quarter's end.

Some private home builders have an appetite to acquire the right company in the right place even today. We think private buyers will lead the return to growth focused behavior and to mergers and acquisitions as a methodology, possibly in the first half of 2008.G