Over the past few months, mergers and acquisitions (M&A) have been heating up across the real estate sector. For example, in January 2021, Foundation Title merged with Paulus Title, in February 2021, Stone Point Capital announced that it will acquire Corelogic, and in March 2021, TitleOne acquired Land Title.
At Qualia’s Future of Real Estate Summit, Barry Finegold, Founder & Managing Partner at Dalton & Finegold, joined Pat Stone, Executive Chairman & Founder of Williston Financial Group, to discuss consolidation trends. Stone, who has been involved in over one hundred M&A transactions, provided his advice for businesses to successfully evaluate M&A opportunities.
Be critical about your reasons for considering any deal
Before evaluating any deal, Stone recommended that businesses consider how the opportunity fits into their current business strategy. “Be careful before you jump into any deal that doesn’t fit [into your growth plan] and make sure the deal warrants changing your business plan,” he said. Stone added the importance of understanding the motivations of the seller as well. “Understand why someone is selling and make sure it fits with why you’re buying,” he said.
When considering a deal, Stone said that it’s important to think about the impact of the deal and who may be influenced in a positive or negative way by the transaction. He described a time that he bought a software company that ultimately failed. “Things went nowhere. I couldn’t get anyone to buy the software because [the software] would eliminate employees,” Stone said. “I hadn’t thought through the impact of a software whose value was replacing the employees.”
Build a strong deal team
Stone recommended that every team include a good attorney and accountant. “If you’re buying a corporation you will assume liability for the prior behavior of that corporation… You buy all the obligations the business has entered into,” Stone said. He added that a good accountant can help identify the synergies between two businesses to understand where they can eliminate any redundancies.
In addition to a strong attorney and accountant, Stone said that it’s critical to have several people involved in diligence who will offer differing perspectives and reveal any blind spots. “One of the challenges is that we’re all human beings and we can get excited about something; however, someone else may have a perspective that is valuable and could prevent you from making a mistake,” he said. He added that the best transactions he’s been involved in were those where the team had a thoughtful process with “quite a few people looking at things.”
Create a comprehensive diligence list
Deal teams should have a standardized and well thought out diligence list prior to a transaction. “You will want to verify the corporate structure and regulatory issues around the company as well as the accounting, legal, IT, and any sort of contracts,” Stone said.
He added that once the comprehensive diligence list is complete, it should be vetted with people who have done similar transactions to ensure there aren’t any blind spots. “If you do that ahead of time you’re less emotional,” Stone said. He added that often people become invested in a deal because they’ve worked on it for so long. “Psychologically, there’s a natural momentum toward closing a deal,” he said. With a second set of due diligence eyes, this phenomenon can be tempered.
Consider the personality of the company you plan to acquire
Stone’s college history degree has helped him frame many of his past deals. He looks back in time to see how a company got to where it is today. “Lots of things go into success. Some has to do with personality, some has to do with behavior, some has to do with luck,” Stone said. “If it’s a successful company, what will change when you buy it? Will you eliminate the reasons it has been successful?”
In the same way, Stone believes that historically unsuccessful companies can be made successful through a merger or acquisition. “Understand what they are missing so that you can align your resources to make it work better,” he said.
M&A will continue to accelerate
At January 2020’s Future of Real Estate Summit, Stone predicted continued title agent consolidation and vertical integration. When we caught up with Stone a few months later in June 2020, he said that consolidation would likely play a role in the economic downturn; however, it was difficult to predict because there were many unknowns at that time (at the onset of the pandemic).
Now, Stone believes the industry will consolidate at a rapid pace. “There’s a strong need for automation and integration with other participants [in the transaction] and the pandemic heightened the awareness of that,” he said. Time from application to close is currently high (at around 55 days) and has made mortgage lenders cognizant of the need for integrations that eliminate rekeying and create a streamlined experience. “You’ll start to see lenders align themselves with fewer participants and align with those who can integrate [with them],” Stone said.
To hear more from Finegold and Stone, click below to stream a recording of their conversation at the Future of Real Estate Summit.