What is a ?Merger? Anyway?

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RISMEDIA-NRRE October 2001

What is a ?Merger? Anyway?

By Tom Dooley

Every industry develops its buzzwords. In recent years, none has dominated the real estate profession more than the term “merger.” As small real estate firms tried to grow into large ones, and large real estate companies became mega-brokerages, and some mega-brokerages were absorbed into national conglomerates, “merger” became a convenient, generic moniker for such activity.

Under a dictionary definition, such usage might be a bit of a stretch. Among Webster?s definitions are, “The act of putting entities together in one mass so that the constituent parts are more or less homogeneous;” “The process of plunging or engulfing in something;” “A coalition, amalgamation, absorption or combination,” and the all-embracing, “Any of the various methods of combining two or more organizations (as business concerns).”

All of this verbalizing must be put to use in describing the various “consolidations” that the real estate industry has experienced in the last decade. For when it comes to real estate, Gertrude Stein would be hard-pressed to declare, “a merger is a merger is a merger.”

So when another owner suggests your firm should “merge” with his, or when you are contemplating expansion via the “merger” route, it is wise to pause and determine exactly what this means. It could be any one (or combination) of the following:

1. A “bona fide” merger in which two or more companies join forces, aggregating their assets and liabilities and sharing ownership in the new organization.

2. A total “buy out” of one company by another. While a more appropriate name for this activity might be “acquisition,” the “merger” terminology is applied because it is generally perceived as being more diplomatically serene.

There are a couple of sub-types of the “acquisition” merger. There need not be a “total” buyout. In some instances the “seller” might continue to retain a minority interest in the “merged” enterprise. Additionally, depending on the financial and tax situations of the parties involved, the transaction might be either an asset sale or an equity sale.

3. “Bail outs” are another category of “mergers.” One company absorbs another by assuming its liabilities.

4. Similar to “bail outs” are “walkovers” in which for the injection of a minimal amount of capital, one company blends another into its company, calling the same a “merger.”

5. Establishment of an “umbrella” organization?a sort of holding company into which more than one operating company is assimilated.

6. Part of a “double breasting” operation in which one company “merges” with another in a corporate or legal sense but continues to operate the second company under a separate name appearing to the public as though nothing had happened.

7. Part of an “alliance” in which two or more companies combine certain operations (usually so-called “back office” functions) in order to realize economic or functional advantages but do not truly “merge.”

8. Restructuring of two or more owner-operated companies (often sole proprietorships) into a partnership?sometimes with equal, sometimes unequal, ownership interests.

With all of these aberrations, is it any wonder that “mergers” usually require more than a fair measure of deliberation, negotiation and careful structuring before they come to fruition.

The principals in each of the companies will not have the same occupational responsibilities as they did prior to the merger. Especially notable in this regard will be the matter of where ultimate authority for setting the direction of the company will be vested. Whether such a person is initially identified in the “post merger” adjustment period, someone will soon emerge. An evenly separated division of labor and responsibility in a merged enterprise is destined to be short-lived.

Vested with an understanding of the idiosyncrasies of various forms of consolidation, and aware of the possible pitfalls, owners of real estate brokerage companies who proceed cautiously and carefully when confronted with the opportunity to be involved in a “merger” can come out of the experience in a better position than they might have if they remained independent.

Tom Dooley is president of TWD & Associates, Consultants to the Real Estate Profession.

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Thursday, March 18, 2010