4 key drivers of a successful real estate M&A transaction

By Ashoo Gupta, Shardul Amarchand Mangaldas

The real estate sector is the largest employer in India after agriculture and is forecast to grow dramatically over the next decade. Little wonder that it attracts a lot of interest insofar as mergers and acquisitions are concerned.

However, for an M&A deal in the real estate sector to be successful it is essential to weigh and, if possible, eliminate the inherent risks associated with such transactions. Other drivers for the success of a deal include maximization of value, speeding up of operational strategy and successful integration, post deal.

Ashoo Gupta Partner Shardul Amarchand Mangaldas
Ashoo Gupta
Shardul Amarchand

Risk elimination

From the acquirer’s perspective, it is essential to assess the leasable/fair market value of the stock of unsold property, especially in a declining market. Other aspects that must be examined include the condition of the target company’s real estate assets and the capital required to upgrade/maintain them; legal issues associated with the target company’s promoters or any of its land banks and buildings; green and other approvals applicable to land parcels in specific zones; terms of lease in cases of leasehold land, etc.

From the target company’s perspective, it is important to assess whether the acquirer has the means to ensure the deal is fully executed, especially if the acquiring party is leaning heavily on leverage.

Value maximization

This essentially consists of cost optimization and value extraction. Real estate expenses are usually the largest expense item on the balance sheet, after personnel and information technology. An M&A deal provides scope for revamping the organization and rationalizing real estate costs.

Cost optimization should begin at the level of due diligence. The assessment should explore cost-saving prospects such as passing rent versus market rent, lease and sub-lease options, co-location options for business facilities and incoming talent, facilities management, utilities and waste, rates and taxes, design and fit-out, etc.

As for value extraction, the assets acquired often carry depreciated historical costs and do not reflect the correct market value. This creates opportunities to secure debt against properties, rationalize, and dispose of surplus properties to release capital.

Real estate can be used effectually to create shareholder value, deliver overall business success and profitability, create employee support for merger and foster greater flexibility for the merged entity. Real estate assets can make a vital contribution in an organization’s drive to realign businesses, improve earnings and create new revenues.

Speeding up operational strategy

There are several ways in which a real estate M&A deal can help fast-track the acquirer’s operational objectives. Questions to be asked in this context are: Is the acquirer’s real estate strategy in sync with, and supportive of, its overall M&A objectives? What is the ideal location for the acquirer’s core business activity? Does the target company and/or its real estate assets meet the acquirer’s locational requirements? What are the potential cost impacts on the acquiring company of the expected real estate demand-supply and cost dynamics of the real estate market post acquisition or merger? What are the acquirer’s likely space requirements? What is the best synthesis of the acquirer’s offshore and onshore units post acquisition or merger? Have lower cost centres been explored?

A company’s strategy for real estate should integrate a set of objectives to unlock far greater enterprise value than just the cost of the underlying properties.

Post deal integration

Real estate provides the acquiring company’s management with an opportunity to address two key integration issues: (a) combining the strengths of the acquirer and the target, post transaction; and (b) whether the target company will remain a standalone entity or be fully integrated.

Retaining human assets is a key area of focus during integration, as a vibrant and quality workplace can bolster staff well-being, productivity and retention levels, reducing absenteeism and labour costs. In this context, the workplace setup plays a crucial role in defining the new organizational structure. It has the potential to bring together the members of the merged entity’s management in the same space, irrespective of their prior roles in either the acquiring company or the target, and to create competitive advantage.

If optimally managed, real estate can help enhance value at various points in an M&A deal, from inception to conclusion. Special attention should be paid to this aspect of a business, as any kind of disengagement in this key focus area is fraught with substantial business risks.

Ashoo Gupta is a partner at Shardul Amarchand Mangaldas. The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official view or position of the firm.


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