Alan White knew he had a tough sell on his hands.
Back in the 1990s, White was in charge of managing the property portfolio of British Telecom. At the time, the telco was engaged in a pitched battle with local start-ups, which were beginning to poach from the company’s customer lists. Meanwhile, powerful cross-border rivals such as Deutsche Telekom and Sprint were hooking up in highly touted, and threatening, alliances. BT’s management decided that the telco had to start buying companies or risk losing ground to more-acquisitive rivals.
White’s dilemma: how, in a buy-or-die climate, do you convince management to consider real-estate issues when sizing up merger-and-acquisition targets?
Some executives balked at the idea of inviting property executives to strategy sessions. But the way White saw it, real estate would play a sizable role in the success of any deal. For example, he believed it was crucial that BT executives devise a plan to secure ownership of a takeover target’s switching centers before launching a bid. If the company’s managers overlooked a contract provision that could jeopardize ownership down the road, it would be exorbitantly expensive for BT to transfer its switching equipment. That, in turn, might interfere with the telco’s ability to provide its full range of services, which could limit revenue growth.
Eventually, White made his case. “We were able to convince the strategy people that as part of their initial consideration of which businesses to buy, they should listen to the real-estate guys. But it took us 18 months,” says White, who now serves as chairman of the Global Commercial Real Estate Group for RICS (Royal Institution of Chartered Surveyors), a global real estate industry association based in the UK, and heads up the Corporate Consulting Group at real estate advisers DTZ in London.
Such a struggle is hardly surprising. During the initial phases of a merger or acquisition, real estate rarely makes it anywhere near the top of a management team’s list of concerns. “Nine out of 10 times, real estate is just considered the physical location where business is done,” says Chris Price, a partner at the New York office of property specialist King & Spalding. “It’s not considered a central component of the business itself.”
And that’s the problem. While real estate may not be a central component of a business, assessing real estate is often a central component of business deals. Lack of attention to even simple factors — think title and certificates of occupancy, lease provisions, and taxes — can turn a good purchase into a dog. “Companies tend to overlook very basic items, like failing to get the proper consent for exchange of control,” says Price. “And those things can come back to bite them later.”
Think Love Canal
Some of those failures are fundamental, such as overlooking environmental hazards. Given the potential for lawsuits — not to mention the costs of cleanup — the risk experts strongly advise suitors to conduct exhaustive environmental surveys before completing an acquisition.