The merger-and-acquisition path is littered with casualties. Ryan Abbe, managing director of San Francisco-based M&A adviser and real estate investment banking group JMP Securities, says that’s because the little guys can “die in these big organizations,” and giants often find it difficult to embrace smaller firms.
- When looking for a merger partner, cultural fit is the most important thing to get right in this human capital business.
- A successful merger is mutually beneficial; a larger brand can bolster support for an indie, while smaller firms breathe new life into their parent company.
The merger-and-acquisition path is littered with casualties.
Entrepreneurial companies accept the umbrella of a behemoth for protection, guidance and growth opportunities — but sometimes it doesn’t work out that way, says Ryan Abbe, managing director of San Francisco-based M&A adviser and real estate investment banking group JMP Securities.
That’s because the little guys can “die in these big organizations,” Abbe said, and giants often find it difficult to embrace smaller firms.
The hardest M&As are those that involve human capital, which is the primary focus of such deals in the real estate brokerage world, in addition to technology, systems and business relationships, according to Abbe. And as the brokerage business gets more complex with new technology that creates uncertainty, brokers are feeling downward pressure on margins and face higher splits to agents and regulators.
But two formerly independent California brokerages and their parent companies are showing how the merger can be done (and done well, at least to start) — San Francisco-based Climb Real Estate, which got scooped up by NRT in August, and Los Angeles-based John Aaroe Group (J.A.G.), which falls under the Pacific Union International umbrella as of December.
It appears that the decision to join forces in both cases has led to successful marriages, made possible by compatible cultures, consistent communication and common end goals.
Here’s a glimpse into their post-merger lives.
Climb(ing) the ranks
Chris Lim, founder of lifestyle real estate brand Climb Real Estate, is thriving in his new corporate environment as part of NRT, a subsidiary of Realogy Franchise Group, nine months post-acquisition.
Lim is enjoying the opportunity to bounce ideas off brand presidents, including The Corcoran Group’s Pamela Liebman and Coldwell Banker’s Charlie Young.
Lim, who founded Climb in 2010, said he had reached the point in his journey where he felt the firm needed leverage. He sought the advice of someone who had done this before, could show him the roadmap and was willing to support him.
So far, Lim has not been told “no” by NRT management.
Climb is part of NRT’s private label division — non-franchise, boutique firms that are highly specialized in their markets — joining the ranks of the Corcoran Group, Corcoran Sunshine, Citi Habitats, The Collaborative Companies and Laura McCarthy in certain St Louis markets.
“I do see myself as a maverick … yet because [Climb is] part of new private label strategy, I have [the] support of a large framework, but have the autonomy to make decisions,” Lim said.
Climb and Corcoran have forged a strong connection and send referrals back and forth between San Francisco and New York, said Lim. The brand leaders have all been curious to see the “new kid on the block,” he added.
“Climb is … more than buying and selling houses,” Lim said. “We are 20 years younger than the average agent. It’s exciting to us; we appeal to a different demographic.
“What it is doing is different from the entire Realogy portfolio, which is a good thing and why there is room for everybody,” he said.
One indicator of success: Agents
Climb hasn’t lost a single agent to Compass, the New York-based firm which came to the San Francisco Bay Area last year and hired high-profile local agents in its wake. Lim sees Climb’s track record of zero agent departures to Compass as a real testament to the success of the deal with NRT.
“That’s huge,” agrees Abbe. “Everyone in this town has lost someone to Compass.”
The brokerage has grown substantially since it was acquired. It doubled its number of agents to well over 250 and opened more offices in locations outside San Francisco, including Walnut Creek, Menlo Park and San Jose.
Taking advantage of an NRT brand
In one example of how Climb is using its new ownership to make interesting moves, the urban brokerage is putting an NRT brand — The Condo Store — to good use.
Lim and his team came up with the concept of a 500 square foot office/showroom where consumers could learn about a number of condo developments in one place.
Opened in April in San Francisco’s Mission Bay, the space was named the Mission Bay Condo Store. Prospective buyers come into the showroom to shop condos in the Bay Area using fun augmented reality and virtual reality technology.
“The developers love it,” said Lim, who is dedicating around 20 agents to the project.
Learning goes both ways
According to Real Trends president Steve Murray, who advised on the Climb deal, what makes for a good (business) marriage is not that both parties are the same but that they both share a passion for a common goal.
When they agree on what they want to achieve, and both parties bring their own strengths to the table, it can be a wonderful and good thing — the 2 + 2 = 5 equation, Murray said.
“In the case of Climb, NRT was looking for an extraordinary, young, vibrant leader to build a hip, cool, urban brand,” Murray added. “Chris wanted the chance to grow as a company without having to risk all that he had built.”
From its base in trendsetting San Francisco, Climb can teach the more traditional NRT brands about the importance and benefits of diversity, said Lim, whose firm has transgender, gay and immigrant agents.
“All these diverse people who are agents and employees find a place at Climb SF,” said Lim.
John Aaroe: Ready to weather industry challenges
In the case of Pacific Union International’s purchase of J.A.G. in December, industry veteran John Aaroe was looking around for a partner; he felt he had to be bigger to survive the coming years.
Murray also advised on this deal.
“With John, he and Mark (McLaughlin, Pacific Union International CEO) wanted to build a large, high quality brokerage in southern California, and with John’s relationships and skills and Pacific Union’s capital and scale, another great marriage is born,” Murray said. “The key is finding the right fit.”
Better for business
This ambitious merger brought the combined businesses, which also include The Mark Company, to a total sales volume of $10.15 billion — J.A.G.’s Los Angeles-based business had a sales volume of $2.5 billion in 2016, compared with Pacific Union’s $7.64 billion, before merging.
“My business partner and I felt there were too many companies in LA of approximately the same size — ones with eight to 12 offices, $2 billion to $3 billion sales volume,” Aaroe said, adding that these markets “can change on a dime.”
Aaroe’s long vision
The deal with Pacific Union wasn’t Aaroe’s first experience in the acquisition realm — he sold another business, John Aaroe & Associates, to the largest Prudential franchise, Prudential California Realty, back in 2000. Aaroe retired but didn’t enjoy the downtime, so he was quick to agree when asked to be a regional director for Prudential. He set up J.A.G. in 2009.
Aaroe knew what he wanted this time around for his business — a regional company, ideally.
“The right merger partner should bring tools into the company, have points of difference and be different from competitors going after the same business,” Aaroe said.
McLaughlin is forecasting that the merged company will reach $13 billion in sales volume for 2017, which would make it the largest independent brokerage in California.
This doesn’t seem overambitious when looking at J.A.G’s first quarter — its best ever — which comprised seven closings over $10 million, including the $65 million Danny Thomas Estate in Beverly Hills and the highest reported sale in the history of Malibu’s Carbon Beach at $48 million.
Eyeing other locations
Aaroe has ambitious growth plans in southern California for the luxury brokerage.
His three-to-five year plan is to expand the business to four times its current size. He’s interested in having a presence in Orange County, Santa Barbara, Playa Vista, Calabasis and Coachella Valley among other locations, and the merger is giving him the financial heft to do this.
After the merger, keep talking
Aaroe and McLaughlin talk every day — their markets (Los Angeles and San Francisco, respectively) are alike.
“It’s interesting; everyone thinks they are in unique markets, but across the U.S, they are compatible,” Aaroe said.
He and McLaughlin are both experiencing strong buyer demand and significant inventory problems. Housing affordability is another big issue for their clients.
For J.A.G., its 499 agents (453 at the time of the merger) are benefiting from Pacific Union’s strengths in tech and international connections, among other things.
“We have many more tools in our tool chest, and that’s the reason why we had such an outstanding first quarter; agents are taking hold of the tools,” Aaroe said.
Aaroe and McLaughlin are big believers in cross-pollination. Aaroe recently took some of his top agents to Napa to meet some of their Pacific Union colleagues, and they will keep doing this on a roster throughout the year.
In addition, Aaroe benefits from having Selma Hepp, vice president of Pacific Union’s Business Intelligence unit and chief economist, based in his Beverly Hills office.
If a Pacific Union agent wanted to come and do business in Southern California under J.A.G, Aaroe would be delighted to accommodate them because the cultures are so compatible, he said.
Looking for a merger partner? Here’s what to ask
Aaroe has some tips for brokerages thinking of merging with other likeminded businesses.
“By far the most important question to ask about is company culture,” he said. If culture is not in alignment, you don’t get the synergy factor, he adds.
One question to ask is, where on the priority scale do they place the professional agent?
“At Pacific Union and J.A.G., we feel that the agent is the most important asset that we have. We owe them customer service and the best tools, everything we can to advance further their career. That’s a little different from the culture of some other companies,” he said.
In addition to feeling out the culture, Aaroe suggests evaluating a potential company’s business plan and its willingness to reinvest. So many companies put shareholders and owners first, Aaroe said.
“If they don’t implement long term decision making, just make short-term decisions, that’s bad,” he said. “They have to be in it for a long time — you have to make commitments, make expenditures that are geared to being a survivor.”
Abbe’s advice to brokerage owners considering this tricky step is to take your time and get to know a company before jumping in “so that you really understand the personality and culture of the organization.”
He’s seen deals go wrong when they come together too quickly without due diligence; the unknowns eventually unravel the merged businesses. Sellers shouldn’t leave anything to chance, he advises. Get everything in writing because post-transaction, you are going to have a whole lot less leverage, Abbe warns.
And, he adds, “The seller needs to understand, no matter what, it’s going to be different. So go in with your eyes wide open.”