By Ken Ashley
(ATLANTA) July 20, 2010
Dana Mattioli writes a great article in the Wall Street Journal today (reprinted below) suggesting that companies are finally ready to spend some of the $1.84 Trillion in assets they have squirreled away. One of the executives in the article describes the “comforting” feeling of having all that cash available. Talk about a good problem to have.
We have gotten calls from clients over the past 60 days who are on the prowl for companies to purchase, so we can confirm we see the trend occurring as well. So the question is what can a real estate director do to support the CFO and team in evaluation transactions? What kind of things should they be on the lookout for?
Of course, alerting the CFO that leases are overmarket is easy. Taking a holistic view of a target company is more challenging but clearly the right way to approach the deal and create real value for the enterprise. Here’s a high level check list for due diligence:
- Complete the requisite “over/under” analysis comparing rates to market. Long term leases that are over market can be used as leverage to reduce the purchase price.
- Check the debt stack of landlords. Make sure the assets are stable and that your SNDA‘s are in place. Unstable situations can also be used as a chit on the purchase price but in many circumstances can be worked through.
- Review termination options, contraction and expansion options. Flexibility is a good thing especially in M&A deals.
- Check sublease language and make sure it is reasonable. Restrictive language can affect the deal price.
- Make sure that renewal options are reflective of market.
- Look for hidden value in leases such as the ability to early renew post closing. Many times investment bankers are focused in other areas so you can significantly reduce cost (just don’t tell the other side!)
Of course, the more data you have, namely leases, the more through evaluation you can perform. In any case, mentioning the idea to executives and offering to be a resource is a great place to start. I would bet in many cases CFO’s and other deal leadership assume that the investment bankers are going to handle all the details.
Clearly there is a role for corporate real estate in these situations as well – and a way to get yourself invited to the closing dinner!
Here’s the article:
CEO’s Get Ready To Tap Cash Piles
By Dana Mattioli
The root of all deals
In what may signal an important shift, some chief executives say they are ready to start spending the mountains of cash they have stockpiled over the past year, despite lingering worries about the global economy.
Many companies, stung by the financial crisis, have hoarded cash as a cushion against continued economic turmoil. But their curbs on spending and investing have been damping economic growth.
At the end of March, nonfinancial companies in the U.S. were sitting on $1.84 trillion in cash and other liquid assets, up 26% from a year earlier, the Federal Reserve reported. In May, 43% of U.S. corporations had larger U.S. cash and short-term investments than six months earlier, according to a survey of 337 senior finance and treasury executives by the Association for Financial Professionals.
Now, some corporate leaders are starting to dip into their coffers, seizing the chance to make favorably priced acquisitions and expand and upgrade facilities.
“Our cash is piling up, and we’re looking at the capital to fuel growth going forward,” said Boudewijn Beerkens, chief financial officer of Wolters Kluwer NV.
The Dutch publishing company was holding €409 million, or roughly $530 million, of cash as of Dec. 31, up from €345 million a year earlier.
In a recent interview, Wolters Kluwer Chief Executive Nancy McKinstry said she is hoping to use some of that money for acquisitions. Last year, business owners were reluctant to consider selling their businesses because they feared they wouldn’t get good prices, Ms. McKinstry said. She expects the improved economy this year will make them more willing to sell.
Mr. Beerkens said Wolters Kluwer wants to make acquisitions in the $100 million to $200 million range by year end, and is looking for software firms specializing in tax, accounting and health-care information.
Meanwhile, Pep Boys-Manny, Moe & Jack plans to use its cash to expand its network of tire and service centers, according to Chief Executive Officer Mike Odell. The Philadelphia-based auto-parts and service retailer had cash holdings of $87.8 million as of May 1, up sharply from $21.3 million a year earlier.
By the end of its fiscal year in January, Pep Boys plans to open around 40 tire and service centers, up from the about 25 it opened the previous year. Each of those centers will cost the company about $450,000 for equipment, inventory and facilities improvements.
Mr. Odell said low prices for leasing commercial real estate make this an attractive time to open the new outlets.
Last year, Pep Boys made a $4 million acquisition of a 10-store Orlando, Fla., tire-and-automotive chain and converted it into auto-service centers. Mr. Odell said he would like to find similar small acquisitions, but that he is open to buying larger chains of up to 100 stores.
“It’s all about being opportunistic,” says Mr. Odell. “If the opportunity is there, we’ll do it via acquisition.”
Other corporate leaders share that inclination. Merger-and-acquisitions activity is up this year, as are all-cash deals by value. Companies globally announced $1.2 trillion of deals in the first half of 2010, of which 66% by value were all cash, according to data provider Dealogic. That compares with $1.1 trillion in deals a year earlier, of which 54% were all cash.
Cree Inc., a Durham, N.C., maker of LED lighting, has boosted its cash holdings to finance expansion, said Chief Financial Officer John Kurtzweil. The company had $988 million in cash and short-term investments as of March 28, up from $367 million a year earlier.
Mr. Kurtzweil said the company will spend more than $250 million on factories, equipment and expansion efforts in China and North Carolina this year, $150 million of which it spent in the first half of the year.
In June, Cree bought a 60,000-square-foot office in North Carolina for its expanding sales and marketing staff. It also is renovating another space for research and development.
Mr. Kurtzweil said Cree is scouting for companies that create the technology for LED components. He said he prefers using the company’s own cash for acquisitions, rather than being “beholden to any banks” for financing, partly because he is wary of banks’ fees and approval bureaucracies.
Computer Sciences Corp. had $2.8 billion in cash as of April 2, up from $2.3 billion a year earlier, and is looking to ramp up spending on acquisitions, said Chief Financial Officer Mike Mancuso.
The information-technology-services company, based in Falls Church, Va., expects to spend an annual average of between $250 million and $500 million over the next three years on acquisitions in the cloud computing, health-care and cyber-security businesses, he said.
Mr. Mancuso calls the economic recovery “tortoise paced,” but believes it still is important to invest in future growth. Although Mr. Mancuso is looking to ramp up growth, he also concedes, “It’s a comforting feeling having that cash available.”
Indeed, some companies said they have built up their cash piles mainly as a defense against further economic turbulence.
Office-supply retailer OfficeMax Inc., based in Naperville, Ill., had $540 million in cash at the end of the first quarter, compared with $149 million a year earlier.
“In the event that there was another downturn we wanted to be sure we had adequate liquidity to cover ourselves,” said OfficeMax Chief Financial Officer Bruce Besanko.
Mr. Besanko said he is open to changing the company’s position once the economy improves further, but first he is keeping an eye on the unemployment rate, especially among white-collar workers, and small business formation.