Why is a reputable real estate valuation vital to the M&A process?

The closing months of 2019 saw a surge in ‘megamergers’, each worth more the $10 billion. According to Fortune and Business Insider, global M&A deals reportedly reached $3.9 trillion, with the likes of a $16.2 billion agreement between LVMH and Tiffany, a $47.5 billion acquisition of Anadarko by Chevron and the $21.4 billion purchase of GE’s biopharma business by Danaher. In real estate terms, LVMH alone reported values up to €2.6 billion of land, €2.4 billion of property and €637 million of investment properties in their 2018 financial statements, highlighting the importance of real estate valuations in the M&A mechanism.

As one of the top three items on any balance sheet, owned and leased real estate is a crucial component of a company’s financial constitution. On the one hand, a company’s real estate holdings can deliver long-term advantages, contribute to earnings, and impact the bottom line. On the other hand, they can have a profound and adverse impact on its corporate debt-to-equity ratio and constrain a company’s ability to finance growth. Moreover, M&A projects bear more inherent risk than organic growth strategies, with some failing to create synergies and reducing shareholder value – therefore, a reputable valuation is essential to limiting these risks.

M&A Processes

Corporates are the world’s largest real estate owners, with the Fortune Global 500 reporting $100 billion worth of real estate on their books. Whether it serves as an inflation hedge, a diversification tool or a way to unlock the benefits of owner-occupation, real estate represents a large constituent of company value. Consistent and careful (re)valuation of company real estate allows for a properly informed merger or acquisition strategy, acting as the first in many steps and towards avoiding past failures. In essence, real estate valuations grant buyers more strategic manoeuvrability, as the information provided to them can be deployed in a number of ways be it executing Purchase Price Allocations (PPAs), identifying monetisation/value-add opportunities or conducting asset deselections as innovative and return-optimising solutions can all be enhanced by detailed asset pricing.

A Brief Glance Ahead

2020 M&A is likely to be driven by companies looking to strengthen their core businesses. A dominant theme of 2019 was one of corporate clarities, meaning companies have begun to reflect on their own “core competencies” and scrutinise the use of their balance sheets. Reputable valuations of their real estate holdings are essential in informing that method of scrutiny. Assuming the macro-economic environment does stabilise, we may see an increase in M&A activity due to a rise in corporate takeovers.

If uncertainty continues and economic growth continues to disappoint, a sector to watch is private equity, which may trigger increased M&A activity. Having raised $1.3 trillion in 2019, according to JP Morgan, it can be expected to be a key driver of M&A volume and frequency.

In the short term, one can expect more protectionist strategies, as private equity houses aim to consolidate portfolios and control damage. These firms may adopt more adventurist policies later on in the year depending on the actual impact, which remains to be seen. With this potential source of investment, the pertinence of accurate real estate valuations becomes even more obvious.

Whichever way the market may turn in the current environment, corporate decision makers will need the strategic clarity and, the knowledge to navigate ever-changing regulatory environments and continued uncertainty in financial markets. This is likely to dictate the level of M&A activity as deals will undergo enhanced scrutiny and due diligence.