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JLL shares three strategies to use corporate real estate to increase returns during a merger or acquisition
CHICAGO, March 11, 2014 – When Merck acquired Schering-Plough in 2009, the corporate real estate team reduced the combined companies' occupancy costs by $300 million within three years—making a significant contribution to the $3.5 billion merger synergy goal. For Merck, the value hidden within the corporate real estate portfolio was the "X factor" that contributed to the transaction's success. According to JLL experts, biotechnology and pharmaceutical companies, including small and mid-size firms, can ensure a positive M&A by using three primary strategies: engage the real estate and facilities function early; identify immediate integration cost savings; and be diligent about change management for long-term success.
"While real estate is only one of the key factors that determine the success of a merger or an acquisition, it is often the 'X factor' where contributions that surpass expectations can be found," says Roger Humphrey, Executive Managing Director of JLL's Life Sciences team, who led Merck's corporate real estate department during the Schering-Plough merger. "When used strategically, corporate real estate can help a buyer edge out the competition for the greatest return on the deal."
Driven by consolidation among the global pharmaceutical companies from 2008 to 2011, M&A in the biopharmaceutical sector is now occurring more frequently among large biotechnology and speciality pharmaceutical companies, according to Ernst & Young's January 2014 The Shifting Balance of Firepower. Overall, executives in the sector anticipate significantly more acquisitions in 2014 than in 2012 or 2013.
To better achieve the goals of these transactions, Humphrey recommends three primary corporate real estate strategies for biotechnology and pharmaceutical companies:
1) Engage early: Bring in the corporate real estate team during due diligence.
A critical component of the M&A process, the due diligence phase is one that entails the highest risk. Engaging the corporate real estate team during due diligence will help investors better understand the value and the risk that may be hidden under layers of leases and building valuations. Dedicated teams that understand the unique characteristics of laboratory and specialized manufacturing facilities should do this work, so that key environmental or business risks are raised and evaluated before the transaction closes.
"Because of regulatory restrictions concerning an M&A, a company will never have all the advance detail it wants, so it is important to focus on the data that you do have in-hand rather than worrying about the data that you can't reach," advises Humphrey. "Having an external real estate partner gave us fast access to real-time global market intelligence to support our thinking."
2) Identify immediate cost savings: Know in advance where redundant facilities can be quickly consolidated when the deal is closed.
From pre-offer to post-close, the corporate real estate team must be equipped with robust business intelligence, processes, tools and expertise to assess the corporate, laboratory and manufacturing real estate. Merck's corporate real estate goal was to build long-term productivity by creating highly-efficient and effective business and laboratory locations and workplaces, rather than focusing on short-term savings from high-value site dispositions.
"Companies need to ask the right questions during the M&A due diligence process to drive the most value from the corporate real estate portfolio — not just cut costs," says Humphrey. "What locations will attract the best and the brightest scientists? Where do portfolios overlap? What is the value of surplus facilities? Are there hidden risks in the corporate real estate portfolio that will hinder integration? What will the fully integrated portfolio look like, and how soon can we get there?"
3) Be diligent about change management: Execute for long-term post-transaction success.
After a deal closes, the faster an organization can rationalize the corporate real estate portfolio, the faster cost savings will translate into returns. With the right capabilities, the team will be able to provide scenarios for the future portfolio in a matter of days.
"Merck's strategy was to identify a three-wave process to achieve significant savings early in the initiative by focusing on the largest sites first," said Humphrey in a post-merger article published in CoreNet Global's May/June 2012 The LEADER. "We used a standard analytical approach to, for example, consolidate operations in Tokyo to improve workplace productivity, enable collaboration and capture more than $8 million in savings. Using the same structure analysis, we achieved run-rate operational savings of more than $2 million by consolidating out of high-cost office space."
A company should create a real estate program management office and a governance framework to streamline real estate integration activities following the closing. This should position team members for success through a playbook that incorporates standardized tools, best practices, lessons learned and how-to information.
However, the program management function will only be as successful as the execution team, which, ideally, will include change management specialists, workplace strategists, CPAs, legal specialists, architects, project managers and commercial real estate brokers experienced with M&A. Also important is the systematic application of a change management program focused on the people who will be affected by real estate decisions, integrated with the larger corporate change management program.
The real estate team must be equipped to manage a potentially large and complex portfolio of diverse property types. Beyond the standard office and laboratory facilities, the portfolio will likely also include data centers, a product distribution network, traditional and biologic manufacturing facilities, global sales team offices in emerging markets, and other specialized properties.
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A leader in the real estate outsourcing field, JLL's Corporate Solutions business helps corporations improve productivity in the cost, efficiency and performance of their national, regional or global real estate portfolios by creating outsourcing partnerships to manage and execute a range of corporate real estate services. This service delivery capability helps corporations improve business performance, particularly as companies turn to the outsourcing of their real estate activity as a way to manage expenses and enhance profitability.
JLL (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $4 billion, JLL operates in 75 countries worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3 billion square feet and completed $99 billion in sales, acquisitions and finance transactions in 2013. Its investment management business, LaSalle Investment Management, has $47.6 billion of real estate assets under management. For further information, visit www.jll.com.
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