Real estate’s competitive advantage during Life Sciences M&A

Evaluating real estate during the early stages of a merger or acquisition can improve price flexibility, identify savings and retain talent.

As the life sciences industry giants look for ways to extend their reach into the farthest edge of innovation, mergers and acquisitions (M&A) have become a strategy of choice. Almost every major industry player was involved in at least one merger, acquisition or divestiture over the past five years, with the goal of broadening their product lines and exploiting growth opportunities. Only some, however, have captured the “X factor” of price flexibility and value gained when corporate real estate is part of the dealmaking process.

After years of biopharmaceutical industry consolidation amidst intense investor interest, undervalued companies with little competition are more difficult to find. Target companies, naturally, look to create bidding wars to achieve the best possible price for their assets. As a result, it’s more difficult for acquirers to achieve returns.

Despite being the second largest cost item, real estate is often overlooked or at least minimized as a factor during the M&A process. Yet thoughtful, timely real estate strategies are essential to optimize a combined portfolio with access to talent and resources in tight real estate markets. An organization can add real value to a merger or acquisition by including real estate in the due diligence process, identifying savings opportunities and executing a strategic post-merger plan. 

Deals around the world

A new era of deal-making is accelerating among biopharmaceutical and genomics companies striving for a leadership position in next-generation therapies. Since 2012, 31 biotech companies have been acquired with valuations exceeding $1 billion each, according to Silicon Valley Bank’s Trends in Healthcare Investments and Exits 2019.

The growth in venture capital, IPOs and M&A activity reflects the investment community’s excitement about buying into therapeutic innovation. We see new treatment modalities unlocking potential cures, new products based on transformational biology, and platforms that can produce multiple first-or best-in-class programs. And they are all are raising expectations for new medicines to provide significant benefits for patients and an enormous upside for investors.

The top 10 pharma companies spent an average of 35% of their total R&D investments on M&A transactions over the last 10 years, seeking new opportunities and efficiencies in response to the patent cliff. Large-scale, transformative acquisitions defined 2018 and the beginning of 2019, such as Bristol-Myers Squibb’s $74 billion acquisition of Celgene and Takeda’s $62 billion acquisition of Shire Pharmaceuticals. M&A transactions in the life sciences totaled $198 billion in 2018, according to EY’s 2019 M&A Firepower Report.

EY’s report also finds that 48% of life sciences executives intend to pursue M&A within the next 12 months. However, much of the large-scale industry consolidation has already occurred. Upcoming transactions are more likely to involve divestitures and highly targeted add-on acquisitions rather than the megamergers of the recent past.

Optimizing the real estate advantage

Regardless of the underlying strategy, a merger or acquisition can be an opportunity to realize more efficient operations. While corporate real estate is only one of the key factors that determine the success of a merger or an acquisition, it can potentially punch above its weight. Once a transaction closes, the more quickly a company can rationalize the corporate real estate portfolio, the more quickly cost savings will translate into returns.

And, as any life sciences corporate real estate executive knows, real estate competes for the same organizational dollars as R&D—but innovation is the lifeblood of biopharmaceutical and medical device companies. M&A activity can impact the availability of capital for real estate and facilities, so it’s critical for CRE teams to both achieve operating efficiencies quickly and add top-line value through smart portfolio rationalization.

The impact of CRE integration

The experience of several major biopharmaceutical companies reveals the value of making real estate a focus during the due diligence phase. By engaging the CRE team early in the process, companies can help investors better understand the value and risk that may be hidden under layers of leases and building valuations.

Merck’s acquisition of Schering-Plough provides a strong illustration of how the value hidden within a CRE portfolio can become the “X factor” contributing to a transaction's success. When Merck executed the acquisition in 2009, the CRE 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.

Similarly, after Medtronic completed its $49.9 billion acquisition of Covidien in 2015, the company announced it expected to achieve $850 million in synergies by the end of Medtronic’s 2018 fiscal year. Savings would come from consolidating back-office personnel teams, optimizing distribution systems and supply chains, and cutting expenses like redundant office space. By first quarter 2016, the company had already been able to shutter 60 field offices, distribution centers and other facilities.

By the close of 2018, Medtronic had consolidated more than 100 non-operations facilities around the world. The company has since reduced its 90 manufacturing sites down to approximately 50.

For office locations, decisions were based not only on sheer costs, but also on larger concerns about talent strategy and retention. For example, Medtronic decided to close the former Covidien executive office building in Mansfield, Mass. The decision was part of the company’s strategy to convert to more flexible workspaces that give employees the option to work from home or remote locations.

Real estate at the table upfront creates price flexibility

It’s no surprise that the due diligence phase is one of the critical components of the M&A process. That’s why it’s important to evaluate real estate during the pre-offer and pre-close phases. At this time, stakeholders on the buy side can identify synergies and risks in the real estate portfolio. Each potential cost savings discovery made during this process can improve acquisition price flexibility and earlier identification of potential savings – and help the acquiring organization more accurately value the company.

After the negotiations are over and the deal closes, all cost-saving opportunities identified during evaluation must be translated into real benefits. By realizing these synergies and savings sooner rather than later, an organization will be able to increase return on investment.

Having good data, processes, tools and expertise on hand to help identify actionable opportunities and drive value is critical. Additionally, having a clear understanding of the M&A goals and objectives will assist the teams in evaluating what can be done to achieve them.

Asking the right questions can target the potential savings. For example, in which market do portfolios overlap? Where can real estate assets be combined? What is the relative value of surplus assets? What hidden portfolio risks might constrain the ability to realize synergies? What could a fully integrated portfolio look like?

The recipe for post-merger or acquisition success

The right integration plan will drive post-merger or acquisition success. A few necessary components will drive value after due diligence assessment.

First, it’s key to establish a program management function and a governance framework to manage all of the real estate integration activities after a merger or acquisition. An effective framework will include a single point of contact to oversee portfolio rationalization. Putting one experienced person in that oversight role will improve the probability of success and ensure efficiency, timely dissemination of information and greater transparency.

It’s equally critical to have a team of the right players in the right positions, with the bandwidth to focus on real estate M&A execution and integration. Merger integrations have many moving parts, so it’s helpful to have an internal team of partners who have a breadth of experiences in dealing with real estate in all phases of a merger or acquisition. Focus is essential—a common mistake is for organizations to deploy team members who must retain other responsibilities and don’t have the necessary capacity to perform execution and integration activities.

Develop and implement a change management program and communications plan

Mergers and acquisitions entail broad change, including changes in facilities operations and, often, changes in where employees work. Through a thoughtful change management program, an organization can identify and predict the source, degree, type and intensity of potential concerns and resistance, and can accelerate the change by strategically reducing that resistance.

At its heart, change management is based on effective communications throughout the transaction and post-integration process. Employees who are aware of the need for change and want to participate in change will help advance success. In a typical communications program, leaders will explain why a change is necessary and what happens without it; describe the desired end state; clarify the change process; and convey a consistent message through multiple channels. 

Create a playbook to develop structured and efficient projects

With all of the moving parts in a post-merger or acquisition, an accessible template for organizing individual projects, along with a collection of standardized tools, best practices, lessons learned and “how to” information, will help streamline integration activities. Documentation and a playbook will improve preparedness as issues emerge and increase response times. A playbook will also increase work efficiencies and internal coordination, as well as provide a common organizational framework.

No signs of slowing down

M&A activity is likely to continue, if not accelerate, in the coming years. Many companies are still tackling patent expiries, competitive headwinds, weak pipelines and growing technology needs. When M&A pressure mounts, the organizations that build CRE into their due diligence and post-transaction strategies will be best positioned to maximize the X factor of real estate savings and value.

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