Brokerage Consolidation Coming, But How?

There's widespread agreement that the sharp market downturn will cause significant consolidation in the brokerage arena, but the absence of natural merger partners may slow the process.

Rumors about possible mergers have swept the industry in recent weeks. The drumbeat got so loud that Cushman & Wakefield and Jones Lang LaSalle last week separately sent out internal memos to their workforces aimed at quelling speculation about imminent deals.

But brokerage executives privately say that mergers or bankruptcies become more likely with each passing month. Most brokerages have seen property-sales volume drop by 60-80% since the start of 2008. And the hope that a flood of distressed properties would fuel activity has dimmed for now.

"The question becomes, how long can you sustain an 80% drop in business?" said a top executive at a national brokerage.

The tough times have spurred firms to informally discuss possible mergers with rivals. "In this market people are considering things they never would have thought about before," said a senior managing director at one national brokerage.

Given the level of distress, just about every brokerage is seeking to explore possible alliances, though the discussions often go nowhere. Said one senior executive at a major brokerage: "Everyone talks to everyone. It doesn't mean a deal is coming."

Much of the speculation has centered around Cushman, which has endured hundreds of layoffs and had to be shored up by its Italian parent after posting a $26 million loss last year. Cushman executives in recent months spoke informally on an exploratory basis separately with Marcus & Millichap and Grubb & Ellis executives about possible mergers, but the discussions did not advance, according to people familiar with the matter. A Cushman spokesman denied that any discussions occurred. Marcus & Millichap and Grubb spokesmen said their firms do not discuss merger speculation.

The two other brokerages in the Big 3, CB Richard Ellis and Eastdil Secured, have their own problems.

CB's staff last year worried that a crushing $2.4 billion debt load and plummeting revenues could send the firm to the auction block or even into bankruptcy, but CB quieted those fears by renegotiating the terms of its debt in March.

Eastdil has been hit especially hard by the downturn because it focuses on the upper end of the market, where activity has come to virtual halt. Eastdil's near-90% drop in business has been the worst among large firms. But the company hasn't been the source of merger speculation because of the perceived deep pockets of parent company Wells Fargo. Also, Eastdil's revenues are expected to be bolstered from workout assignments resulting from Wells' takeover of Wachovia.

The big holdup to consolidations, insiders said, is there are few natural matches, unlike during the last wave of mergers and acquisitions in 2006 and 2007. Back then, Grubb and the parent of Triple Net Properties teamed up, CB acquired Trammell Crow for $2.2 billion and Ifil of Italy bought a majority stake in Cushman for $625 million.

Those transactions provided obvious synergies. For example, Grubb was able to add Triple Net's tenant-in-common and advisory practice to its product menu overnight. And CB was able to expand into property management by absorbing Trammell.

But what natural synergies exist between brokerages now? Market players said Jones Lang, for instance, would like to expand its capabilities for placing debt and equity. But while Cushman has a debt and equity placement arm, Sonnenblick-Goldman, that operation probably isn't big enough for Jones Lang to justify also absorbing the hundreds of brokers and dozens of offices at Cushman.

Mid-tier firms, like Grubb, might want to buy one of the Big 3, but it's unclear whether they have the wherewithal to do that. And most industry insiders say it's impossible to imagine any buyer paying a premium to take over a company - as in Ifil's deal for Cushman or CB's acquisition of Trammell. A more likely scenario is that two brokerages would merge with little or no money changing hands in order to gain economies of scale by consolidating overlapping infrastructures.

It was evidently employee jitters over the possibility of such a consolidation that prompted Jones Lang to distribute its memo last week. Although it has also been hurt by the downturn, Jones Lang is viewed as one of the few national brokerages positioned to be a possible buyer. Jones Lang employees became nervous because of talk that the company might combine with another major brokerage, a move that would result in steep job cuts. But many market players question whether the timing is right for Jones Lang to get involved in a big merger, because the firm is still digesting last year's $727 million takeover of Dallas-based Staubach Co.

One wildcard is whether a foreign firm eager to enter or expand its presence in the U.S. might swoop in and snatch a big brokerage at a discount. While such a move wouldn't lead to consolidation, it would prop up an existing player. Two London-based firms, Savills and DTZ Holdings, appear to be interested in gaining a stronger U.S. presence. Savills acquired brokerage Granite Partners of New York in 2007. DTZ bought a 50% stake in brokerage Rockwood Realty of New York for about $45 million in 2006 and rebranded the firm DTZ Rockwood - although there are signs that the parent is now backing away from Rockwood (see article on Page 3).

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