Collins
by Mike Collins
July 23rd, 2013

Homebuilder Buyouts

There has been a good deal of merger and acquisition activity lately among the largest publicly traded homebuilders. These buyouts have important implications for the door and window industry, some positive and some negative. Large homebuilders are profitable again and homes are selling at increasing prices. They are buying small, privately held homebuilders that lack the cash to survive – ironically – the recovery. The past 18 months have seen eight large builder acquisitions worth roughly $1.5 billion collectively.

The first positive implication is that big homebuilders are thriving because they have strong access to capital. Public builders issued $8.1 billion in debt last year. They are on pace for a record debt year in 2013, according to J.P. Morgan. Smaller builders, for their part, rely on small and regional banks that have been slower to resume lending. For a builder, lack of capital means an inability to acquire land on which to build homes, let alone to upgrade systems and equipment or invest in recruiting top hires. The fact that the largest builders have been able to consistently attract new capital – a nearly impossible feat a few years ago – is another indicator of the overall health of the new construction industry. For door and window manufacturers serving the residential new construction segment, the fact that the capital markets are again placing favorable bets on the housing industry is a very good sign.

Through organic growth and acquisitions, publicly traded builders are increasing their market share. According to Deutsch Bank, in 2007, the 10 largest publicly traded homebuilders accounted for just fewer than one out of four homes built in the U.S. By the first quarter of 2013, this group built nearly one out of three homes. This increase in market share by the largest builders has a generally negative net impact on the majority of door and window manufacturers. The largest builders typically buy from the largest door and window manufacturers. When these large builders make acquisitions, the small and medium door and window manufacturers that sold products to the small and medium builders being acquired are likely to lose their customer. Purchases will likely be consolidated to the larger builder’s suppliers. The “winning” manufacturer may face a larger customer who is able to demand deeper volume purchase discounts in an industry segment already typified by tough margins. If you are a door or window manufacturer serving the small and medium builders, you should diversify your customer base as much as possible. This will provide a stronger base of participation in the recovery and will mitigate the negative effects if the current builder merger and acquisition boom finds its way to your customer list.



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