David Simon doesn't like to take no for an answer. The chairman and CEO of Indianapolis-based Simon Property Group didn't grow his company into the nation's largest public real estate firm, with 382 properties, by being a shrinking violet.

Simon (NYSE: SPG) has amassed 162 regional malls, 41 Premium Outlet Centers and 16 Mills retail centers generating combined annual sales of more than $60 billion. Among shopping center owners, the company is No. 1 in gross leasable area, with 245 million sq. ft. It also ranks as the nation's largest real estate investment trust (REIT) by market capitalization.

But Simon still has an appetite for growth. General Growth Properties, that is. Although his $10 billion offer to buy the nation's second-largest mall owner was rejected in February, Simon's CEO has no intention of backing down as the Chicago-based REIT struggles to emerge from Chapter 11 bankruptcy.

Simon can afford the prize he covets. At a time when many other commercial real estate companies are taking drastic steps just to survive the effects of a devastating recession and credit shortage, Simon has stockpiled a war chest of $7.4 billion, including $4.3 billion in cash and $3.1 billion in corporate credit. “That firepower is available for something like a General Growth, among other things,” the CEO says.

He will use some of the capital, along with other financing sources, to buy Baltimore-based Prime Outlets Acquisition Co. and its 22 stores for $2.3 billion, a deal scheduled to close later this year.

“It's got to be smart growth,” says Simon. But he is determined to expand the REIT's portfolio. “I think our shareholders would like to see us grow the company. We certainly would like to see us grow the company.”

But cautionary tales abound, demonstrating the downside of what can happen when a commercial real estate firm grows too quickly. General Growth's plunge into bankruptcy last April, the largest real estate failure in U.S. history, is often blamed on its $14.2 billion acquisition of mall owner Rouse Cos. in 2004, which was highly leveraged. General Growth Chairman John Bucksbaum, however, said in February that the unavailability of credit to refinance maturing mortgages caused the collapse.

Simon is well aware of the dangers of expansion. “We think about them all the time,” he says. “You've got to learn from history.” But he has a duty to shareholders to maximize their investment. “It's a public company. The expectation is to grow, but don't do it to the point where you risk the foundation. We've seen that before in our industry. We certainly have no intention of following in those footsteps.”

Shoes of the father

The footsteps David Simon follows are those of his father, the late Melvin Simon, who became a legend in Indianapolis after he founded the real estate company Melvin Simon & Associates in 1960 with his brother Herb. Melvin Simon developed grocery-anchored, open-air centers and shopping plazas, signing major tenants such as Sears before building the first enclosed malls in Indiana.

The company grew steadily, riding a wave of suburban development as it expanded into Illinois and Michigan and branched into Western states. In the process, the developer helped to shape the American postwar landscape. Known for his eclectic interests and gregarious personality, Melvin Simon started a film production company, and with his brother bought the Indiana Pacers basketball team.

In the meantime, David, the oldest son, graduated from Indiana University in 1983 and earned an MBA from Columbia University's Graduate School of Business in 1985. He took a job at First Boston Corp. and in 1988 moved on to Wasserstein Perella & Co. in New York, a Wall Street investment banking firm specializing in mergers, acquisitions and leveraged buyouts.

Bruce Wasserstein, a former banker at First Boston, was a prolific dealmaker and a philanthropist. Wasserstein, who died in October at 61, has been credited with turning major takeover deals into high art, using strategies more commonly associated with battlefields, according to an obituary.

Simon quickly absorbed Wasserstein's lessons and strategies. At 29, he was a vice president at Wasserstein Perella when he left to join his father's firm in 1990 as chief financial officer.

It didn't take the newcomer long to put his own ideas to work. He started a program of upgrading the company's properties, and in 1993 led the ambitious project to take the family firm public with an initial public offering (IPO) of $840 million — setting a record for the largest IPO in the country at the time, according to The National Association of Real Estate Investment Trusts. With that feat, Simon Property Group was formed. Two years later, in 1995, David Simon became CEO.

It has been a long road, acknowledges Simon, now 48. And the company he guides has a great deal to show for the journey. “We went from $2.5 billion of assets to $50 billion of assets over the last 16 years,” he says.

Along the way, he acquired some firms that bore the names of old family dynasties that had reigned in the retail property realm for generations. In 1996, just a year after his promotion to CEO, he steered the company through a bold, $3 billion merger with rival mall owner DeBartolo Realty Corp., founded by the late Youngstown, Ohio developer Edward DeBartolo.

The merger created the largest U.S. mall company at the time, Simon DeBartolo Group, with 111 regional shopping centers, 66 community centers and six specialty centers. It gave the company a presence in 32 states. In 1998, the company dropped the DeBartolo name and again became Simon Property Group.

Growth spurt?

If David Simon prevails in absorbing General Growth's 200 regional shopping malls, it would bring the REIT's portfolio to more than 500 malls and the company would command a hefty 40% of the mall market, analysts point out.

Extending from the Ala Moana Center in Honolulu, where Chanel, Coach, Fendi and other upscale shops draw 42 million visitors annually, to the Staten Island Mall with its 2 Cute, Ann Taylor and Disney stores, General Growth encompasses more than 24,000 retailers.

But Simon is not the only company angling for General Growth. Rival Brookfield Asset Management, based in Toronto, reached an agreement with General Growth in February to invest $2.6 billion and acquire a 30% stake in the company. Undeterred, Simon Property issued a public statement Feb. 24, calling the rival plan a risky equity play and an inferior proposal.

Simon's offer would give the bankrupt company $9 billion in cash upfront, rather than just $2 billion and “the hope of additional cash down the road,” scoffed Simon's statement.

General Growth's initial response to Simon's offer was to thumb its nose and call $9 per share insufficient. The flurry of public letters and terse exchanges has made for great theater, but Brookfield, for one, is unfazed.

“We're very pleased. This is quite a step in the right direction,” says Denis Couture, senior vice president of Brookfield, which manages $40 billion of global property, infrastructure and financial assets.

Bankruptcy Judge Allan Gropper's March 3 decision to give General Growth four more months to develop a plan to emerge from bankruptcy works in Brookfield's favor. If its proposal is approved, it would be a coup for the Canadian company. “That would give us a platform in the U.S. that we have coveted for a number of years,” says Couture.

Old rivalries resurface

A Brookfield victory would also be payback, of sorts, for a run-in with Simon several years ago. In 2007, Brookfield consented to buy The Mills Corp., a shopping mall REIT based in Chevy Chase, Md. “We made an agreement with them and at the last minute in the bankruptcy proceeding, Simon Property Group [submitted a larger bid],” says Couture. “We had a right to match it and decided not to.”

Old memories may not fade. “Brookfield has been trying to figure out a way to snatch the company away from Simon,” asserts Ralph Block, a REIT historian and author in Westlake Village, Calif. As for General Growth, it wants to remain an independent company, says Block. “They've been looking for Brookfield to help them stay independent.”

Simon may team up with New York-based private equity firm The Blackstone Group to acquire all or part of General Growth, says Block. “Blackstone's muscle means that it would reduce the risk that Simon could be overexposed after swallowing the company.”

The friction between Simon and General Growth isn't surprising, says Dennis Mitchell, vice president at Sentry Select, a wealth management company based in Toronto. “These two families are rivals,” he says of the Simons and Bucksbaums.

“If Simon Property were to take over General Growth, they would have no use for the Bucksbaum family. They would have no use for most of the existing executive and senior level management. So the Brookfield Asset Management alternative sort of preserves the Bucksbaums as the managing family or influential shareholder and allows them to continue their legacy,” says Mitchell.

With many old retail real estate dynasties, preserving a family name is worth fighting for. “You start talking about family-created businesses that have been around for 40, 50 years, those sorts of things matter,” says Mitchell.

But to prevail, the Bucksbaums would have to outfox David Simon, and that won't be easy. “He doesn't like to lose. He's very, very competitive,” says Mitchell. “For him, winning means that he's got better assets and he's making money.” If General Growth turns down Simon's offer, says Mitchell, “I think they'll take it to court.”

But David Simon doesn't always win. “The only deal he wanted that he didn't get was Taubman,” says Barry Vinocur, editor of the newsletter REIT Wrap, based in Novato, Calif.

In late 2002 and 2003, Simon made a hostile offer to acquire mall owner Taubman Centers, based in Bloomfield Hills, Mich. The offer came after founder Albert Taubman resigned as chairman following his conviction and brief imprisonment in an antitrust case involving price-fixing at auctioneers Christie's and Sotheby's, where he had been chairman.

In a bitter, 11-month fight for control of the malls, Taubman managed to get a law enacted prohibiting Simon's planned $1.7 billion takeover and Simon withdrew. “When the history is written people will have to remember that Taubman escaped Simon's clutches by getting the law changed in Michigan,” says Vinocur, who calls David Simon a “superb” leader. Otherwise, Simon might have won, he adds.

“Anybody that's in that business will tell you that he's a tough-as-nails competitor. He's a take-no-prisoners type of guy,” says Vinocur. “When you go to war, you want a general out in front who's experienced and able to lead the troops into battle. And that's what David is.” Vinocur has known Simon for 20 years and watched him become a dominant force in the REIT industry.

Retail malls of the caliber owned by Taubman or General Growth only rarely become available. They represent business and real estate prizes that took family dynasties generations to build, and it stands to reason that competition for them will be rough.

“This is like the Super Bowl,” says Vinocur. “When guys get to the Super Bowl, they come to play. They know they're going to get knocked around, they know they're going to knock some other people around. This is the big game.”

Denise Kalette is senior associate editor.

Asia intrigues Simon as venue for expansion

As Simon Property Group looks for new acquisitions and projects, some of them undoubtedly will be in Asia, according to David Simon, chairman and CEO of the Indianapolis-based real estate investment trust (REIT).

“We have a very strong outlet business in Japan, and that continues to prosper. We also have a wonderful outlet center in South Korea. We're looking at another development opportunity there,” says Simon. “I like the outlet business in Asia. We'll continue to hopefully broaden that appropriately.”

It's unlikely that the REIT will open shopping centers or malls catering to middle-class consumers in China in the immediate future, however. In late 2009, Simon sold its joint venture interest in the development and operations of its shopping centers in China to its Chinese partner, SZITIC Commercial Property Co. Ltd., for about $29 million. Simon lost some $20 million on the venture.

The Chinese middle class is not yet ready for discretionary spending at shopping centers, he says. “The high-end spending in major metro markets in China has obviously been successful. But the middle-market consumer, kind of the suburban shopper there, still needs increased disposable income, we think, to support a lot of the retail development activity that's transpired there.”

He expects the market to improve with time. “It's a great opportunity, but you've got to be very patient for that consumer.”

In Europe, meanwhile, Simon and Montreal-based developer Ivanhoe Cambridge agreed to sell their interest in Simon Ivanhoe, headquartered in Paris, to investor and developer Unibail-Rodamco, also based in Paris. The portfolio is valued at 715 million euros ($U.S. 970 million) and includes assets in Poland and France. Simon expects to gain $300 million this year when the sale closes.

“We're always looking to allocate capital appropriately,” says Simon. “We thought it was a good price and we can reallocate that capital toward higher returns. And we feel those [returns] right now are in the U.S.”

His company is buying Baltimore-based Prime Outlets Acquisition Co. for $2.3 billion. Other purchases will depend on the market and price.

“We're not just a high-end mall company, or a mall company or a strip center company. We have exposure to all forms of retail real estate,” says Simon. “It's important because retailers themselves are very diverse. It just boils down to having good, quality real estate.”
Denise Kalette

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