CRANFORD, N.J. - Mack-Cali Realty Corp. and Dallas-based Prentiss Properties Trust have entered into a merger agreement that will create the fourth largest U.S. office REIT, with Prentiss merging into Mack-Cali. The $2.3 billion transaction is expected to close in the fourth quarter, pending shareholder approval.

The acquisition of Prentiss will add more than 19 million sq. ft. of primarily suburban office properties to Mack-Cali's portfolio, increasing the portfolio size by 68% to 47.7 million sq. ft. Upon completion of the merger, the combined companies will have a market cap of $5.9 billion and a portfolio of 457 properties in 16 states and the District of Columbia, with more than half of the portfolio in the Northeast. Prentiss' third-party management company, which manages more than 25 million sq. ft., is also part of the transaction.

For Mack-Cali, the deal provides entry into the Chicago market and adds depth in the Philadelphia, Dallas, San Francisco and Washington, D.C., markets.

"The strategic benefits of this transaction go far beyond adding diversity, liquidity, scale and increased operational efficiencies to our combined portfolio," says Mitchell E. Hersh, CEO of Mack-Cali. "This transaction is about depth - depth in strategic geographic markets and depth in management. This acquisition, given the depth of management in some of the strongest macro economies in the United States, layers very well."

Hersh also cites a long-standing relationship with Prentiss chairman Michael Prentiss and president Tom August, who will serve as COO of Mack-Cali, as advantages to seamlessly integrating the two companies.

The transaction values Prentiss at approximately $2.3 billion based on Mack-Cali's closing stock price of $27 per share on June 27, including $1 billion in debt and $245 million in preferred equity. Mack-Cali will issue approximately 36.6 million new common shares in the transaction.

Michael Prentiss will be appointed co-chairman of Mack-Cali, as the New Jersey-based owner/developer has a number of other management changes as well. John J. Cali, 81, chairman of the board of Mack-Cali, will become chairman emeritus, and William L. Mack, director, will be appointed co-chairman to serve with Mr. Prentiss. Brant B. Cali, executive vice president, director and COO, and John R. Cali, executive vice president of development, have decided to leave the company to pursue other interests. John R. Cali will be appointed to the board of directors, where he will replace Brant B. Cali, who resigned as director of the company. The Cali family's stock holdings will remain invested in Mack-Cali.

Both Moody's Investors Service and Fitch affirmed Mack-Cali's investment rating and looked favorably on the merger, citing the added geographical diversity that the transaction brings. On the other hand, many analysts changed Mack-Cali's rating from market outperform to market perform because the merger is not expected to have a positive impact on earnings until 2002.

"The reaction of the Street has been that it's a dilutive transaction, and I submit that this a one-time investment in the future," says Hersh. "Strategically, this is exceptionally sound for the company. Clearly, our stock price will reflect the ability now to have a higher sustainable growth rate as a combined company, and that's what I'm telling analysts.

"You have to look out beyond [the short-term] a little bit," concludes Hersh.