Hush! Is that a merger I spy?
It's not quite the Twilight Zone, but imagine if you will, that if, for once, there was a merger and nobody reacted? Strangely enough, that's been the case, as of presstime anyway, with the announced merger of San Francisco-based LoopNet and Los Angeles-based PropertyFirst.com.
Now this is no smallby any standards, and even if exact financial terms were not disclosed, you'd quite naturally think people would be moved. After all, these are two of the largest listing companies in the marketplace.
But maybe — just maybe — everybody's finally had enough of high-tech and the noise of everything online, at least in commercial real estate. Witness the high-profile failings of notable technology firms such as Comro, Cubitz, iProperty, TheAskingPrice.com and Goldman Sachs-backed Zethus.
And certainly many investors in high-tech ventures have backed down or completely backed out of their online investments in the past year. In fact, the last round of major funding for both LoopNet and PropertyFirst was back in November 1999. Altogether, LoopNet has raised $24.5 million, while PropertyFirst scraped up $48.5 million. What's ironic is that PropertyFirst was the first to feel the biggest pinch, cutting costs by laying off 46 staffers this past November.
But both firms refuse to admit to any failing or lack of adoption of their products and services in the marketplace. What's really at stake in this game, they say, is the notion that if not now, certainly eventually, real estate transactions will be conducted online and in a more efficient manner. And they want to be around to make it happen rather than watching from the sidelines.
Success or failure may ultimately fall on the shoulders of LoopNet's top brass. Dennis DeAndre, the CEO and founder of LoopNet, and John Stanfill, CEO, president and co-founder of PropertyFirst.com, lead the combined company. Both will now be co-chairmen of the new LoopNet.
Success also depends on how quickly the industry adopts technology for transactions. “Truly, only time will tell,” said Michael O'Hanlon, executive managing director at theoffice of New York-based Insignia/ESG. “The size and complexity of a transaction determines the amount of personal attention and assistance required to close the deal. Real estate is not just a commodity, it's an emotional decision.
“An online listing is an excellent source of information, but when it comes to a large, sophisticated transaction, it can't provide the personal service you get from a broker,” O'Hanlon said. “The broker can handle the subjective piece — the handholding and personal selling needed to alleviate buyer dissidence. The Internet can't do that.”
Doing ‘the deal’
It was rumored that both executives had been talking about a combination over the past year. But why did these two really do this deal? One could speculate that it was because Los Angeles and San Francisco are close to each other or that it was simply a marriage of convenience. But why is two better than one?
“While the firms had a common vision, each pursued a different path in trying to build out the vision,” DeAndre said. “That resulted in both of us having different, complementary strengths. LoopNet has been able to generate a critical mass of users, listings and traffic. PropertyFirst has an unparalleled technology platform, deep institutional relationships and a critical mass of high-end investment properties.”
Stanfill is in complete agreement at this point. “We concluded that the synergy was excellent. We each brought complementary strengths to the table, and the time was right to step out and offer our customers a clear choice while creating an even stronger combined company,” he said.
Will it cut the clutter?
That's really the $64,000 question. One of the biggest complaints byand property owners is the myriad choices offered to them when listing their properties online. With fewer choices available in the market, does a larger LoopNet really sound that much more enticing?
“Partners and users have seen the merger as a victory for them, leaving them with a clear choice for an online commercial real estate strategy,” DeAndre said. “The merger will provide a better product to a greater number of users.”
“I agree,” Stanfill said. “Our current customers and some firms with which we've been negotiating all view this as a natural move for us and for them.”
It might not hurt that LoopNet has amassed a good bit of “traction” in the marketplace. The combined venture will result in more than 145,000 listings and about 200,000 users. By contrast, Bethesda, Md.-based CoStar Group owns a database of more than 20 billion sq. ft. in 800,000 individual properties, 583,000 sale comps, 59,000 for-sale properties, 968,000 digital images and more than 1 million tenants.
The next-largest competitor, New York-based RealtyIQ, which formed in May 2000, counts 101,000 listings totaling 1.81 billion sq. ft. But rumors about RealtyIQ's vitality have circulated for months. Last December, it laid off 60% of its employees and closed six of its eight offices. Project Octane, the high-tech alliance formed by brokerage and service giants CB Richard Ellis, Jones Lang LaSalle and Trammell Crow Co., reportedly acquired RealtyIQ in late April.
From there, the listings market gets even more fragmented, with a number of smaller players filling in the gaps.
“We have been predicting consolidation since last year — it is a necessary and vital step in the maturation of an infant market,” said Joe Rubin, national director of financial services with Ernst & Young's real estate practice in New York. “Consolidations will accelerate because the dearth of capital means that only the strongest will survive. Here you have two companies that are building really good functionality, and the combination of these efforts will make for a strong company and a clear industry leader.”
Merging and purging
It's early yet, but both bosses have worked out an interesting scenario of how the two firms will work together from theirbases.
“In agreeing to the merger, we first identified the best capabilities of each company,” DeAndre said. “When all was said and done, things divided pretty much along entire operating groups, which makes the geographic separation very achievable. Technology will be housed in Southern California while customer support and inside sales will be based in Northern California.”
Now the inevitable question — will layoffs ensue and how many? DeAndre admits only that cutbacks have and probably will occur. “The new company will be composed of the best capabilities of each of the individual companies. There have been some layoffs and some new hires, as we have already eliminated redundancies and moved to achieve new efficiencies,” DeAndre said.
Looking out over the decimated landscape that seemed to hold such promise for changing the industry just a little over a year ago, DeAndre and Stanfill are understandably happy to be survivors themselves.
“While the firms had a common vision, each pursued a different path in trying to build out the vision. That resulted in both of us having different, complementary strengths.”
— Dennis DeAndre LoopNet
“For a company to be successful as an online commercial real estate listing service, that company must be able to generate a critical mass of supply, or listings, and demand from buyers, brokers and tenants,” DeAndre said. “And it must be able to monetize that activity. The companies that have left our space to date have been unable to generate the critical mass of activity that LoopNet and PropertyFirst have enjoyed. Companies that were unable to clear that hurdle were not able to raise capital in today's environment.”
Stanfill said the fallout was inevitable in a crowded market. “There were too many participants in the market and most were under-capitalized and could not provide a revenue-producing value proposition to the market at large. We believe that by combining these two companies, we have a much clearer value proposition via our combined reach in the marketplace, augmented by our superior technology platform and capital base along with a strong stable of investor partners.”
Technology to the fore
Lost in much of the discussion, but at the core of whether this new venture will even fly or not, is the issue of technology. How can it really shape or change an industry?
Stanfill keeps pointing to the features that bits and bytes bring to the table. “Our technology expands the knowledge, speed, reach and relationships of each of the industry participants that use our marketplace,” he said.
“We will be able to speed a property for sale or for lease into the marketplace and, at the same time, expand the exposure or reach of that opportunity,” Stanfill said. “We will be able to reduce the cost of marketing properties and provide a higher level of service to customers and clients. Any time you can assist your clients in generating more revenue, reducing costs and improving client service, you have a powerful value proposition.”
So, why was PropertyFirst's platform adopted over LoopNet's? “The foundation of the operating system will be from PropertyFirst because the system was designed to be somewhat more flexible and modular, and to enable us to make additions and changes faster in the rapidly changing world,” Stanfill said. “LoopNet has many excellent features and functionalities that will be seamlessly integrated into the ongoing company platform.”
“We believe that the industry may be at an inflection point and, at long last, may be prepared to both accept technology and, even more importantly, pay for it. We expect to achieve profitability in 2002.”
— John Stanfill LoopNet
Certainly, speed-to-market is one thing, but going head-to-head with a huge competitor like CoStar is a bit daunting. To say the battle is heated is quite the understatement. Interestingly enough, CoStar didn't devote a single word of text about the merger announcement on its Web site when the marriage became official on March 21.
The good word on profits
What this merger boils down to is more than just staying alive. After all, that's no fun on a day-to-day basis. “By all means it [our strategy] is to continue to grow,” DeAndre said. “Each firm was growing and gaining market share as we demonstrated more and more capabilities, and as other firms perished. By coming together, we hope that we can accelerate that marketshare growth even more.”
Will that take more capital raising in a tight-money environment? Stanfill said no. “We believe that our existing capital base is sufficient to allow us to first achieve a break-even level of revenue, which will then grow to profitability,” he said. And surprisingly, there's this: “The only need for additional capital would be to take advantage of some attractive acquisition opportunities that might further strengthen our market position.” An acquisition — now that is something you don't see every day anymore.
As if to reiterate his optimism, Stanfill makes this bold prediction: “We believe that the industry may be at an inflection point and, at long last, may be prepared to both accept technology and even more importantly, pay for it. We expect to achieve profitability in 2002,” he said.
Ben Johnson is an Atlanta-based freelance writer.