If you think staying in touch with Corporate America and its changing face is easy, you better think again.
In late-April National Real Estate Investor and Jones Lang Wootton gathered a group of top corporate real estate executives at the posh and very private St. Francis Yacht Club on San Francisco's Golden Gate harborfront to discuss some of the most important issues facing CREEs today. Topics ranged from mergers and acquisitions mania, to the CFO's new role in corporate real estate, to alternative officing, to the changing nature of service provider relationships.
But the one consistent theme throughout the all-day roundtable was the need for flexibility in an age of sea-changes. In fact, since we held this discussion, JLW is in merger negotiations with Chicago-based LaSalle Partners. Now, that's a timely topic ...
I want to personally thank JLW's Richard McBlaine, managing director of corporate and advisory services in Chicago, for helping us be involved in this meaningful discussion, as well as Mark McLaughlin, senior director of JLW's new San Francisco office.
Mergers & acquisitions mania And you thought the 1980s were merger-filled. Along comes the 1990s, when M&A has become an accepted culture both in this country and abroad. In fact, the timing of the topic was good, since one of the biggest proposed mergers of all time, certainly in the financial services arena, was announced on April 6 between Citicorp and Travelers.
Debra Moritz, director of corporate and advisory services in JLW's Chicago office, set the M&A landscape with the fact that more than 28,000 companies merged between 1995 and 1997, more than in the entire 1980s. And in this year's first quarter, there have been $444 billion worth of new merger deals announced. Those are some impressive raw numbers, but think about what that means to the lives of corporate real estate executives, and you begin to understand why many of them aren't sleeping much these days.
Certainly, the importance of the real estate component is now on chief financial officers' radar screens as more mergers are done and the importance of the real estate as an asset component has surfaced.
"Up until two years ago, we were totally decentralized, we had a lot of banks, but we operated them separately," said Thomas Rainey, vice president of corporate real estate at Banc One. "So we then merged into a single entity, but over time when we would do acquisitions, years ago, we would focus on the quality of the loan profile, the people resources and that sort of thing and would expect that somehow the real estate issues would get resolved. Once we merged and managed to figure out how many billions of dollars we have in assets and what percentage of our operating costs we represent, all of a sudden real estate became a real issue in the acquisition process."
What was the key to his success in becoming part of the process? "Continual confrontation about the problem," said Rainey.
"I've had a unique experience of being gobbled up and six months later being part of the gobbler," said Frank Robinson, vice president of corporate real estate at Tandem Computers, which recently was acquired by Compaq. "When we were acquired by Compaq, they went about it in a very good manner and so a lot of those lessons I took forward and now that we're in due diligence to acquire Digital Equipment, we're moving in that same way. One of the important things as the acquirer is to quickly find out what the level of information available is, and normally that is through your peers, where their sites are, the number of people in those sites, the cost, as well as risk factors in the markets. If you go about it in a cooperative, non-threatening way and the information is there, it is a smooth process."
"The first step is a small group of people sitting down listening to each other, and then moving forward to bring in the additional folks that are needed to add data or information around their specific areas," said Robinson.
As companies become more globally inclined, they also must take into account cultural differences and internal politcal issues, including the importance of human resource issues.
Kenneth Knutsen, vice president of corporate operation services at National Semiconductor, related an interesting example. "We had a situation outside the U.S. where we moved the people from the acquired firm over to our facility at the end of the week, 40 people or so. This group came in over the weekend and removed all of their furniture into a different pattern, set the file cabinets around it like a fortress wall and put up a sign clearly identifying themselves as the old entity. So it was a really interesting lesson because it speaks of the necessity of involving high-level management, HR and other players. The integration of the people and the culture was really the bigger issue, and we hadn't really anticipated that well enough."
Dan Busch, manager of international real estate at EDS, told of his company's own strategy for dealing with integration issues. "We formed a group of people from HR and real estate and finance that reports to our finance committee before they approved the deal, which was real effective. It's a high-level summary, but everybody gets so excited about doing the deals, but then they find things they don't like. We do about 30 or 40 big outsourcing things a year. We got the directors of real estate and put them in key roles and we started leveraging purchasing and brokerage services and all sorts of things together."
The rise and rise of the stock markets, too, has accelerated the mergers and acquisitions binge, as corporate stock values have increased and created a new currency for buying companies.
"What I've noticed over the years is that 10 years ago the mergers used to be more in the micro-acquisition mode where you would identify small properties and small companies and go after them," said Skip Law, vice president of real estate and construction at McKesson Corp. "Since that time, the multiples that are being paid for public companies are so large that they dwarf any influence that the real estate might have on that acquisition and the acquisition is so strategically important to the ongoing business plan of the organization that the real estate has become less and less a critical factor in the equation."
Where is future officing? If you are still wondering about the future of the office environment (and who isn't, right?) this group of corporate real estate executives conducted a lively debate on the merits of open-space plans versus the traditional high-wall-and-door environment.
"It's the old philosophy that, 'I've spent 20 years trying to get the corner office and when I get there you tell me there isn't one,'" said Busch. "I looked at Dell, and they haven't built an office in three years and they never plan on building another one. Sprint is putting everybody in a universal cube that's 9' by 8' and they change the guts three different ways."
Often, the cost factor is the most important issue for corporates at the end of the day. "It makes it a lot easier when you have your hand on their wallet because you have their attention," said David Cumming, vice president of real estate at Citicorp. "There's a synapse that runs between their wallet and their brain. When you get into that rate times volume and you sit down at the beginning of the year with the chief financial officer of that business and say, 'Here's what you're paying now, here's the inefficiency,' then you're out of the policing business and they discover that there is a way to increase utilization."
Like a lot of companies, Gary Tuckman, manager of corporate real estate at Silicon Graphics, is examining the pros and cons of alternative officing firsthand. "We're in the middle of an interesting experiment now. We have about 4,000 people at Mountain View and historically the design engineers were the only ones who had hard walls on the interior and everyone else including the chairman were on the perimeter in a cube. Now for cost reasons, we're looking at downsizing office space, and it wasn't driven by a desire to be creative or effective. So we're trying an experiment in a group of 18 of us, five of us are lodgers and the rest are campers. We've set up some interesting workspace that five of us use routinely day by day. Everybody else logs in each day and they have a variety of full-use carrels, enclaves, conference rooms and space to work in for the day and locker rooms to store their stuff and bags to carry it in. We felt we had to experiment on ourselves before rolling it out," said Tuckman.
"The easiest part is the real estate, setting up the space. Then the technology is a harder part. The third one is something I haven't heard much about, and that's etiquette. How long do you talk on the phone before you step out of your cube to meet with someone? And you don't leave stuff around at the end of the day. I can see that the cultural issues are going to be a challenge."
In his experience, Frank Robinson said that space was not the primary consideration in whether a person was a productive member of the workforce. "When you talk to people and ask them what turns them on and what makes them want to do something and be productive, the space is not on the list. I'm not sure if we are focusing on the wrong thing every time we get into this thing about cubicles versus offices."