by Ray Summerell

One of the first realities facing companies involved in a merger and acquisition (M&A) growth strategy is that they suddenly have two of everything. Two IT infrastructures, two headquarters campuses, two sets of regional offices—combined with possible redundancy in manpower, this duplication can create an unnecessary drain on finances.

The earliest stages of a M&A scenario offer an opportunity (perhaps for the first time ever) to gather executives in operations, finance, and IT to take a broad strategic look across the enterprise to understand asset lifecycle management—the land, buildings, infrastructure, and other assets that affect any organization’s profitability.

During this time, executives from both sides of the merger or acquisition must work cooperatively. Combining data sets and maximizing efficiency in space/facilities use will ensure a successful start to the newly formed, larger organization.

This article provides pointers for companies looking to effectively combine assets.

Take the long view

Understand that this process poses a landmark opportunity to gauge the contribution of your company’s real property on your business overall—beyond the fact of the M&A transaction itself.

Are you using your real estate portfolio properly to improve your business processes and therefore make the business more efficient? Are you managing or reducing business operating costs? Either way, your real property portfolio directly affects the bottom line of the business.

Consolidation due to M&A is an opportunity to understand what your key performance indicators are for your real property inventory’s business value. Key performance indicators will change from one business to the next, depending on the nature of that business.

Regardless of how you choose to measure the value of your real property on your business, remember that you have an opportunity to create repeatable, sustainable processes for an aggregated real property portfolio that you are addressing for the first time ever. You also have an almost unprecedented opportunity to validate the data that relates to your real property.

Take the long view when consolidating your real property assets. You will be creating sustainable procedures that are not simply applicable to this transition in your business. In fact, they should become a decision support framework that can be applied any time your company prepares for growth—whether organically or through acquisition.

Develop an aggregated real property asset inventory

The due diligence called for in a successful M&A plan requires the real estate portfolio to be scrutinized on various levels. The first step is to create a real property inventory—a database of all the real property holdings for both companies involved in the M&A transaction.

Among the key aspects of this real property inventory are the condition and utilization (the current capacity and the projected maximum capacity) for each facility. By understanding condition and utilization, you can make sound business decisions on what stays, what goes, and what is changed in its function.

Understand that this inventory will—and must—change. Almost by definition, an M&A results in consolidation. There is almost always a shifting of locations where employees do particular types of work. Typically there will be a decline in total employees, to eliminate unnecessary functional redundancies. This in turn results in reduced demand for facilities and indicates the most logical locations for certain types of work to be performed under the company’s new organizational structure.

In short, a whole new demand profile must be compared against the combined assets in the aggregated real property inventory. Are the facilities optimally located for operational efficiency of the new, larger organization? What is the cost per square foot to operate the facility, and is that cost within an acceptable budget for the new company?

Is the facility you’ve selected as the new primary location for certain functions properly configured for the work to be done there? Is there sufficient space for a combined workforce—despite the overall staff reductions that are likely to take place? Is there room to grow in the chosen facility?

The answers to these questions will help you right-size your real property holdings without keeping unnecessary or inadequate inventory on your books.

Include asset reallocation (people, facilities, processes)
as part of the due diligence cycle

Companies worry foremost about the business they’re in. Real property often is relegated to the operations backwaters—until it adversely affects the core business, or the cost becomes an objectionable operational burden.

As a corollary to the real property pointer offered above, take a close look at your people and processes. Is there a need for realignment of functional responsibilities? Are your people located in the best possible space to fulfill that function? Would the company realize greater operational savings by changing geographic locations altogether?

Now is also the time to consider how new work processes may affect your organization’s real property portfolio. For example, consider telecommuting. If a consolidated work force is also given the opportunity to work from home or a telecommuting center, it further changes your company’s demand profile, possibly reducing maintenance or lease costs.

This savings can be appreciable. In the public sector, US Patent and Trademark Office Director Jon Dudas noted in Congressional testimony in June 2007 that his organization saved $1.5 million in rent per year in one facility alone by introducing a work-at-home program.

Through teleworking, Dudas said, the USPTO was able to shed itself of three full floors of office space in Crystal City, VA. That annual $1.5 million rent savings was then rolled into the organization’s operating budget moving forward.

Is your resource accounting transparent—

can you really tell where all the money goes?
When you bring two business entities together, you are combining the accounting systems between those two companies. Typically the data from one company will be integrated into the enterprise accounting system of the other.

When merging your data files and accounting systems, make certain you retain the capability to identify how specifically the budget allocation for corporate real estate is being used across the new, larger organization.

If you are a real property professional, you have a duty to the financial and operations executives on both sides of the M&A transaction to educate them about the value of the real property portfolio to the new organization’s bottom line. You must be vocal when the transition to a combined accounting system is developed. If you do not have a role in the merging of data and the capabilities of the accounting system, your real property portfolio will only be viewed as a cost center.

Do you have the information necessary to support critical business decisions—
and is that data sustainable?

The other side of the coin in being vocal about the business value of real property means being held to stricter standards for accurately forecasting the budget required to achieve measurable results in meeting business goals. This work requires spending on decision support capability to analyze sound, validated, cost effective and sustainable data with predictable results. You need valid real property data—and a lot of it.

Whether you develop it yourself or you rely on outside assistance for data collection and validation the data, you must be confident that the data is sustainable, and that it is sufficient to support the more rigorous operational decisions you will be called upon to make.

What is your return on this investment?

Is your level of spending appropriate to develop the information you need to effectively manage key program areas?

There are established modeling techniques that provide proven methods for assessing the relationships between decision requirements, sustainable data accuracy, information costs and return on investment.

For real property, capital expenses can be organized into overarching categories with a simple memory device: “FOCUS” (taken from the first letter for each category: Facilities, Operation, Condition, Utilization, Strategy).

For each of the FOCUS categories, there are specific capabilities that valid, sufficient and sustainable data will provide to your organization:

Facilities

• Adjust or Realign Property Inventory: Make best use of assets to ensure mission fulfillment
• Define Real Property Asset Data: Assess your property utilization and the condition of your facilities.

Operation

• Support Key Assessment Decisions: Validate your asset repair, improvement, disposal or replacement plans

Condition and Utilization

• Define Real Property Business Requirements: Set processes for asset databases, budget requests, and asset management plans
• Request or Realign Budget: Justify your requests by tying operational controls to auditable information

Strategy

• Develop Asset Management Plans: Create best practices for consistent reporting and repeatable, accurate performance

It will become clear quickly whether you have made a sufficient investment in real property data quality when you set out to address the goals set out in the categories above. 

An M&A scenario is a rare opportunity to align your real property inventory to your emerging company’s business goals. By taking advantage of this opportunity, you will always have access to validated data and a way of tying financial issues to performance management of your real property portfolio. You will be able to constantly right-size your inventory and use it to your best advantage.

Ray Summerell is VP of Corporate Development for VISTA Technology Services, Inc., a Herndon, Virginia-based provider of decision support analytics for business and government, with an emphasis on real property. He can be reached at ray.summerell@vistatsi.com