REAL ESTATE : Prudential Had a Special Reason for Buying Merrill Lynch Realty

Run that by again?

About a year ago, Jerome M. Cole was criticizing the competition in explaining why Prudential’s new nationwide network of franchised real estate brokers began by recruiting individual brokers rather than buying a whole network at once.

Merrill Lynch Realty and Coldwell Banker, explained the president of Prudential Real Estate Affiliates Inc., were two “prime examples of companies built primarily through acquisitions.”

“If you look at both those companies, what you see is the expenditure of millions of dollars and, to date, not a particularly outstanding return on those investments,” Cole said in an interview last year. Merrill Lynch, in particular, “didn’t do a very good job because the top management they bought ended up leaving them within a short period of time.”

So what did Prudential do six months later? You guessed it. They bought Merrill Lynch Realty.

Prudential, which bases its franchised brokerage operation in Costa Mesa, agreed in August to pay a tidy $300 million for Merrill Lynch’s 450 real estate brokerages around the country. In 1988, the brokerages earned an unexceptional $37 million before taxes on nearly $800 million in sales.

Prudential already has about 500 offices of its own. Not bad for a network that started only two years ago. But it started so late in the game that many of the best brokerages had already signed up with other franchise systems, such as Century 21. Signing up good brokerages is getting a lot tougher, and that makes buying a bunch of brokerages a lot more tempting.

Does Cole think differently of Merrill Lynch now? Sort of.

It’s true that Merrill Lynch was “never terribly profitable,” Cole said in a recent interview, because headquarters loaded tremendous overhead onto the branch offices.

It turns out, however, that this whole deal isn’t really about the brokerages, according to Cole; it’s about acquiring Merrill Lynch’s corporate relocation company, which assists business people in finding a house when they change jobs and move.

The Prudential franchising operation was having trouble signing up brokerages last year because it didn’t offer relocation services.

So Prudential decided to buy a relocation company. Merrill Lynch had one of the two biggest, Merrill Lynch Relocation Management, but wanted to sell its entire real estate operation.

As for the brokerages, well, they look pretty good without the crushing corporate overhead, Cole says.

“They’re much stronger than the franchises we would have signed up,” Cole says.

As opposed to franchises, the Merrill Lynch brokerages are company-owned. So Prudential is selling them off in blocks to Merrill Lynch Realty’s management with the requirement that they become Prudential franchisees. That will nearly double Prudential’s offices nationwide at a stroke.

“I’m not saying all this hasn’t caused problems,” Cole says, adding that the purchase was probably the largest in the industry’s history. “It was a very complicated deal.”