CB Richard Ellis Group Inc., the world's biggest commercial real estate firm, agreed Tuesday to buy rival Trammell Crow Co. for $1.8 billion in cash in a deal that would boost its business catering to blue-chip companies.
The deal signals a consolidation trend among commercial real estate firms, as top players seek to get bigger and offer more services amid a booming office and industrial property market, analysts said.
By buying Trammell Crow, El Segundo-based CB Richard Ellis would become the top supplier of real estate services to the world's top corporations, holding contracts for 85 of the Fortune 100.
Managing such major corporate accounts is a segment of the commercial real estate universe at which Dallas-based Trammell Crow has excelled, making the company attractive to CB Richard Ellis, said Brett White, CB Richard Ellis' chief executive.
"Trammell Crow has developed the secret sauce to provide those services in a really powerful way," White said. "We're not so arrogant to believe that everything we do is perfect. In this area, Trammell Crow is as good or better."
Because the commercial real estate industry is highly fragmented, companies looking to capture market share must offer a broader array of services, experts said.
"Expansion and diversity of services are key, so buying a premier services company like Trammell Crow is the way to go," said Stan Ross, chairman of the Lusk Center for Real Estate at USC.
But major companies' efforts to expand through acquisition can have pitfalls.
"The question becomes one of execution, said Harvey Green, CEO of Walnut Creek-based Marcus & Millichap, a commercial property broker and CB Richard Ellis rival. "Some mergers are successful, some are not."
CB Richard Ellis said it would pay $49.51 per share in cash for Trammell Crow, a 27% premium over Trammell's closing price Monday.
The deal received a favorable reaction from investors and industry observers. On Tuesday, CB Richard Ellis shares rose $1.81, or 6.4%, to close at $30.03. Trammell Crow's shares shot up $9.65, or 24.7%, to $48.75.
As the residential market weakens, more institutional investors and real estate investment trusts are snapping up commercial properties, and their need for property managers and other real estate service providers is growing.
International investment in commercial real estate is expected to increase 26% to $600 billion this year, according to commercial real estate firm Jones Lang LaSalle Inc.
Institutional investors and real estate investment trusts "are really ripe for property managers like Trammell Crow or CB Richard Ellis," JPMorgan Chase & Co. analyst Michael J. Fox told Bloomberg News.
The acquisition would help CB Richard Ellis generate a more reliable source of revenue beyond property sales and leasing brokerage fees. The combined companies would have about $4.4 billion in annual revenue and a more than 10% share of the U.S. commercial real estate market.
CB Richard Ellis has used acquisitions as a key method for growth in recent years. Tuesday's deal, which includes the assumption of $400 million in debt and other costs, came three years after its purchase of another major commercial real estate player, New York-based Insignia Financial Group, for $415 million.
Other major real estate firms also have been consolidating. Earlier this year, General Electric Co.'s real estate unit acquired Los Angeles-based Arden Realty Inc., at the time Southern California's largest office landlord.
USC's Ross likened the consolidation trend in commercial real estate to the mergers of the big accounting firms that began in the late 1980s. By 2002, the largest accounting concerns went from being known as the Big Eight to the Big Four.
The same thing is happening in commercial real estate. The reason: Major corporate clients "demand that you can service them on a global scale," Ross said.
As a result of the transaction, CB Richard Ellis' revenue from corporate contracts would more than double, to 18% of total revenue, the company said. These contracts can include such services as property management, lease administration, property appraisal, consulting and construction management.
Trammell Crow built a reputation and a solid business model servicing the biggest corporations by managing their properties as well as developing new projects as their needs arose.
Trammell Crow also is a leading office developer and has several major projects under construction, including a 12-story office building on Avenue of the Stars in Century City.
CB Richard Ellis said Trammell Crow's development business would operate as a wholly owned but independent subsidiary under the Trammell Crow brand.
Robert Sulentic, Trammell's chairman and CEO credited with having the company focus on major corporate clients such as Bank of America Corp. and ExxonMobil Corp., would oversee the development subsidiary as a CB Richard Ellis group president.
The deal is subject to Trammell Crow shareholders' approval. The combined company would have 21,000 employees worldwide. CB Richard Ellis CEO White said the number of potential layoffs would be "nothing meaningful."
One of CB Richard Ellis' largest shareholders is Chairman Richard Blum, who owns a 14% stake through his Blum Capital Partners. He is the husband of Sen. Dianne Feinstein (D-Calif.).
Times wire services were used in compiling this report.
Begin text of infobox
Name: CB Richard Ellis Group Inc.
Headquarters: El Segundo
Founded: 1906 in San Francisco
CEO: Brett White
2005 sales: $2.9 billion
2005 net income: $217.3 million
Market capitalization: $6.7 billion
Source: Times research
Los Angeles Times