M/I Homes started in Columbus in 1976, and today is one of the largest home builders in the U.S. Chairman and CEO Robert H. Schottenstein's dad was one of the co-founders of a business that today that does business in 16 markets and has been public since 1993.
The company makes a lot of acquisitions — of not just builders, but also real estate.
Schottenstein says that during his career, the company has acquired three fairly good sized privately held home builders in markets that they were either in already and wanted to accelerate their position or markets that they wanted to enter.
"When we entered the Minneapolis market, which today is one of the largest markets we have in the country, we bought the second largest builder in that market — privately held builder," Schottenstein said during this past year's Columbus Smart Business Dealmakers Conference. "Interesting transaction. It worked out. The other two, one was in Houston and (the other) in Detroit. They didn't work out. We bought it. We got the assets. We're glad we did. But we expected A, B, C and D and we ended up with E, F and G. But we did get in the markets. And I don't know what people's batting averages on acquisition, but I suspect if you're successful — this may seem cynical — but I think if you're successful 51 percent of the time, you're probably in good shape."
Land acquisition is not that much different, he says, except the hit rate has to be better than 51 percent.
"It's a lot more art than science," he says. "We spend about a billion dollars a year in our company on real estate acquisition and real estate development. That's the biggest risk that we take every single year. And you better be right, most of the time, if you're spending that kind of money."
To mitigate the risk in buying land, he says his company does not speculate on land.
"If we could have bought 200 acres directly across the street from where Intel is going to be building their plant, but because it currently is unzoned for residential, and zoning is not certain, unless we could have bought it for next to nothing, we wouldn't have bought it for any price," he says. "We would rather pay fair market value, and then some, but know. We're in the homebuilding business, and we don't want land unless we can build houses on that land. And obviously, you can't build a house without a lot. So, when you're selling roughly today 9,000 homes a year, we've got to keep feeding that engine. And so, there's certain governors and regulators that go into the acquisition for real estate, the most significant of which is zoning."
The other major consideration is location, and it's something he spends most of his time on.
"If you have a great location, with the wrong product, a mediocre salesperson, and sort of a bad reputation, I bet you'll still be somewhat successful because it's a great location," Schottenstein says. "Conversely, if you have the finest designs in the world, with world-class construction and great salespeople, but you've got a marginal location, good luck. Because location is just so important in our business. And it's not like we're the only one that knows that, so our competitors, particularly during good times, there's a war for talent, but there's also a war for land, and good land, and smart sellers know this."
When buying companies, the target's culture is key. Schottenstein says as one deal neared closing, the assistant of a person involved in the deal came into a room where he and others were talking, and the person didn't know the assistant's name. The moment, though minor, gave Schottenstein pause.
"I told our guys afterwards, I'm glad we're buying the assets," he says. "There's about a one in three chance that any of these people are still with us in a year. And as it turned out, I mean, I didn't want to be right, but I was. Our culture is so important to us. We're in the business to make money but how we treat our people, I'd like to think, is really very high level. I don't care what job they have. That's just really important to me."
Mergers, he says, are very different than acquisitions. When there's going to be post-closing coexistence of one form or another, it introduces a different set of issues than if you're just buying something outright.
"If you're the buyer, what's the single most important reason you want to buy what you're buying?" he says. "What is it you like about that company? Is it their client list? Is it the technology? Is it their locations? As it was in the case of us with the deals we did in the three cities, is it certain people that are critically important to the long-term success post-closing? And I think you have to really get your head around that because if it's things that are a little harder to evaluate — like people; or customer lists; or perhaps technology, which may be here today, gone tomorrow; rather than something like land, which is sort of easier to evaluate; and even if somebody wakes up in a bad mood a month after the closing, the land is still there — I think that the due diligence takes a totally different set of questions. And I think that you should never lose sight of what the main two or three, if there happened to be four, reasons for the acquisition or merger are, and continually say, Am I still checking that box? I thought this was great. Is it still just as great? Because if it doesn't look quite as good pre-closing, it's probably going to look a lot worse after."