Home builder mergers and acquisitions (M&A) could be harder to accomplish under the new antitrust guidelines proposed. It is not just the mega-tech deals we hear about in the press; home building M&A activity is not immune from antitrust scrutiny.
Understanding the new M&A landscape will be critical for the owners and founders of home builders when assessing the antitrust risks of M&A strategic plans.
The antitrust agencies propose a new “30% rule” that will place greater scrutiny on M&A deals where a business controls 30% or more of a geographic market.
- In the home building business, the 30% threshold has been crossed in 13 of the top 82 markets.
- There are another 12 where one builder is close with a 25% to 30% market share.
Background
On July 19, 2023, the Federal Trade Commission (FTC) and Department of Justice (DOJ) released new draft merger guidelines. These guidelines are essentially the playbook for how the agencies will review M&A activity. The guidelines are proposed but are nearly certain to be implemented after a 60-day comment period.
JBREC reviewed the guidelines, researched home builder market share in the top markets in the country, and interviewed industry M&A leader Margaret Whelan of Whelan Advisory Capital Markets to understand the guidelines’ impact.
Margaret Whelan
Founder & Chief Executive Officer
Whelan Advisory
“Home builders like to fly below the radar. Even before this announcement, we have seen smaller M&A transactions that fall below the threshold for agency review.”
The FTC and DOJ review all M&A that exceed a $101M threshold. The agencies’ newly announced 13 guidelines signal an aggressive shift in how they will evaluate M&A activity. The $101M threshold is a low bar—for context, D.R. Horton’s purchase of Riggins Custom Homes (a 170-homes-a-year operation) in northwest Arkansas in late 2022 was $107M.
The impact of these guidelines should be considered by home builders or their private equity investors in their M&A risk evaluation.
The proposed guidelines include the horizontal merger market share threshold (“the 30% rule”): All horizontal merger transactions (a merger of two firms in the same industry) that result in a combined market share of 30% or higher will be considered impermissible regardless of the overall market concentration level. The agencies will scrutinize market share on a geographic market-by-market basis, not just nationally.
JBREC tracks the top markets in the country by new home sales, and we note the following:
- In eight of the top 50 markets by number of sales, the top builder has a 30% or greater market share.
- Another six markets’ top builders have a 25% to 30% market share.
It is not just the big market M&A activity that could be impacted.
“For the last several years, builders are focusing on tertiary markets that are less concentrated, where they can take more market share without attracting the attention of regulators.”
According to JBREC research, among the next 32 largest markets (those with at least 1,000 new home sales):
- There are five markets where the top builder has a 30% or greater market share.
- Another four markets’ top builders have a 25% to 30% market share.
In the current economic climate, we expect home builders will continue to consolidate for market share and scale that provides them leverage on costs. But the new 30% Rule could limit some of those deals.
Another area of focus for the agencies is highly concentrated markets (Guideline 1).
The agencies’ new threshold for “highly concentrated” markets (based on the Herfindahl-Hirschman Index, or “HHI”) is now lower than previous guidelines.
JBREC’s tracking of top home building markets:
- Nearly every market today has a concentration of three to five builders with an aggregate market share of over 50%, but
- Because an additional 10+ builders are forging out 1% to 5% of market share in each of those markets, the concentrations do not meet the agencies’ HHI definition of “highly concentrated.”
“The top four home builders nationally have significant market share, but they do not always compete directly; rather, they are focused on their own product type and price points, even when they’re in the same geographic market.”
In Guidelines 8 and 9, the agencies are focusing on roll-up or serial acquisitions—where a merger or acquisition is part of a series of multiple transactions in the same sector. The agencies may examine the entire series itself or as part of an industry trend.
Home builders have been consolidating for years to gain market share and reach a scale in each market that provides them with leverage on overhead.
The M&A activity trend in the home building industry is clearly within the broad scope of Guidelines 8 and 9, but how these guidelines materialize on a deal-by-deal basis is undefined.
