Review Articles: REAL ESTATE MERGER MOTIVES: AN ANALYTICAL REVIEW OF THE LITERATURE

Article excerpt

Abstract

This paper examines the dominant theories, motives, methodologies, and results of the existing literature on the rationale for real estate related mergers. The literature review draws on the mainstream corporate governance literature in finance as its base and highlights the differences in motives between real estate and non-real estate related merger activity. The studies highlight that the homogeneity of real estate firms, especially as they pertain to the highly regulated real estate investment trust (REIT) industry, is expected to reduce the availability of revenue and overall corporate synergies, but might allow for the ability of some firms to more readily be able to take advantage of scale efficiencies. In addition to summarizing past studies, the review concludes with a discussion of the need for continued research in this evolving literature.

In the finance literature, there exists a plethora of studies that examine both theoretically and empirically the issues surrounding mergers and acquisitions (M&A).1 The traditional approach has been to examine, utilizing event study methodology, the wealth implications for the bidder and target firms. The same approach has also been predominantly applied on real estate related M&A studies. Womack (2012) is the first to determine the combined firm returns for a sample spanning nearly three decades of real estate mergers. Prior real estate merger studies analyzed bidder and/or target returns but did not evaluate the combined wealth effects. Target returns were consistently found to be positive but relatively small compared to those evidenced in studies outside the real estate industry. Results concerning bidder returns are less conclusive and vary greatly depending on the analyzed time frame [i.e., before or after the Tax Reform Act of 1986 and/or the Real Estate Investment Trust (REIT) Modernization Act of 1999], as well as on the types of firms (i.e., REITs vs. all real estate firms, equity REITs vs. all REITs, public targets vs. private and public targets, etc.) studied in the individual sample of the studies. Most studies, however, show slightly negative returns to bidding firms around the merger announcement, at least for mergers with public targets.2

However, as depicted in Ling and Petrova (2011) and Anderson, Medla, Rottke, and Schiereck (2011), there are very few studies that assess ''why'' mergers in the real estate industry (or really any other market for that matter) occur. And, perhaps just as important, the current literature is largely inconclusive or at best inconsistent across studies and sectors, leaving many unanswered questions. The majority of studies attempting to determine the rationale behind mergers in the real estate industry mainly draw on findings from studies analyzing merger motives outside the real estate industry. More recently, a number of studies build on the observation that hostile takeovers among real estate firms are extremely rare and use this as the motivation to exam why mergers then occur. The findings that hostile takeovers among real estate firms are extremely rare, as well as the many other peculiarities of the real estate market, cast doubt on the assumption that the reasons for takeovers in the real estate industry are basically the same as for those outside the industry.

Moreover, the role of synergies as a motive for mergers and acquisitions in the real estate industry and especially for REIT mergers is a particularly controversial question among academics and practitioners, even though the size-related benefits in REITs are well documented in the literature.3 The common skepticism concerning the relevance and existence of synergies can mainly be ascribed to the observation that several studies measuring abnormal returns for bidding and target firms in real estate mergers document wealth effects of materially lower magnitude than those detected in studies for other sectors. The lower magnitude of returns is thereby regularly explained by the limited potential for synergistic gains from real estate mergers. …