The recent announcement entails pros and cons for the property sector.
The industry has been greeted this week by the merger of two housing giants Pulte Homes and Centex. According to the Associated Press, “Pulte Homes Inc. is buying Centex Corp. — two homebuilding giants with their communities scattered throughout Southwest Florida — for $1.3 billion in stock in a deal that will create the nation’s largest homebuilder. The new company, which will also include the Del Webb, DiVosta and Fox & Jacobs brand homes, will keep the Pulte name and headquarters in Bloomfield Hills, Mich. Pulte lost almost $3.73 billion over the past two years, more than wiping out all of its profits for the prior three years. Centex lost $2.66 billion last year, erasing its earnings for the prior four years.”
For every merger, it entails a strategic move on the stronger company. We see this as last resort of Pulte Homes since the real estate market is currently on a downward spiral. This could spark a series of consolidation in the market but we’re still concerned over some things that might imperil the new company’s future. First, the AP report mentions, “The acquisition will give Pulte large tracts of land in Texas and the Carolinas, two of the most resilient real estate markets, and a presence in 29 states and Washington, D.C.” This is good news but more lands located in California and Florida will also be inherited by Pulte. The states’ property markets have been battered severely that analysts are skeptical if values can rebound by the end of the year. Second, job cuts are inevitable in order to avoid job duplication and excess costs in the labor pool. We expect the retention to occur most in Pulte and leave most employees in the Dallas-based Centex packing their things. Finally, we highly doubt that the company can realize its savings within the time frame. Given the current credit freeze, home building has yet to recover from its cloudy prospects. What they should look forward to is how Obama’s housing plans can revert the situation or worsen the market’s plight. But as we mentioned, this merger is still a smart move.