Anatomy of a merger : an examination of factors influencing REIT consolidation

Abstract

An investigation was made into the factors influencing the recent merger and acquisition activity in the Real Estate Investment Trust ("REIT") industry. Several financial factors influencing consolidation activity were reviewed in theory including the desire to lower the cost of capital to the REIT, to take advantage of economies of scale, and to increase the liquidity of the REIT stock. Strategic factors including vertical and horizontal integration, the desire to influence market rents, and increasing management talent were also noted. The risks of integrating two organizations and the legal and tax implications of REIT mergers were also investigated as to their influence on current merger activity. Observations of three office REIT mergers were made for purposes of comparison with the noted theoretical factors. Although financial factors were the underlying motivation of these mergers, strategic factors including horizontal integration played a visible role in each case. The theoretical and practical observations were then used to create a framework for identifying the presence of acquirers and targets in the office/industrial sector of the REIT industry. Finally, strategic factors were used in combination with identified acquirers and targets in order to attempt to predict logical merger combinations in the future.