Six Steps to a Successful Merger:
An Insider’s Perspective of a REIT Deal
[November/December 2006]
By Brad A. Molotsky and Michael H. Friedman
What are the workings that swim under the waters of a REIT merger? After the deal has been signed and the press releases have been sent, there is still more work to close the deal.
Brandywine Realty Trust's (NYSE: BDN) $3.3 billion merger with Prentiss Properties Trust on Oct. 3, 2005 created one of the country's largest office REITs and doubled the volume of Brandywine's square footage of owned and managed properties. The deal consisted of $2.2 billion in cash and the assumption of Prentiss Properties' debt, and approximately 35.5 million Brandywine common shares and convertible partnership units.
The transaction was coupled with a sale of approximately $750 million of Prentiss assets to Prudential Insurance Company affiliates, and expanded Brandywine's holdings into Austin, Dallas, Northern and Southern California and Washington, D.C.
The three-month merger went smoothly due to Brandywine's familiarity with Prentiss, which was built through previous JV transactions.
Two of the lawyers working on this deal were Brandywine's Brad A. Molotsky, who served as inside counsel, and Michael H. Friedman, a partner with Pepper Hamilton LLP, who served as the outside counsel. The merger was very efficient because they prepared a clear delineation of duties and responsibilities. They identified the mandatory issues up front, such as the business, board-level and manpower requirements. By doing so, they were able to determine which parts of the deal would come to closure quickly and which would need extra attention.
Through closing this deal, they identified six tips to keep in mind for success:
1. Be clear about the business rationale for the sale or merger. The Prentiss Properties merger was guided by Brandywine's objective to become one of the major companies in each of its sub-markets.
2. Assign specific responsibilities to inside and outside legal counsel to take advantage of each lawyer's strengths. In this deal, Pepper Hamilton took the lead on documentation and structural issues. Brandywine's internal legal team focused its energies on manpower and business issues, providing strategic guidance to the board and executive management as the transaction progressed, and working with due diligence professionals to address title, survey, environmental and structural matters.
3. Don't underestimate the importance of early planning. The deal's smoothness is determined by the amount
of upfront planning and anticipation of potential issues. The preparation should address:
- Key approvals needed
- Tax structure
- Whether anti-trust clearance from the government will be required
- The merger's structure
- Financing considerations
- Contractual provisions
4. Recognize that a merger more closely resembles an organic, rather than a static, process. While it's possible to anticipate certain occurrences, many others emerge unexpectedly.
5. Be sensitive to the needs of affected constituentices. Public companies need to communicate regularly with their boards and shareholders, assuring them that the transaction has been thoughtfully and thoroughly considered, and that the best interests of the investors have been upheld.
6. Successful real estate transactions ultimately hinge on relationships. All players in the market have the
potential to be future partners, and relationships should be nurtured through keeping in regular contact.
Brad A. Molotsky is general counsel and senior vice president for Brandywine Realty Trust. Michael H. Friedman is a partner with Pepper Hamilton LLP.
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