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What Does Lennar’s Billion Dollar Merger Mean for the Market?

On Monday, Lennar [1] and CalAtlantic [2] announced a merger between the companies—where each share of CalAtlantic stock will be exchanged for 0.885 shares of Lennar Class A common stock, a transaction valued at approximately $9.3 billion. This deal results in the nation’s new largest homebuilder.

Though the agreement is subject to approval by Lennar and CalAtlantic stockholders, if it goes through the combined company will control approximately 240,000 home sites in 49 markets across 21 states. Additionally, it will result in the company being in the Top 3 position in 24 of the 40 larges MSAs, with the company projected to have combined revenue in excess of $17 billion.

According to Business Insider [3] reporter Akin Oyedele, the merger reflects two of the largest problems with the U.S. housing market—the scarcity of new housing inventory and the shortage of skilled construction labor.

“The lack of home building is a major reason why the market has been strained by a lack of inventory. Homebuilders continue to complain they cannot find skilled labor, especially framers, and that buildable lots remain in short supply,” said Mark Fleming, Chief Economist at First American in September [4].

Through the merger, Lennar stated it will be better position to navigate these market challenges.

"Our overall company size and local critical mass will yield significant benefits through efficiencies in purchasing, access to land, labor, and overhead allocation to a greater number of deliveries," said Lennar CEO Stuart Millar in a public statement.

According to Cara Brosius, an analyst with the Freedonia Group [5], the Lennar/CalAtlantic merger reflects the overall trend of consolidation in the homebuilding industry.

“During the housing bubble, the number of homebuilders and residential remodelers increased rapidly, reaching a peak of about 200,000 firms in 2005. However, the housing crisis caused many firms to exit the industry or consolidate. More robust credit standards, along with the availability of existing homes for sale, have continued to hinder revenues, discouraging many new firms from entering the industry,” said Brosius.