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Pulte: Off-Site Investments a Key to Survival
In our conversations with production builders, some have expressed a reluctance to invest money in off-site solutions such as wall and floor panel plants. Many wanted to conserve their capital until after the next housing market correction.
That caution is understandable and, not surprisingly, most of those responses came from mid-sized production builders who lacked deep pockets.
Things are different at the big public builders, and one of the biggest believes that long-term financial investments in off-site are wise regardless of what happens over the next few months or years. That builder is Pulte, which announced on January 28 that it had acquired Innovative Construction Group (ICG), a Jacksonville, Fla. off-site solutions provider that manufactures and assembles panelized frames for single-family and multifamily projects.
The acquisition was just one step towards a wider goal. During the 4th Quarter 2019 earnings call Pulte CEO Ryan Marshall said that company was looking to automate as much of its production as possible and indicated that ICG's expertise would be invaluable as they looked to open plants in other markets.
This was reinforced by a March 19 entry across ICG's social media outlets. "Off-site and prefabricated construction is primed to take over the market, and the historical reluctance to adopt the manufactured model is vanishing rapidly," it stated.
Then in April, when the nationwide shutdown was slamming the brakes on residential building, we decided to ask Chuck Chippero, Pulte's National Director of Strategic Sourcing, if the company was rethinking their plans. He didn't comment on the short term but reaffirmed that, despite an industry in crisis—The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) reported its largest-ever decline in builder confidence in the first two weeks of April—Pulte remained committed to prefabrication and automation.
"We view off-site production as a logical next step in the common plan management strategy we have been pursuing for the last several years," he said. That reference is to Pulte's strategy of reducing and standardizing home designs, while constantly seeking out ways to build them more efficiently.
He also hinted that competitive pressures would keep them on that path. "We're aware of significant investments being made in machinery, equipment and software focused on increasing off-site production particularly for wall panel and floor cassette components," he says.
Of course some builders expect the next downturn to make labor more abundant and stick framing more cost effective. Chippero says they're kidding themselves. "We believe the next market downturn will not result in an abundance of low cost, high quality labor."
And framing isn't the only area where Pulte wants to use more prefabrication. While most builders are still playing catch-up when it comes to panelized construction, they're already looking at the next steps.
"We are pursuing a variety of different innovations with multiple partners," says Chippero. "For example, we are working with one partner to bring a new performance-engineered HVAC solution to market that integrates standard heating, cooling and control equipment with a unique air distribution manifold and network of small-diameter, quick-connect, flexible ducts." The new solution will enable fewer workers to complete a job in less time than with conventional ductwork.
For other builders looking to acquire manufacturing partners, Chippero advises them to perform plenty of due diligence, and to get a financial advisor with experience in the industry. Whelan Advisory brokered the Pulte-ICG deal.
"M&A decisions are a time consuming and emotional process requiring a level of expertise few business operators possess," said Chippero. "Having an investment banking expert on your team greatly increases the likelihood of a successful outcome, particularly in instances where the buyer and seller desire a long-term relationship and share common go-forward goals."
He also warns that combining two companies is a huge change management task that will be easier if the companies have similar goals. "Every transaction is different, but a shared vision between the leadership of both parties is a key success factor. If there is agreement on how things will operate AFTER the transaction is completed, you can then focus on a deal structure that works for both sides and is supportive of the business going forward."