Romance, Rejection, Drama! The Saga of CoStar and REIS

Thanks to a comment on my About page, I thought to look into the dance going on between CoStar and Reis. It’s fascinating stuff, actually. If the story weren’t being told through boring press releases, SEC filings, and dated news clippings, it might make for a great opera, full of passion and melodrama. As a matter of fact, I wrote a little story — it’s at the end of this monster post.

At least, I think it would, based on what little I can tell as a totally uninformed outsider who has not been following the story. But hey, when did being uninformed ever stop your faithful scribe?

The latest chapter in the tale is that CoStar has reiterated its offer to buy Reis for $8.75 a share earlier today (the press release is dated 2:38PM on Wed, August 13, 2008), for the total price of $96.1m. An important point here is that CoStar made the exact same offer back in June, and was rebuffed. A mere ninety minutes later, Reis rejected CoStar’s offer for the second time (the press release is dated 4:01PM, Wed, August 13, 2008), saying:

In the view of the Board, the price offered in the CoStar proposal is inadequate. The price is below the long-term value REIS could realize for its stockholders by the pursuit of its business as an independent entity and the continued disposition of its real estate assets, or by a sale of the Company.

Mr. Lloyd Lynford, CEO of REIS, stated: “It is extraordinarily disappointing that, after our Board unequivocally rejected CoStar’s $8.75 proposal, CoStar has seen fit to come back with exactly the same proposal in a hostile fashion. To judge the value of our company by the daily trading prices of its relatively illiquid common stock makes no sense. We trust that our clear second rejection of CoStar’s offer will prompt CoStar to withdraw it. Our Board will, of course, review carefully any serious proposal from any responsible third party.”

I believe words like “extraordinarily disappointing” and “unequivocally” and “makes no sense” are corporate chieftainspeak for “Fuck off, you loser!” Reading between the lines, you can almost feel the heat.

Initially, I was really puzzled. In normal course of business, getting a 97% premium over the last stock price (which hasn’t moved at all until the offer came in) is cause for celebration and a rush to the alter lest the groom come to his senses. I mean, imagine that your house was valued at $300,000 and some dude rolls up and goes, “Hey, I’ll give ya $600,000”. That’s normally a “Honey, start packing — we’re moving!” type of thing. But Reis was like, Talk to the hand:

The price is below the long-term value REIS could realize for its stockholders by the pursuit of its business as an independent entity and the continued disposition of its real estate assets, or by a sale of the Company.

Okay, so like, let’s go with that.

I spent the last 30 minutes or so of my life looking at stock charts and old new reports and such. Frankly, I hadn’t known that Reis was a public company at all. Back when I was still in commercial real estate, Reis was privately held, or so I remembered.

The Scene

Turns out, I wasn’t completely delusional. Reis became a public company through a merger with an already-public company named Wellsford Real Properties (WRP) in May of 2007. WRP was a real estate development company that invested in and developed various residential and commercial properties. Post-merger, the combined company became REIS, a commercial real estate information services company. Huh. Interesting.

Thing is that WRP had run into difficulties and had been looking to liquidate the company, at least in 2005:

Mr. Jeffrey Lynford, Chairman and CEO stated, “Your Board of Directors, after significant analysis, has approved a plan of liquidation, which we believe will most likely maximize stockholder value. Since the Company’s public trading volume is very low, approximately 4,000 shares per day, there is no significant current market liquidity for our stockholders. With the adoption and implementation of this plan, significant cash could be distributed. The initial distribution could range between $78 million and $91 million, and our total distributions could range between $116 million and $133 million.”

As of November of 2005, WRP became a company in liquidation, meaning that it was no longer interested in doing anything except to sell off all of its assets and settle its debts. The Q2/2006 report of WRP notes:

After the approval of the Plan by the stockholders, WRP completed the sale of its largest asset, the three residential rental phases of its Palomino Park project for $176,000,000. On December 14, 2005, WRP made an initial liquidating distribution of $14.00 per share, aggregating approximately $90,597,000, to its stockholders.

It then lists some of the assets it has that needed to be sold off. Bunch of buildings, some land, and oh yeah, “Interests in Reis, Inc., a real estate information and database company.”

Somewhere along the way, WRP decided that it shouldn’t just liquidate everything and close its doors. In October of 2006, WRP and Reis agreed to merge in which the privately-held REIS was valued at about $90m. Why would they do this?

Well, one reason was given: merging with Reis may create more value for WRP shareholders than a straight liquidation would. The other reason, possibly, is that the Chairman and CEO of WRP is named Jeffrey Lynford, while the co-founder of Reis is one Lloyd Lynford. Not saying anything untoward happened there, since independent directors of both companies signed off on the deal, and the investment banks and law firms on the deal all blessed the merger. But maybe, just maybe, that might have had something to do with the decision to merge.

A fun fact that emerged:

Lloyd Lynford and Jonathan Garfield, the chief executive officer and executive vice president, respectively, of Reis, who together own approximately 37% of the outstanding Reis shares, have agreed to vote their Reis shares in favor of the merger. Their shares, when combined with the shares WRP currently owns, totals approximately 60% of the outstanding shares of Reis.

I’m guessing none of the shareholders of the remaining 40% thought $90m for Reis was too low; otherwise, there’d be some court papers somewhere.

In any event, the brothers were together again, and the company is now publicly-traded Reis. It still has all of WRP’s unsold land and buildings and such, and it’s continuing to try and get rid of them. It’s core business is, of course, data and research.

All of this is prologue. It’s mere scene-setting.

The Drama

Because the thing about public companies is that its shares are public. And the management has certain duties to the shareholders — even if you own ONE share — that a private company does not have. One of the disadvantages is that when someone comes calling and offers to buy your shares, you have to entertain the offer. Otherwise, the minority shareholders can get real up-in-your-face about that.

Enter CoStar, the Billion Dollar Behemoth of the commercial real estate information sector.

Certainly, CoStar has been aware of Reis for years and years, and vice versa. While smaller players like Real Capital Analytics were out there, for most commercial professionals, the choice for market data was between Reis and CoStar. They each had their strengths and weaknesses. My perception was that CoStar was more of a bottom-up approach, since they had detailed information on every building, every lease, every transaction in a market. But CoStar didn’t have the data analytics prowess of Reis. On the flipside, Reis was always seen as a bunch of brilliant guys, but they went off of a more top-down approach, lacking the tends of thousands of researchers and the CoStar truck and all that jazz. Whether you went with one or the other depended on which you valued more: the raw data, or the analytics.

I’m sure both CoStar and Reis would disagree with that characterization, but that was the feeling in the industry at least in 2005-2007.

I don’t think there’s much doubt that CoStar was many times larger than Reis, and buying up Reis would have made all kinds of sense for CoStar. One, it gets rid of your only serious competitor in research; two, you take the data prowess of CoStar and marry it to the brains of Reis analysts, and you’ve got a serious combination. I have no way of knowing, but seriously, I’d be surprised if CoStar didn’t approach Reis multiple times while it was a private company.

As a private company, however, Reis had no duty to disclose any offers from CoStar; nor did it have to seriously entertain any offers. Sure, in theory, managers of private companies owe a duty to shareholders, but the duty is way different for SEC-regulated public companies vs. private concerns.

So, one would have to guess that CoStar was repeatedly rebuffed by the private Reis. Who knows why? It makes all kinds of sense strategically to an ignorant outsider for CoStar and Reis to combine. Did it have something to do with the fact that CoStar is nearly universally despised in the commercial real estate industry? Were there personality conflicts between Lloyd Lynford and Andrew Florance? (I dealt with Andrew once, and found him to be a very pleasant, very professional guy who’s really really smart, but have heard others describe him as a “cut-throat competitor”. That.. ain’t necessarily a bad thing….)

Who knows?

What matters is that as long as Reis was privately held, CoStar had no way to take it over.

The Romance

Now that Reis is publicly traded, however… and is no longer controlled entirely by insiders, CoStar can actually engage in a hostile takeover if push came to shove. As noted in the ownership report linked to above, insiders only control 22.6% of the stock of Reis. Further, some 30% of Reis stock is held by institutions (aka, hedge funds) who typically don’t give a damn about “long-term prospects” when someone is offering a 97% premium.

What follows is rank speculation. Actually, what preceded was mostly rank speculation as well, so… go me for consistency!

That CoStar came back a second time with the exact same offer suggests to me that they are absolutely gearing up for a hostile takeover fight. Whether that’s a proxy fight, or something else, I expect that the next chapter will be an all-out hostile takeover.

If CoStar had been genuine about wanting a friendly takeover, I just don’t see how you come back with the exact same offer as the first time. “Hey, I know you said $90m was too low the first time, but uh… how about I give you $90m for your company?” The swiftness with which Reis rejected the offer suggests that the folks over there are pretty incensed.

In particular, I note with interest this language in the rejection press release:

We trust that our clear second rejection of CoStar’s offer will prompt CoStar to withdraw it. Our Board will, of course, review carefully any serious proposal from any responsible third party.

Translation: HELP!

Reis is desperate for a white knight suitor to emerge. Again, I have to think there’s some sort of animosity between the principals involved here, because that’s awfully strong language. (Either that, or Reis has really bad press release writers who write inflammatorily interesting stuff.)

The Next Chapter

We turn, therefore, to the next chapter, which is likely to be dramatic. Hostile takeover battles always are.

I expect litigation. I expect proxy fights. I expect tender offers directly to shareholders. I expect long nights in fancy boardrooms all around NYC. I expect that some third party suitor will emerge at the last minute and snatch up Reis for a relative bargain — something over $96m, and if I had to guess, I’d have to go with something in the $120m range. Why that figure?

Well, in the merger between WRP and Reis, private-Reis was valued at $90m. In the liquidation plan, WRP said that all of its assets liquidated would be between $116m and $133m. Add that up and you get let’s say $210m. But WRP already sold off its prime asset and distributed $90m to its shareholders prior to the merger. So $120m or so for the combined assets makes sense to me. In fact, I believe the reason why the Reis board rejected the CoStar offer is that it is awfully low compared to what they have been thinking was their liquidation value. Of course, CoStar apparently doesn’t think private-Reis was worth $90m to begin with… so there is that.

Who could be the suitor? Three possibilities come to mind.

One is Loopnet (LOOP). Loopnet consider CoStar its archnemesis, and would do a deal just to piss off CoStar. But strategically, it makes sense as well. Loopnet might have the largest listings platform in CRE, but as a research source, it’s just not taken seriously by serious players. Adding Reis to its portfolio, then supplying all the wealth of data from its listings platform, is a smart play for them. The only thing here is that Loopnet’s own market cap is only about $380m right now. They also have only about $70m in cash on hand, so a deal with Reis would either require fundraising or be mostly a equity-swap deal. How Reis shareholders might see that in comparison to CoStar’s all-cash deal is a big question.

Second is actually CBRE (CBG) — specifically, the Torto Wheaton division. From a financial standpoint, CBRE could do this deal and have it be a footnote in its annual report. Strengthening the Torto Wheaton group might not be a bad idea either, depending on how much business Torto Wheaton does from non-broker clients. The thing here is that many of Reis’ clients do tend to be other real estate brokerages; CBRE has no incentive whatsoever to sell is proprietary research to its direct competitors. And brokerage clients of Reis would have to think real hard about buying from their biggest competitor as well. So the strategic fit isn’t really there for these guys.

Third is some random player who I couldn’t think of if my life depended on it. Maybe some private equity fund who figures it can take Reis private by buying ALL of the shares, hold it for a couple of years and then sell Reis to CoStar for $200m or something. Who knows.

Ultimately, however, I see CoStar successfully taking over Reis at the end of the day. They have the cash, they have the strategic synergy, and as is said, Andy Florance hates to lose.

We will likely never hear the inside story on what ultimately will go down. But man, it’s fun to speculate.

Concluding Story

So while this might be interesting to nerds like me, it will likely put most people to sleep. In gratitude for reading to the end here, I offer you this story to help you understand why it’s so fun to me. Imagine we are in Dickensian London.

Risa, a pretty young orphan waif, has known Mr. Cosgrove, a wealthy industrialist, all her life. He has always wanted her for his wife, believing that her beauty combined with his intelligence would produce beautiful offspring for the glory of the British Empire. Unfortunately, Risa has been locked away in a convent for years, and despite all his entreaties, Risa thought Mr. Cosgrove to be an ugly, overweight philistine.

When she heard, however, that Wellsford, her artist half-brother, had become deathly ill with no one to look after her, Risa left the cloistered life to brave the streets of London. She cares for Wellsford until he expires from tuberculosis, and he leaves her all of his paintings, asking that she sell them and keep the proceeds.

Upon learning that Risa was now out of the convent, Mr. Cosgrove appears at her doorstep, pleading his love, and asking her to marry him. “Mary me, Risa, and I will give you the townhouse here in London, and jewels and furs!” She refuses, saying only that “I believe I have a worthier destiny. In fact, I’m shocked and amazed, Mr. Cosgrove, that you think I can be bought so cheaply!”

Not used to being denied, Mr. Cosgrove returns the week after, corners Risa in the street, and asks her again, “Marry me, Risa – the townhouse, the jewels, and furs are yours for the asking! Besides, it’s more than twice what any other man would offer you, seeing as how you’ve lost some of your color, and you’re not getting any younger!” She contemptuously throws his ring into the mud of the street, crying “Nay, nay sir! Not for a thousand years! I would rather die than be married to you! Repeating your same offer effects no change in my desire. I do not love you, and will never love you!”

Dashing away from Mr. Cosgrove, just slipping from his grasp, Risa runs into the street crying, “Help! Help me! Is there no kind gentleman who can save me from this wretched man?”

Oh, constant reader… what is to become of Risa? What of Mr. Cosgrove? Will a gentleman suitor appear? Or is she to become Mrs. Cosgrove in the end? Or will she throw herself into the Thames rather than marry the hated Mr. Cosgrove?

Tune in next time (whenever that is) for the next chapter in this tale of romance, rejection, and drama!

-rsh