Building the Brands

Bloomfield Hills-based Pulte Homes is poised to become the largest homebuilder in the country, but can it derive new and repeat business by becoming a household word like Apple, Target, or Coca-Cola?

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Pulte Homes Inc. in Bloomfield Hills might be on to something. Corporate history has shown that companies that aggressively expand market share or sales during economic downturns are more apt to reap greater gains during the next recovery. While it doesn’t work out for every business, consider some of the success stories.

In the late 1920s, C.W. Post and its chief rival, Kellogg Co., which both got their start in Battle Creek, saw cereal sales initially fall due to the 1929 stock market crash and the ensuing Great Depression. Post decided to batten down the hatches by cutting advertising and scaling back operations. Kellogg took the opposite route. The company introduced new products like Rice Krispies and expanded its advertising budget. The result was a 30-percent jump in profits in four years. As a result, Kellogg was able to stake out a dominant position in the industry — a plateau it still holds today.

Other companies have launched products or new sales programs during recessions and come out on the winning end. Apple introduced the iPod in 2001; the transistor radio came out during the 1954 recession; and the 8-track tape player was introduced in 1965, during the 1964-65 economic downturn. In fact, the 8-track tape player was a big hit for Ford Motor Co., which by most measures had a two-year head start on its chief rivals, GM and Chrysler.

So where does Pulte Homes fit in? At the start of 2009, the company was the nation’s fourth-largest homebuilder. But it will vault its way to the No. 1 spot before year’s end by completing a merger with rival Centex Corp. in Dallas, the nation’s third-largest homebuilder, for $1.3 billion in stock. The deal, announced in April, is expected to close in the third quarter.

Some housing experts say the deal will help Pulte realize savings as it ramps up the merger, mostly by eliminating overlapping positions, consolidating offices, and negotiating lower prices for lumber and other building materials due to its increased size. Because it was a stock transaction, Pulte will be able to conserve cash and avoid taking on added debt by tapping financial markets.

Longtime homebuilder Gil Silverman, who oversaw the construction of around 15,000 homes in metro Detroit over a 50-year period, says he’s encouraged that Michigan and the region will realize new jobs as Pulte moves to consolidate some of Centex’s operations in Bloomfield Hills. But he wonders how the expanded company will deal with lower appraisals due to a rise in foreclosures in recent years.

“Pulte will realize cost savings as they consolidate duplications in the combined labor forces, but that only lasts one or two years,” says Silverman, president of Holtzman & Silverman Realty Co. in Southfield. “Construction labor hasn’t gone down, and material prices are down a bit, but not by much. The thing to watch is how they’ll handle the foreclosure issue. They’ll have to be very diligent about monitoring their sales activity so they can position themselves for growth.”

The combined company expects to save $350 million annually, and Pulte President and CEO Richard J. Dugas Jr., who will be chairman and CEO under the merger, says the deal will lead to a quicker route to profitability once sales pick up. He also cites positive signs in the marketplace, as the company’s first quarter sales appeared better than the previous quarter. Still, that may be more a measure of seasonal variations.

Overall, the deal positions Pulte as a true generational company. Centex is a strong player in the starter home sector, while Pulte’s strengths are in middle- to upper middle-income homes, as well as the active adult market — resort-style developments targeted to people aged 55 and older that Pulte competes in with its Del Webb brand.

By making itself a dominant player in the starter home market, Pulte will be better positioned for the next upturn as the sector requires lower mortgages, while tax credits and other subsidies are made available to first-time buyers. Still, selling more lower-priced homes won’t affect the company’s revenue stream as much as a recovery of more expensive residences.

As the housing sector deals with a wave of foreclosures brought on by aggressive lending practices and other factors, Pulte’s acquisition of Centex provides much-needed cash to weather the downturn, analysts say. At the time of the merger announcement, Centex had a $1.7-billion cash reserve, which matched what Pulte had on hand. The combined $3.4 billion in cash will be a critical component in paying down debt while maintaining operations (Pulte is taking on a net debt of $1.8 billion in the deal, although Centex has $1.2 billion of tax benefits that aren’t carried on its balance sheet).

“Home sales are down and you have a lot of write-downs on land and inventory,” says Steve Taglione, president of Westminster Abbey Homes in Bingham Farms. “All of these factors are causing homebuilders to consolidate to weather the downturn. But I think once the market turns around, Pulte will be well-positioned to serve a variety of markets so that it isn’t too heavy in one market segment.”

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