Thursday, April 28, 2011

The CoStar/LoopNet merger

So, the big news exciting everyone in the commercial real estate world yesterday was the announcement of CoStar acquiring its rival and sometime litigation adversary LoopNet in a combined stock and cash deal expected to close by the end of 2011.  As always, Retail Traffic has excellent coverage of the deal.  The two companies are, as far as I know, the biggest national players in the commercial real estate information market.  Since I am a lawyer I do not use either service much, other than for news; but on the property information side I do have a preference for one company over the other.

When I saw this announcement, the one question I had was whether the combined company, given the market share it would have, would run afoul of anti-trust laws.  I am not the only one who thought that, as I saw a tweet or two to that effect and received a message from a friend (who can identify him/herself is s/he wants in the comment section) asking the same thing.

My initial reaction was that this might be a problem.  But then three things happened:

1.  Jason Sandquist correctly (and indirectly) reminded me that in many markets (including the small market where I live), the good old MLS is still king.  The commercial service providers are big on the national level but they are not alone for information.

2.  I saw in the press release the law firms working on the merger: Simpson Thacher for CoStar and Davis Polk for LoopNet. No slouches they -- two of the preeminent M&A law firms out there, with armies of folks able to argue that this deal is okay. (The business advisers were JP Morgan and Evercore Partners, respectively.)

3.  Finally, this little wire gem on termination fees: if LoopNet tanks the deal it pays a 3% fee, or $25.8 million.  If the deal tanks for anti-trust reasons, then CoStar pays LoopNet a 6% fee, of $51.6 million.  I don't know what is typical in the business, not being an M&A guy, but I believe the proposed antitrust termination fee for the NASDAQ offer to buy the NYSE is just over 3%.  So a 6% fee to me means someone must be confident it passes muster.

We will all keep an eye on this one, I'm sure.


Keith G said...

It may be that the CoStar and LoopNet lawyers can argue that there are no antitrust issues with this merger, and can "win" that argument (i.e. silence their opponents). However out here in the world of companies who use the services, it certainly feels otherwise.

Even without the LoopNet purchase, it has been obvious to most of us in the industry that CoStar has been able to set its own terms and prices without regard to, well, anything, because they've had no competition, and we've all been a captive market for so long.

When LoopNet recently appeared to be rising to the occasion, possibly actually becoming a bona-fide competitor, it was very exciting; it seemed as though they might give CoStar a run for their money, and break the lock that they had on us.

The announcement of this merger however completely dashes any hope that any other company will be able to rise to the rank of true competitor, or will be able to break the unilateral control CoStar has over this market segment. Any other challengers that materialize on the horizon? What's to keep CoStar from just buying them up as well?

I am a lay person, not an attorney. But if that's not what the antitrust laws are supposed to protect against, then what exactly are they there for?