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MATCH MADE IN HEAVEN?

Macerich, Westcor say firms made for each other

BY DEBRA HAZEL

Westcor brings to the partnership with Macerich its venerable track record for building such successful centers as the upscale Scottsdale Fashion Square.

Some companies acquire competitors to eliminate them, but The Macerich Co. says that’s the last thing it wants to do with Westcor Partners. In what could become a model for a consolidating industry, Macerich sees the Phoenix-based developer it acquired last year as a partner, not as a conquest.

“There’s a difference between integrating two organizations and buying a company,” said David Contis, COO of Macerich. “We chose to integrate two companies.”

The story began early last year. That’s when Phoenix-based Westcor’s controlling partner, AEW Capital Management, which invests in real estate for pension funds that include AT&T and Owens-Illinois, decided to diversify its assets, and Westcor was put in play. Nearly every major industry REIT looked at Westcor, the dominant developer in Phoenix with properties also in Denver.

Several factors led to the Macerich bid. Phoenix is only a one-hour flight away from Macerich’s Santa Monica, Calif., headquarters, and Westcor’s existing portfolio of nine malls and 18 community centers fit well geographically with Macerich, a major West Coast player. The Westcor portfolio’s size, about 15 million square feet, roughly equaled a Macerich regional division, and the upscale nature of projects that included Scottsdale (Ariz.) Fashion Square meshed with Macerich’s own portfolio.

Westcor would also offer ground-up development capabilities to the publicly held Macerich, which, rather than building centers, has specialized in acquiring and redeveloping such properties as Westside Pavilion, Los Angeles, and Queens (N.Y.) Center.

Westcor’s concerns were to find the best possible deal for its owners and the greatest protection for its staff, said Robert Ward, then Westcor president and an ICSC past chairman who, along with other former Westcor executives, has formed a joint venture with the newly merged company.

Within certain financial parameters, AEW allowed Westcor to select the bidder it felt most comfortable with.

“With a pension fund as an owner, you do have to take a high bid,” said Wally Chester, Westcor’s executive vice president. “But we eventually took the one we felt was most compatible.”

Westcor broke new ground when it came to the methods it used to find a buyer. Its information technologies staff created a dedicated, password-accessible Web site on which all the firm’s pertinent documents were posted. Bidders could log in and examine financial and center information 24 hours a day.

“It was a virtual war room,” Chester said.

The site also allowed Westcor to track the number of site hits and learn which potential acquirers were most interested. By far, Macerich was visiting the site the most.

“We were a developer, and the other companies also were ground-up developers,” offering less protection to Westcor staff, Ward said, noting that Macerich has acquired rather than built centers in the past. “Plus, Macerich did the most homework.”

The interested companies also visited Westcor’s headquarters, and Macerich made the greatest impression on the Westcor staff.

“They made a point of meeting the people here, more so than the others,” said Michael Treadwell, a Westcor senior vice president of development.

The finalists were quickly narrowed to Macerich and General Growth Properties, both of which offered roughly comparable bids. Westcor and Macerich struck a $1.5 billion deal at ICSC’s 2002 Spring Convention in Las Vegas and announced it on May 31, less than two months after Westcor put itself on the market.

The deal created a company with 56 malls and 21 community centers as of mid-December. But Macerich purchased more than just property; it also acquired a staff anxious about job security, salaries and benefits. Integrating Westcor into Macerich began long before the late-July closing. Macerich had a game plan before the bid was due and shared a checklist with Westcor before the contract was signed. Macerich put a hiring freeze on its own personnel, looking to increase opportunities for existing employees in both firms.

Getting to know the newcomers was the next step. Contis appeared regularly to meet and talk with Westcor’s people, and Macerich founder Mace Siegel also visited Phoenix.

“We really knew who our new family members were, and that was a big plus,” Contis recalled.

The day after the close, each Westcor staff person received a personal letter welcoming him or her to Macerich, with descriptions of benefits. Not one salary was cut, and all 401(k) plan participants are rolling over into the Macerich plan. Seventeen of Westcor’s staff ended up with Macerich stock as part of the acquisition.

Perhaps most reassuring to Westcor’s staff was the retention of the Westcor name, because of its dominance in the Phoenix area. Merging the Westcor portfolio completely into Macerich’s was never a consideration, Contis said. To drive home the value of the name, Westcor staff presented Macerich with the results of a survey showing that Westcor enjoyed a higher brand profile than Coca-Cola in its hometown.

“We consider it an example of their flexibility and willingness to take recommendations from employees,” said David Scholl, a Westcor senior vice president of development.

Robert Ward

Macerich also had another goal in mind: to find and adopt the best practices in industry operations, regardless of which company they came from.

“It could have been very easy for the victor to say, ‘Look, if you’re lucky enough to keep your job, here’s what you can expect,’” Scholl noted. “Here, it was, ‘Let’s learn from you.’”

A “sister mall” program pairs each Macerich project with a Westcor center of similar demographic and size. Macerich’s Washington Square mall in Portland, Ore., for instance, has been linked with Scottsdale Fashion Square; Westcor specialty center The Borgata at Scottsdale is paired with Macerich’s Carmel (Calif.) Plaza. Their staffs meet, exchange procedures and determine which of their contrasting methods is better. Scottsdale Fashion Square, for example, implemented the ShopperTrak customer-counting system used at Washington Square in November. The psychological benefit of intermall visits and consultations is important, staff say.

“You feel as if you have a resource,” said Karen Litton, SCMD, Scottsdale’s marketing director.

The constant communication also helps to dispel rumors and clear up bad information before they become poisonous to the organization, Contis said. One week after the closing, all senior executives met off-site to explain their positions and how they would help affect the transition. They, too, were paired off to determine best practices. The meeting reduced tensions on both sides of the acquisition, said Tracey P. Gotsis, SCMD, Westcor’s vice president of marketing.

“Everyone came back so much more relaxed,” Gotsis said. “Everyone said, ‘We are so much alike.’”

Three months later some procedures and job descriptions had already changed. Macerich was so impressed, for example, by the information technology Westcor employed during the acquisition that Westcor’s IT staff now oversee the parent’s Web site.

Meanwhile, Westcor continues to learn the communication and reporting needs of a public company. Decisions once made in a few minutes with little documentation in Phoenix now must follow a more rigid system, representing perhaps the most dramatic cultural change for the company. Budgeting and reporting systems were changed, and Westcor is moving from its account-based leasing system (in which one staffer makes deals for multiple centers with a retailer) to Macerich’s system of having each mall’s leasing representative responsible for signing up tenants.

Perhaps the greatest change is in the former Westcor leadership. Ward, Chester and Executive Vice President Jack Rasor, along with Executive Vice President and CFO Bob Mayhall, have formed Westcor Development Partners, a 50-50 joint venture between the principals and Macerich. The venture, which operates out of Westcor’s offices, will find potential development sites for Macerich. Macerich’s own staff seek such opportunities as well, but all dismiss the idea of competition.

“We’re all going to benefit,” Ward said. “Now we have more tentacles.”

Macerich, too, is adjusting to its new opportunities.

“We now have an opportunity to be a builder, and Westcor had already established an existing pipeline,” Contis noted.

In that respect, things remain very much the same at Westcor. Development continues on La Encantada, a 258,000-square-foot open-air village center near Tucson, Ariz., and Scottsdale 101, a power center near Phoenix. Macerich-Westcor also has options on other properties in Arizona. Scholl focuses on department stores and mall tenants, while Treadwell looks more at nonmall opportunities. The larger portfolio simply gives them more to play with.

“Now that we have 50 malls, we can funnel opportunities to the two or three markets that make sense,” Treadwell said. “We don’t feel we have to keep passing on opportunities.”

Wall Street seems to agree that the transition has been exceptionally smooth.

“Operationally, this has gone better than they had hoped,” said Craig Schmidt, a REIT analyst at Merrill Lynch in New York City.

Financially, too, all has gone well. Through the third quarter, funds from operations increased from $2.03 per share in 2001 to $2.19 per share in 2002. Net income for the first three quarters of 2002 totaled $27.7 million, up from $22.5 million the previous year. Macerich recently sold out a common stock offering of 15.18 million shares at $29 per share, and Contis said he anticipates selling $150 million of noncore assets this year. Both moves alleviate Wall Street concerns about Macerich’s debt from the acquisition.

“The big question for Macerich was how it would get its balance sheet in order,” Merrill Lynch’s Schmidt said. “The stock offering went a long way.”

In all other respects, Macerich is finding that its crazy math of 1 + 1 = 3 is working. Some 120 days into the integration, only a few employees have left the combined company; others have taken advantage of transfer opportunities.

There is one downside to the process of synchronizing the two firms: staff exhaustion. Contis acknowledges that everyone, himself included, has worked long hours on their own premerger jobs as well as on integration activities.

“You have your day job and [then] your second job conferring with your new partners,” Gotsis said. “I keep hoping it will slow down, but communication with every single employee is key to a positive integration, and that takes a lot of time.”

That will continue. Contis expects to focus on and review the integration for 18 months after the merger.

“The reason it’s successful is that we work hard at it,” Contis said. “I’m very proud of what our people have accomplished, honored at how Westcor has accepted us and proud of the Macerich staff. Our job is to keep our eyes on the ball.”

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