CoStar Amps Up Offerings with LoopNet Acquisition

The deal comes as no surprise to those who keep an eye on the ins and outs of the industry. B. Riley & Co. L.L.C. director of research Ian Corydon said, "It has made sense for a long, long time."

Courtesy Flickr Creative Commons user morrissey

The acquisition of online commercial real estate marketplace LoopNet Inc. by its one-time rival, commercial real estate information firm CoStar Group, comes as no surprise to those who keep an eye on the ins-and-outs of the industry.

“It has made sense for a long, long time and CoStar was finally willing to pay the price they needed to get the deal done–which was relatively rich,” Ian Corydon, director of research with independent investment bank B. Riley & Co. L.L.C., told CPE. “What CoStar could never get was the buy-side audience; it’s what they tried to take from LoopNet for years but never could.”

In a deal valued at $860 million and an enterprise value of $762 million, CoStar will acquire LoopNet in a transaction expected to close by the end of the year.

“We are combining two very innovative companies that have transformed the commercial real estate industry,” CoStar president & CEO Andrew Florance said in a conference call. “We believe that the combination of our two outstanding and complementary companies will lead to even more innovative and greater efficiencies by creating the premier internet solution for the $11 trillion commercial real estate industry.”

Florance asserted that while both the CoStar and LoopNet models track different aspects of the industry, neither comes close to covering all bases. “Once a combination of LoopNet and CoStar is complete,” Florance said, “we believe that we will deliver a higher-quality marketing solution to LoopNet’s customers and a higher-quality information solution to CoStar’s customers.”

He estimated that the combined forces will allow CoStar to deliver more than 2 million commercial real estate listings to its customers.

Clients on both sides will be able to see the difference, literally. CoStar subscribers, as Florance noted, “will see prominent displays of how much more exposure is available for their listings on LoopNet,” and LoopNet clients will have access to displays offering an increased level of information. Customers of both companies will not have to go through a lot of red tape to take advantage of the new opportunities that will materialize post-merger, as quick and easy purchasing methods will be of top priority. “We believe that this transaction will enable our combined teams to build even more innovative services, which can deliver even greater value to our respective customers.”

As a result of the transaction, CoStar’s paid subscriber base is estimated to double to at least 160,000, representing approximately 15 percent of an estimated 1 million commercial real estate professionals in the industry. Florance asserted that the overlap between CoStar and LoopNet subscribers is as small as 10 percent, meaning that the acquisition will allow for major cross-selling opportunities between the two customer bases.

The customers will get more, and the merged entity will save more. By putting their heads and efforts together, the companies anticipate saving an annual $20 million within 24 months of the completion of the transaction.

Upon the close of the deal, LoopNet equity holders will own approximately 8.5 percent of CoStar shares outstanding on a fully diluted basis. CoStar said that it has received a commitment letter from J.P. Morgan for a fully committed term loan of $415 million and a $50 million revolving credit facility, $37.5 million of which will be committed to funding the acquisition and its subsequent costs.

In 2004, the two companies did legal battle as CoStar alleged that LoopNet was posting its copyrighted photographs on its website. The United States Court of Appeals for the Fourth Circuit ruled, however, that LoopNet did not violate copyright. However, it appears that if anyone loses in this joining of forces, it will be the legal community.

“Obviously, one area where we can begin to save money is by eliminating redundant legal costs,” Florance suggested during the conference call. The two entities will no longer have a need to go head-to-head in the courtroom and the funds doled out for keeping attorneys on retainer will likely diminish–or maybe not. “Now, as it turns out, the legal costs being friends are almost as much as legal costs being not friends. But by acquiring LoopNet, we believe we can add hundreds of thousands of new listings with dramatically less cost than we would if we used 100 percent of our traditional researcher-driven model; that could be an enormous cost savings for us.”

As for how the merger will impact the greater commercial real estate industry, experts say only time will tell, on many levels. “It remains to be seen in terms of what CoStar does with pricing,” Corydon added. “They should have better pricing and services.”

Regardless of the outcome, CoStar’s planned purchase of LoopNet is very big news in the commercial real estate industry “By doing this deal, CoStar is in a position of power because there are not a lot of alternatives,” Corydon said. “They’ve got the eyeballs you need and there is nowhere else to go.”