VTS, Hightower merge in landmark CRE tech deal
$300M merger only the “tip of the iceberg”: expert
VTS and Hightower announced a $300 million merger Tuesday, in what observers are already calling a landmark deal for the commercial real estate technology space.
The all-stock transaction will see two of the industry’s top cloud-based leasing and portfolio management platforms fall under one company, which will operate under the VTS name and be led by VTS CEO Nick Romito.
In an interview Tuesday, Hightower CEO Brandon Weber and Romito said they first started talking about the merger in earnest in June and quickly realized that it would create a “one plus one equals five” situation, in Weber’s words. Both companies offer very similar products, and combining them will likely make it easier to scale up. Weber and Romito also claimed that the two platforms’ strengths are complementary, making the new product better than its two predecessors.
“The board and the investors saw that opportunity and frankly believed in it,” said Adam Marcus, a managing partner at OpenView and an investor in VTS. “There was little controversy around the merger.” VTS’ other notable investors are the Blackstone Group, Insight Venture Partners and Trinity Ventures. Hightower’s backers include Joshua Kushner’s Thrive Capital, RRE Ventures and Bessemer Venture Partners.
In May, after VTS raised a $55 million Series C round, Romito said there was “consolidation to be had.”
“Whether it’s via acquisition or acqui-hire, they [our investors] want to help us,” he said at the time. Hightower raised its last round, a $13 million Series B, in May 2015.
On Tuesday, Romito said the firm has “been looking at things for about a year now and plan on continuing to do so. It’s a big part of our go-forward strategy.”
Zach Aarons, co-founder of tech accelerator and advisory firm MetaProp NYC, called the merger the third defining moment in the history of commercial real estate technology, after the launch of Argus and Yardi in the 1970s and CoStar’s IPO in 1998.
On the face of it, the deal hardly looks like a blockbuster: VTS and Hightower have a combined valuation of $300 million and 275 employees (although some jobs will likely be cut following the merger).
But Aarons argued the deal could set off more mergers and draw more investor interest to the commercial real estate tech scene, raising the profile of an industry that has so far failed to live up to lofty expectations.
“This is the tip of the iceberg for these deals,” Aarons said. “It creates an opportunity to roll up many different startups in CRE tech under this umbrella.” He predicted that VTS could raise more funding from private equity investors and buy real estate data startups like CompStak (with which VTS is already offering linked products) or Reonomy. Meanwhile, incumbent tech companies challenged by VTS’ rise could be more inclined to buy tech startups themselves in order to stay competitive.
As TRD recently reported, one of the main challenges facing the commercial real estate tech industry is that it’s been fragmented into small players each offering specialized technology. This has meant they have to compete fiercely for the attention of commercial real estate executives who often prefer a single login or software provider for all their technology needs. Observers have long predicted that this disconnect will lead to a merger wave.
The VTS-Hightower merger is “sending a clear message to CRE tech that people want this one-screen experience and better data connectivity,” said Peter Boritz, CEO of real estate software company Real Data Management. Like CompStak, RDM has signed an agreement with VTS to link its services.
“This is a seismic shift in the marketplace,” he added. The news of the merger was first reported earlier Tuesday by the Wall Street Journal.
For executives at VTS and Hightower, there are more immediate concerns than the future of CRE tech. Hightower’s founder Brandon Weber will serve as chief product officer of the combined firm. But now redundant staff will have to be cut and technologies and offices combined. VTS leased the floor below its current office, doubling its footprint to 32,000 square feet. Hightower’s employees will begin moving in in about six weeks.
“There are tough organizational decisions that need to be made and they cut both ways,” Weber said. But he added that the technologies behind the two platforms are “startlingly similar,” which should make integration easier. Clients of the two firms include most of the household names in commercial real estate, including SL Green Realty, RXR Realty, JLL, CBRE, Cushman & Wakefield, Two Trees Management and the Durst Organization.
But despite the obvious advantages of the merger, it also combines two firms that waged a fierce rivalry in the fight for customers and for status as the market leader. And for Weber, it comes with the cost of giving up the name Hightower and his title as CEO.
“These are two of the top guys. They have egos. It’s going to be tough for anyone,” said Aarons. “But making hundreds of millions of dollars each is not the end of the world. They’re not stupid.”