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How independent real estate companies got played by Compass

In 2018 and 2019, hardly a month went by without Compass acquiring an independent real estate company. Funded by a $550 million trove of venture capital raised at the end of 2017, the brokerage went on a spending spree, snapping up other brokerages and tech firms in its quest to become the country’s dominant residential firm.

How did Compass acquired independent real estate companies?

All told, between 2018 and its IPO in April 2021, the firm spent $300 million on acquisitions. In a little over two years, Compass acquired at least 14 brokerages, upping its head count by some 4,000 agents.

Did Compass use other methods to seduce independent real estate firms to join them?

Oh yeah, Cash wasn’t Compass’ only means for acquiring businesses, though. The firm also issued loads of stock to some of the companies it gobbled up, mirroring its approach to wooing star agents.

What is Compass stock valued today?

Some of those shares came at private market, pre-IPO discounts — if the firm valued its shares internally at $20 a share, say, it would give the stock out for $10.

But even with that boost, given the tumbling value of Compass stock, their recipients may be wishing they’d just pushed for cash. After hitting $20 a share on its April Fool’s Day debut, Compass shares have fallen over 85 percent. Those stock packages have gone along for the queasy ride.

Between 2018 and Compass’ IPO filing in March 2021, the firm reported issuing around 186,000 shares of stock worth a combined $6.6 million (at the time they were issued) in connection to acquisitions, according to its IPO filing.

At Compass’ debut (also its high) of $20.15 per share, those would be worth around $3.7 million. At their current price of $2.90 per share, that would come out to a little more than $530,000.

My thought on the seduction of Compass stock

I can see why some opted for the stock given that Compass original goal was to only recruit the “best of the best” real estate agents in every market. But for their quest to keep growing they lowered their hiring standards thus, their original business concept became diluted.

The bottom line, the stock today and for the foreseeable future is worth a lot less than if they’d just taken the earnout in cash

It doesn’t really matter what the stock price was when the independent real estate companies and agents accepted it . It wasn’t as low as it’s traded now.

Read More: This Compass story may shock you

For the most part, it’s impossible to know which firms received stock or how much they received, as the acquisition terms were almost always kept under wraps. But in its IPO filing, Compass broke down its Aug. 2018 acquisition of Pacific Union, a 1,700-agent California brokerage with $14 billion in annual sales and a stronghold in the Bay Area luxury market. The Pacific Union deal came just a month after Compass bought Paragon Real Estate Group, a 225-agent firm with another $2.3 billion in sales.

Compass paid $64.5 million in cash for Pacific Union plus $3.7 million in stock, with follow-up payments contingent on certain performance metrics set to pay out over three years, according to its IPO filing. Those add-ons had the potential to reach $24.4 million, including up to $4.7 million in equity.

Compass didn’t disclose the number of shares it gave Pacific Union, just their dollar value. An insider with knowledge of the deal said it valued Compass at $6 billion, meaning the $8.4 million in equity Pacific Union could have earned from the deal would give it 0.14 percent of the firm’s total shares. At today’s market cap, those $8.4 million in shares are worth just $1.75 million.

One source said the deal was 60 percent cash and 40 percent stock. Assuming the same overall purchase price of $83.3 million, that would mean $33 million was paid out in stock — worth just $7.1 million at today’s market cap.

In 2019, Compass bought Stribling & Associates, one of the last major independent firms in New York City, which in 2018 had 270 agents and $1.62 billion in sell-side deals. That same year, Compass purchased San Francisco-based Alain Pinel and Delectica, a New York City-based AI firm. The deals collectively cost Compass $14.6 million in cash, as TRD reported at the time, plus $13.1 million in contingent considerations that could be paid out over six years.

The brokerage’s valuation once hit $6.96 billion according to PitchBook, a far cry from its current market cap of $1.19 billion. Compass disclosed losses of $101 million in the second quarter and nearly $800 million since the start of 2021.

Read More: Compass story that may shock you

Source: The Real Deal

Updated: Boston Real Estate Blog 2022

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Ford Realty Inc., Boston Beacon Hill Office Location