Scale Economies and Corporate Transactions in the Spanish Real Estate Sector. Is there a Link?

The last years, and in particular 2006, have been particularly active regarding corporate operations in the real estate sector in Spain. We have seen many mergers and acquisitions of development and construction firms, and the experts foresee a similar trend for 2007. One possible reason that explains this phenomenon is the actual status quo of the sector in Spain, highly fragmented and populated by a myriad of Small and Medium Size firms, most of them family business. Another complementary reason is the possibility of economies of scale being prevalent in the sector. Thus, firms would involve into M&A operations to gain size and therefore efficiency. In this paper we begin by analysing the last corporate operations that have been carried out in the Spanish markets in the last period of time. After getting an idea of the common features of these transactions, we go one step further and try to ascertain the reasons why these M&A have been implemented. In particular, and using a sample of Spanish development and construction firms, we analyse empirically whether the data confirm the existence of scale economies. Tentative results do not support this hypothesis. Hence, we provide other explanations for this type of operations, such as easier access to the strategic raw material (land), whose market is highly imperfect in Spain, or the search of diversification opportunities through the purchase of companies that operate in segments/locations different from the one of the buyer. These explanations agree better with the Spanish experience.