Equity Office Properties acquired by Blackstone. A small procurement investment would make sense.

Today Blackstone announced they were acquiring EOP in a record setting leveraged buy-out worth $36B ($20B to shareholders and $16B in acquired debt). This story caught my eye as a few years back an e-marketplace I worked for served EOP and we also worked for a few months to convince their new VP Procurement to hire us for procurement services work. On the other side of the transaction a former client is now a Managing Director at Blackstone. I think this transaction can help illustrate my statement that few investments can rival procurement for generating returns for companies.

The sources and analysis appear below.

EOP has approximately $850M in sourceable spend, that is the cost purchasing of goods and services that typically can be negotiated. Based on my recall of discussions at EOP and similar REITs I estimate that approximately 50% of the spend could be addressed by strategic sourcing - $425M. Strategic sourcing in this industry typically yields savings, net of $4M in sourcing costs, of 8% or $34M in annual savings.

So apart from generating an incremental $34M to the bottom line, how else can we describe the impact an incremental investment of $4M in Blackstone's $36B acquisition of EOP achieve?

Current

• Earnings per common share of Operating Income: $2.27
• Earning per comon share of Net Income available to common shareholders: $0.02

After a $4M procurement investment

• Earnings per common share of Operating Income: $2.35 (an incremental $0.07 per share)
  
• Earning per common share of Net Income available to common shareholders: $0.08 (an icremental $0.06 per share)
  

So, the question is whether Blackstone will make room in a $36B budget for a $4M investment that quadruples the earnings per common share of net income available to common shareholders.

Source: EOP Annual Report 2005

• Revenue: $3.0B
• Operating Expenses: $2.1B
• Operating Income: $0.9B
• Net Income available to common shareholders: $8.1M
• Weighted Average Common Shares Outstanding: 403,147,751

Source: Procurement Investor Analysis

• Earnings per common share of Operating Income: $2.27
• Earning per comon share of Net Income available to common shareholders: $0.02
• Sourceable Spend: $849M (Repairs & Maintenance $341M, Property operating $442M, Corporate and general administrative $67M)
• Addressable spend: $425M
• Cost estimate to source $425M in addressable spend: $4M