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Rouse's new owner is buying a reputation far above its own

CHICAGO — CHICAGO -- The headquarters of General Growth Properties Inc. is housed in a squat, four-story mushroom of a building among the soaring skyscrapers of The Loop, this city's famed business district.

The modest building might seem out of place in the city of big shoulders and unfit for a multibillion-dollar company that is the nation's second-largest owner of shopping malls.

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But it portrays a lot about the personality of General Growth, which has quietly climbed from small-town roots to become one of the biggest players in the volatile mall market.

"It's not all about appearance," said David Keating, a General Growth spokesman. "It's what's happening on the inside."

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Much has been happening inside General Growth lately as it prepares to seal its biggest deal in its 50 years -- the acquisition of the Rouse Co. of Columbia, Md., for $12.6 billion, including cash and assumed debt.

The size and scope of the transaction, announced Aug. 20, was somewhat unexpected for a company that has made its fortune constructing midlevel properties and not the ritzier malls and revolutionary ideas that defined Rouse.

Yet General Growth has been building to an acquisition like this for a decade. It went public in 1993 after deciding it would have to buy up competitors to remain competitive as prime locations for major malls becoming scarcer.

The company has gone on a buying frenzy since, amassing $13.2 billion in assets. Today, it owns 178 malls in 41 states, second only to the Simon Property Group of Indianapolis.

"We saw the business changing from one of development to one of acquisition and consolidation," said company chief executive John Bucksbaum, whose father and uncle built the company from a grocery business 50 years ago.

General Growth had been eyeing Rouse for awhile and had casually raised the subject with Rouse executives over the years, Bucksbaum said.

"In the back of your mind, you think about the what-ifs," Bucksbaum said. "I've been playing the what-if game for quite awhile. That doesn't mean you think it will ever happen."

Rouse contacted buyer

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The what-if became a what-might when Rouse contacted General Growth two months ago. Bucksbaum wasn't wholly surprised, he said, because Rouse had been rumored to be an acquisition target.

Analysts had speculated as much after Rouse hired an investment banker as a chief financial officer, and began shedding under-performing properties. Last year, for example, Rouse sold six malls in the Philadelphia area to acquire a 50 percent stake in the successful Christiana Mall in Newark, Del.

While the Rouse acquisition was seen as epic in Baltimore, where the developer was responsible for the city's downtown renaissance and the creation of its most prosperous suburb in Columbia, the sale to General Growth took but a few meetings to negotiate.

Bucksbaum said his company agreed by late July to buy Rouse for 25 percent above stock value, Rouse's initial offer.

"We did a lot of work to become comfortable with what we thought the deal was worth," Bucksbaum said. "That $67.50 [a share] was something we thought was fair to them and fair to shareholders. It was the first offer."

At 4:30 p.m. on Aug. 19, Rouse board members convened in New York to consider the deal. They signed a contract at 2 a.m. the next day.

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Close likely this year

Rouse shareholders must still approve the deal, which is expected to close by the end of the year. Shares of Rouse have risen to $66.51, at Friday's close, from $50.61 the day before the announcement, while General Growth fell to $28.84, from $31.54 before the announcement.

Their holdings suggest the two companies couldn't be more different.

Rouse owns "urban festival marketplaces" such as Harborplace in Baltimore and Faneuil Hall in Boston that have been copied and credited with downtown revivals. Its Fashion Show Mall in Las Vegas is one of the most ostentatious shopping centers in the country with models sashaying on runways in daily fashion shows and big-screen televisions blasting commercials and music videos outside the mall.

General Growth has a few luxury malls, but most of its centers are more common, steady performers. Rouse's mall tenants produce average retail sales of $420 a square foot, while General Growth's get $360 a square foot, said Ryan Dobratz, an analyst with Morningstar.

The two companies' roots, however, aren't so different. Both began as family ventures that were ahead of their times, before shopping moved from downtowns to suburbia.

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The late James W. Rouse started the Rouse Co. as a mortgage banking firm with a partner in 1939. Three Bucksbaum brothers launched General Growth in Iowa in 1954.

First mall

The oldest brother, Martin Bucksbaum, had a dream of owning a supermarket chain. It was a business he learned from his parents, who owned a grocery. But his plans took a turn after a local developer bailed out of a shopping-center project. Martin Bucksbaum and brothers Maurice and Matthew took over and completed Town and Country Center in Cedar Rapids with no knowledge of the shopping center business.

The strip center opened that year with a Kinney Shoes outlet, a Woolworth and a Singer sewing machine store. On opening day, the Bucksbaums put trampolines in the parking lot for kids to jump on.

In 1956, two years after the Bucksbaums opened their first shopping center in Iowa, Jim Rouse opened Baltimore's first shopping mall, Mondawmin.

The Bucksbaums' business grew after they brokered a deal with Younkers Department Store in Des Moines, Iowa, to anchor all their future malls. They focused on middle-sized Midwestern cities, places national mall developers had yet to tap. Warren Buffett, the investor guru-billionaire chairman of Berkshire Hathaway Inc., served on General Growth's board in the early 1970s.

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"They'll tell you they did everything wrong," said Matthew Bucksbaum's son, John, about the company's first project. "They didn't know anything about construction, financing or leasing. But it got completed and they got it open. They figured given all the things that they learned, they should build another one."

In 1970, Martin and Matthew -- Maurice had long since left the business -- formed a real estate investment trust, a company that buys, sells, manages and develops real estate and allows people to invest in the portfolio of properties. The company used the proceeds to finance acquisitions and new projects through the 1980s. But after the stock languished, the brothers sold 19 properties for $800 million and took the company private again in 1984.

As REITs gained popularity among investors, the Bucksbaums took the company public again in 1993. With its new capital, the company purchased 40 percent of CenterMark Properties of St. Louis in 1994 and added 16 regional malls.

Sears division bought

In 1995, it bought Homart Development Co., the shopping-mall arm of Sears, Roebuck and Co., in a real estate transaction described at the time as the largest in history.

That same year Martin Bucksbaum died, leaving many to wonder about the course of the company. John Bucksbaum took over the reins in 1999 from his father Matthew, who continues to serve as chairman.

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The company began to shed its small-town cloak. It moved from Iowa into Homart's offices in Chicago.

It moved again to the west side of Chicago's Loop in 1997 to its current home -- no-frills quarters with plain cubicles and virtually no art on the walls.

While John and Matthew Bucksbaum have offices with windows, most of the vice presidents sit out in the open with their employees.

Signs with mantras such as "Maximize Your Strength" hang from the ceilings. Befitting his company's informality, John Bucksbaum is the rare company CEO who gives out his phone number to reporters.

Some analysts expect that much of Rouse's business will be done from these offices, including the elimination of scores of jobs at its Columbia headquarters. In typical mergers, there is usually an overlap in accounting, finance and information technology jobs, said Paul Morgan, an analyst with Friedman, Billings and Ramsey in Northern Virginia.

For now, however, Bucksbaum isn't saying what could happen to Rouse employees or the Columbia headquarters.

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"We haven't made any decisions regarding any personnel issues or process issues because we haven't had an opportunity to get to know their skills and their desires," Bucksbaum said. "This is what we have to work on."

But General Growth is known for efficiencies if it is known for anything. Bucksbaum said that General Growth could sell some of Rouse's "non-core" assets, which could include its planned communities in Maryland, Nevada and Texas, and office properties.

Most executives left

After General Growth bought JP Realty Inc. in 2002, it turned the latter's Salt Lake City headquarters into a regional office. It kept some of JP's staff, but most of the executives left. When it took over Homart, most of its executives also left.

While General Growth received some criticism for increasing its debt load with the Rouse purchase, it has demonstrated an ability to make properties more profitable with new ways to make money and attract new shoppers. These include selling gift cards and an exclusive contract with Twentieth Century Fox to promote their movies in the malls.

By increasing its holdings to 215 shopping centers from 178, General Growth will also have greater negotiating leverage with retail chains.

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"They have a history of being a little more aggressive than their peers and then succeeding," said Morgan, the Friedman analyst. "So I think they deserve the benefit of the doubt."

Without going into detail about changes, Bucksbaum said there are areas for improvement. "They do a lot of things right," the CEO said of Rouse. "We hope to keep building on the things they have done right."

"We've got a successful track record and like to believe we know what we're doing," he said. "Yes, we have taken a lot of additional debt, but we have plans in place to reduce it over time. ... We're going to make money."


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