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What: Shares of Starwood Waypoint Residential Trust (NYSE:SWAY) surged 12% after the market open on news that the company intends to merge with Colony American in an all-stock deal. The merger will create a combined company with over 30,000 homes under management and a net asset value of $7.7 billion.

So what: Starwood Waypoint and Colony American are two of the largest single family home investors in the country. In consideration for the merger, Starwood Waypoint will issue approximately 64.9 million shares to the current owners of Colony American.

Starwood Waypoint expects significant cost savings by combining the two companies. It identified $40-50 million in annualized synergies, helped largely by eliminating duplicate roles within the company. In a presentation, the company announced that it expected the combined company to have 54 homes per full-time employee, up from 33 homes per employee today.

Now what: Bulking up by doubling in size should help Starwood control its costs and generate bigger returns on its portfolio of homes.

Importantly, the company intends to internalize its management team, ridding itself of a management agreement in which shareholders paid its managers 1.5% of the average market value of the company on an annual basis. Though the fee agreement directly compensated the manager for a rising stock price, it also puts a cap on its appreciation, as a high share price results in a larger fee and ultimately lower earnings for the company.

Eliminating the external management fee and taking advantage of new economies of scale could set the stage for similar stock-for-stock deals going forward.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.