Mergers and Acquisitions— What’s the Deal?
The recent acquisition of Woodward-Clyde Group (Denver, CO) by URS Corporation (San Francisco, CA) is just one big deal among many, many other smaller deals that are going on weekly in the A/E/P and environmental consulting industries. Industry consolidation is taking place at an increasing pace with absolutely no signs of slowing down. Here’s some of what we’re seeing out there:
Typical sale prices are in the range of 40-50% of net service revenues, with higher prices being paid for firms that are leaders in a market or service area, high growth firms, over-capitalized firms, and extraordinarily profitable firms. Lower prices are being paid for no-growth companies, firms that need an injection of cash just to stay afloat, unprofitable firms, and generic service providers with fragmented geographic office networks.
Due diligence efforts buyers are making include much more than an assessment of current projects’ percentage completion and analysis of accounts receivable collectability. Buyers are also routinely performing client perception surveys on the firms that they are acquiring, as well as employee surveys to learn more about the morale and motivation of the selling firm’s work force. Many times, outside sources are used for these efforts and the cost is borne partially by the seller.
The time it takes for a deal to come full circle is usually six to nine months. I have witnessed sales that took as little as five days, where the buyer never even visited the branch office he acquired from its parent company. But this was a small deal— very low-cost (essentially, the buyer paid for the sellers’ fixed assets and gave the seller a small percentage of continuing revenues for a short time), and one that could only be considered low-risk given the resources of the buyer. On the other extreme, I have seen deals that dragged on for years and were eventually consummated.
Big buyers are writing lots of letters of intent. Some firms actually open discussions with a seller with one of these letters, just to let the seller know they mean business. I have looked at some of these “early offers” (ones that come out of the blue after a brief conversation) and most are attempts to low-ball a seller in the hopes that they catch someone eager to get out. One recent example consisted of an offer to buy the firm at “adjusted book value” (with plenty of allowances for questionable accounts receivable) and a one-year earn-out that would have paid, at most, 3% of net service revenues to the seller. That was a low-ball if I had ever seen one!
Contingency brokers are up to their usual shenanigans. I can’t stand these business brokers who work on contingency fees and will say or do anything to make a buck. At a national industry conference we were at recently, one of these guys actually went around telling people that he arranged a certain deal even though we actually put the clients together! Another tactic some of these sleazoids use is to create a fictitious company and market it to the most likely buyers. Then, when the potential buyer expresses interest, the broker learns more about their plans and eventually tells them the firm is “no longer available.” Of course, the next questions they ask are aimed at trying to get that buyer to sign them up as their representative. If they’re successful, they gain a client with resources who has the cash they need to actually close a deal and make a big fee.
Accountants and lawyers can get in the way. Sure— there a few exceptions to this statement. There are some industry-specialized accounting and legal advisors who can help get a deal done— and get it done well. But many more accountants and lawyers don’t know anything about our business, or about buying and selling companies, yet they whisper untruths (usually about what the firm’s worth or what kind of deal structure the seller should insist on) in the ears of their “selling” clients. Why? So they don’t lose a client, that’s why. Or how about the attorneys whose legal bills are bigger than the actual transaction price? They start drafting documentation before it’s appropriate and raise every little objection they can while the meter runs.
As an industry, we’re getting better at this whole process. I think firms are learning that buying and selling other companies is not nearly as scary or perilous as they first thought. Companies with in-house resources to process simultaneous possibilities at once and the experience at successfully integrating other firms under their “big tent” may have a significant competitive advantage over their less sophisticated competitors.
Originally published 9/22/1997