More Mergers and Acquisitions

Sep 13, 2004

As the economy inches its way toward improvement, we are seeing A/E/P and environmental firms rekindling their interest in merger and acquisition activities. In fact, it’s almost a mini-boom of activity that’s occurring right now. One can only speculate on the real reasons so many firms are looking to buy, merge, or sell. Certainly one factor at work is that it has been hard for many firms to grow over the last three years or so. The owners of these companies are getting impatient and want to get back to the heady days of growth. Internal growth is too slow, so they decide to buy another firm or firms. The historically low— but starting to rise— interest rates are another factor. If you can buy a firm with 5% money, and it generates a 30% or 40% annual return on the purchase price, why not? It’s easy to see why some of the less risk-averse A/E firm owners are thinking that perhaps now is the time— and that time may not last forever— for them to be doing a merger or acquisition. The difficulty with hiring is another reason firms are looking to buy. Virtually everyone I speak to is telling me how hard it is and how long it takes to hire people these days— especially those with experience. Buying a firm is a quick way to add experienced talent and capacity to a busy firm. Some firm buyers actually value their acquisition targets on a “per-head” basis; i.e., they figure out what equivalent recruitment fees would be for the company’s staff and that’s what they are willing to pay for it! We’ve helped put together some successful transactions this year and that’s always a good feeling. In recent cases where the buyers weren’t able to close the deal with sellers, by far and away the number-one problem I have witnessed is sellers who are just plain unrealistic about what their firms are worth. On several occasions this year, we’ve seen sellers turn down offers that, to my mind, were more than generous. And these were in situations where the sellers should have had other reasons to sell (major owners who were outside the business; no viable succession plan; overdependence on one or a couple clients that could go away). Occasionally, the buyers are the ones who cannot sell the benefits of the transaction to the sellers. But lately, with more and more experienced buyers of firms in our business, it’s the sellers who aren’t being realistic. Then again, all sellers have to ask themselves the question of what price is freedom worth to us? My experience is that freedom, while a fantastic thing, may not be all it’s cooked up to be. With that freedom often comes a lack of discipline, particularly financial discipline, that a well-managed parent is not going to tolerate. And along with that freedom in the small to mid-sized professional services firm is often a lot of disagreement amongst the owners on direction and allocation of scarce resources. Again, an experienced parent can help resolve these two issues and get the acquired entity (and its employees) back on a healthier track. I’m really glad to see the M&A business heating up, and not just because it fuels the financial consulting and general management consulting areas of ZweigWhite. More importantly, it signals to me a return to the optimism of the late ‘90s and early 2000s, and that can only bode well for the entire industry. I have always believed that we could do without a recession if we just didn’t talk ourselves into it. And, in many parts of the country, I think we did just that. While the mid-Atlantic through the Sunbelt states through California and Nevada have enjoyed tremendous and consistent growth for land development services, most of the rest of the country has been pretty flat. And while there’s a mini-boom for transportation-oriented firms from new gas taxes in Oregon and Washington, the rest of the firms serving state DOTs are anxiously awaiting the new transportation bill to be signed. That said, no one is doing that poorly in our business, with the majority of firms experiencing either no growth or slower growth over the last three years, versus facing major declines in their revenues or going completely broke. How about your firm? Are mergers, acquisitions, and/or divestitures part of your strategy this year? Share your thinking with our readers and drop me a line! Originally published 9/13/2004

About Zweig Group

Zweig Group, a four-time Inc. 500/5000 honoree, is the premiere authority in AEC management consulting, the go-to source for industry research, and the leading provider of customized learning and training. Zweig Group specializes in four core consulting areas: Talent, Performance, Growth, and Transition, including innovative solutions in mergers and acquisitions, strategic planning, financial management, ownership transition, executive search, business development, valuation, and more. Zweig Group exists to help AEC firms succeed in a competitive marketplace. The firm has offices in Dallas and Fayetteville, Arkansas.