The Not-So-Plain Truth About Mergers and Acquisitions
Jan 10, 2005
We held our 2004 AEC Mergers and Acquisitions Summit at the Biltmore in Coral Gables, Florida, the first week in December. The food and accommodations were great, and the meetings were a success. As someone who has been involved in dozens of these transactions, starting with a sale of the first bike shop I worked in at age 17 and culminating in our own recent merger with Mercor Media on September 15th of this year, I was asked to give a keynote on the plain truth about mergers and acquisitions for our industry. Here are a few of the points I made in my talk that I thought were worth sharing with our readers: There are a lot of deals out there right now, and there will be many more to come for a whole host of reasons. The market is heating up. There are more purely financial buyers coming into our sector. They are seeing that we have high returns on equity in this business, and they may be facing a lack of other, more glamorous alternatives. Many of those leading the efforts to acquire another firm are doing so because they are simply BORED with their jobs. There are some smart folks out there running A/E and environmental firms who need a challenge. Buying another company and integrating that firm with their own is one way to create some excitement. The critics inside the company will always take a position that you cannot consider acquisitions until every problem in the current operation is fixed. Hogwash! I can’t tell you how many times I have heard this sentiment expressed. You will never have everything perfect, and if this is your attitude, you will never be able to buy another company. There are still too many game players out there on both sides of the equation— buyers and sellers— who waste a lot of folks’ time. The reason is that there are buyers who like to dream and act as if they will be doing an acquisition. It’s an ego-boost and a boost to firm-wide morale if the employees think they are working for a firm that has the resources and wherewithal to buy another company. And there are sellers who just like to hear a number— that makes them feel good to know they could sell their business for millions if they wanted to— even though they have absolutely no intent of doing so! The process of buying or selling is a real distraction, and the rest of your business will not be as well-tended when you are going through it. One way to minimize that distraction, speed up the process, and do it right is to have one person in the company who is in charge of the entire buying or selling process and then let that person do their job. Both buyers and sellers get into this process and psychologically commit to a deal. When things start looking bad, they often see it through because of this early decision that was made. They simply commit too early. Firms that are serious about buying need to devote time and money to developing alternatives— you don’t want to lock in on the wrong seller! Conversely, firms that are serious about selling should develop additional alternatives if they can. It will put them in a more rational decision-making mode than if they have a choice of one. The quality of advisors varies dramatically! Few advisors have much transaction experience, and fewer still know anything about OUR “industry.” Many of the attorneys think it’s their job to tell you why it won’t work. Investment bankers are often little more than business brokers and useless when it comes to structuring the deal. And we have found that many accountants will tell sellers that their firms are worth more than they are so they don’t lose a client. In selling companies, there will always be resentments amongst/between the larger and smaller shareholders. Smaller shareholders may resent the amount of money or the employment or consulting agreements the larger shareholders are getting. Larger shareholders may resent the things they have to do to make the deal attractive for the smaller shareholders to stay, such as commitment bonuses or other cash incentives and employment deals. No matter how hard you try to keep the word mum on a pending deal, it will get out. Competitors will start rumors that you are going through a distress sale. Employees will always be scared about their jobs. And once the deal is announced, employees will ask some crazy questions about what may seem to be trivial matters. Pending deals may attract a certain number of vultures (former employees, vendors, etc.). There’s nothing like a wrongful termination lawsuit while a seller is in the throes of a transaction. Those unsavory types who sense an opportunity often realize that plaintiffs will want to settle any lawsuit quickly so their buyers don’t get cold feet and their entire transaction isn’t jeopardized. Everything takes longer than it should. The devil is in the details! Landlords in cities where you have a branch office may not understand your sense of urgency in getting a lease assignment. Negotiations over employment agreements with key staff members may be difficult to bring to a close due to travel schedules. There will be delays, and despite everyone’s best intentions the original schedule is rarely met (though I have seen it happen). Warranties and reps can be deal-breakers. I never fully appreciated this until our own recent transactional experience. Total honesty about every possible future problem is the key here to making sure there aren’t any misunderstandings down the road. n The fun starts when the deal is done— integrating the two companies. Synergy is over-rated and too often does not materialize. There are many barriers to getting people in the old firm and new firm to work together. And a lot of sellers who like to talk about “building value” do just the opposite by running the business to maximize its short-term profits. Often sellers experience a post-partum depression. There are always more transactional costs than sellers expect. The taxes will be higher, the accounting fees more than expected, and the legal bills bigger than originally estimated. There will be ongoing insurance costs, and the receivables may not all be collected. The costs/deductions will add up, and the sellers will often feel they got less than they thought they’d get. Sellers may forget that they sold. They may still think they can employ all their kids in the business and take their spouses out to eat on the company credit card. Buyers may forget what they actually own and start running over people. Nothing EVER stays the same. Often, that’s a good thing. Things need to change! EBITDA is NUMBER ONE. It drives EVERYTHING today in M&A! You can talk all you want about value as a function of revenue, or what it’s worth to get into a key market, or how great a firm’s reputation is or isn’t. But when it comes down to what someone will actually pay for you, all experienced buyers are looking at the future EBITDA (earnings before interest, taxes, depreciation and amortization). They will only pay so much for any business, and that is based on what they think it will make and how long it will take to do it. Originally published 1/10/2005
About Zweig Group
Zweig Group, three times on the Inc. 500/5000 list, is the industry leader and premiere authority in AEC firm management and marketing, the go-to source for data and research, and the leading provider of customized learning and training. Zweig Group exists to help AEC firms succeed in a complicated and challenging marketplace through services that include: Mergers & Acquisitions, Strategic Planning, Valuation, Executive Search, Board of Director Services, Ownership Transition, Marketing & Branding, and Business Development Training. The firm has offices in Dallas and Fayetteville, Arkansas.