What We’ve Learned From a Decade of M&A

Dec 08, 2003

Last week, we held our first-ever conference on mergers and acquisitions, the 2003 AEC Mergers & Acquisitions Summit, at the Omni Parker House in Boston. It was a successful event with a wide range of speakers and topics. I was one of ‘em and my topic was “What we’ve learned from a decade of M&A activity” in the A/E and environmental consulting industry. Here’s the essence of what I said: There are many different ways to skin a cat. There are firms that buy companies and use earnouts and ones that buy for all cash. Both methods can work. There are firms that buy profitable companies and leave them alone and firms that buy unprofitable companies and integrate them. Both methods can work. The point is there are many formulas for successful acquisitions that a buyer can follow. Beware the deals that drop in from the sky. Last-minute opportunities that present themselves and are not part of an overall strategy are dangerous. This is where many companies end up with a firm of a type, location, or make-up that does not work out. M&A is not the exclusive domain of larger firms. There are plenty of small firms that are successfully buying other companies. I have seen firms as small as five or six people buy other small firms. In no way is a strategy to buy or merge with other firms only something large companies can consider. There’s a need for a lot more frankness earlier in the process. The more both parties are completely honest with each other in terms of what their plans are, how things should work after the transaction is done, and what their motivations are, the more likely the marriage will get done in the first place and last afterward. You can never spend enough time planning the integration. Planning for what will happen afterward needs to be started as soon as any potential deal starts to get discussed. Many problems will be uncovered in this process, and it’s critical that they get addressed. Discussion of the after-planning may even result in the deal being killed, but so much the better if it wasn’t going to work out anyway. Leaving everything alone is probably not the way to generate oneness. It’s possible to buy a successful firm and leave it alone and actually have things work out. On the other hand, if your goal is for integration, client sharing, and staff sharing, this is probably not the approach to take. Synergy is overrated! No matter how much planning you do and what your philosophy toward acquisitions is, most firms discover that the synergy they expected was not as great as they hoped for. There are many reasons for this that experienced buyers understand and therefore have more reasonable expectations. There are many assets beyond the people in a firm. The brand name of the firm, the firm’s backlog, clients, and database are just a few. There may even be other assets that are undervalued in a transaction (unbilled work-in-progress, real estate, etc.). It’s all about the people. In spite of #8 above, buyers and sellers better be thinking about what’s in it for the people involved or they will quickly undo any of the value that was hidden in the other assets. The importance of anticipating what is going to keep the people committed to the successor firm cannot be underestimated. Selling a firm may be the best thing for the firm’s employees. Many owners feel that they are selling the opportunity out from under their employees if they sell their firms to outsiders. Many of those who have actually been through the process could tell you that, in fact, just the opposite occurred. Larger firms are probably better capitalized. They may already have been through more than one ownership transition and have a viable ongoing transition program. They may have bigger/better clients and projects. They may have other geographic offices that people can work in. No single advisor will suffice. You can’t enter into one of these transactions with just your accountant, your attorney, or your management consultant by your side. You need the advice and perspective of all three. None has it all. Mixing up personal stuff into a business makes it worth less. If you want to sell your firm but have five family members working there, your vacation house as a company asset, and you own the building that you are charging your firm too much rent for, you’ll have some real barriers to overcome. Keeping the business and personal stuff as separate as possible is where you want to be. Buyers never fully penalize sellers for poor profitability, nor do they give full recognition for stellar profitability, either. This is something that never ceases to amaze me, but it’s true. The buyers either figure the high profits cannot be sustained or the low profits will be fixed. Success chances improve with more possibilities. Whether you are a buyer or seller, the more possibilities you have, the better your odds of finding the right match. It’s kind of like dating someone from junior high that you end up marrying. Maybe playing the field would help you make a better decision of who to get tied down to! There’s always a reason NOT to do the transaction. There will always be smart people inside your firm who will tell you all the reasons why you shouldn’t buy or sell. Consider the fact that many of these people are not very entrepreneurial and it’s easy to think of reasons why something won’t work versus how to make it work. Nothing can work if the numbers don’t work. The bottom line is this: You can have the greatest cultural match-up, the best integration planning, and every reason as to why someone in a selling company should want to remain on with the organization, but if the price paid by the seller is too high, or the price received by the seller is too low, the deal won’t be a success. While it sounds like a cliché, it has to be a “win-win” for all. So what will the next decade bring as it relates to mergers and acquisitions of industry firms? More learning. My guess is we will get better at it, still, and the numbers of transactions considered “successful” by both buyers and sellers will grow. Originally published 12/08/2003

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.