By Bronwen Parsons
After the AcquisitionEngineering
"Mergers of professional firms are the single most difficult mergers to put together--Absolutely!" says Toronto lawyer Howard Burshtein. He has been working in the field of mergers and acquisitions fo...
“Mergers of professional firms are the single most difficult mergers to put together–Absolutely!” says Toronto lawyer Howard Burshtein. He has been working in the field of mergers and acquisitions for 22 years. His reason: “With professional firms your assets aren’t machines. They’re not equipment. They’re not land. They’re people. And people are the unknown variable.”
Mergers and buyouts of consulting engineering companies in Canada are happening almost every week. By May of this year, for example, Canadian Consulting Engineer had reported 21 acquisitions involving Canadian companies. Twelve of these were cases of publicly traded corporations of thousands of employees buying smaller firms with fewer than 300 on the payroll. Half of the 21 transactions involved firms of fewer than 100 employees. The acquisitions go both ways across the Canada-U. S. border, with U. S. corporations buying Canadian firms, and vice versa.
When the announcements are made, the executives of both buyer and seller firms are brimming with enthusiasm. But how do these marriages work out in practice. And what is the impact on the people involved?
Since consulting engineering is a business that is built upon the expertise of human beings, it is critical that the most valuable individuals in the purchased company are kept happy if the joint venture is to be successful. Legal contracts can ensure that some of the key principals stay for a set number of years, but keeping them motivated can be a different matter.
For staff, when a small practice becomes part of a large corporation with thousands of employees, it’s a big adjustment. Tensions can run high. Spending your days in a slick corporate environment and feeling like an anonymous cog in a wheel, is very different from working in a cozy studio-like space alongside a handful of like-minded engineers who are your friends. Some people adjust well and flourish in the larger corporations. Others not so much.
Finding your horizons have widened
In the first part of this article, “Buy and Sell Fever,” March-April 2008, Brad Wilson said sources estimate an astonishing 50 per cent of owners of architectural and engineering companies who have gone through a merger or acquisition would not do it again if given the chance. Wilson is with PSMJ, the U. S.-based business management advisors for the construction industry.
However, Wilson says the situation is improving, mostly because corporations are being careful how they treat their new acquisitions during the transition phase.
From a business point of view the strategy of buying up small firms seems to be paying off, at least for two of Canada’s publicly traded engineering companies. Stantec of Edmonton and Genivar of Montreal have been on a buying spree for several years. In the first quarter of this year they acquired four companies each. Genivar reported gross revenues of $70.1 million for the first quarter, up 29% from 2007; Stantec had gross revenues of $291.8 million for the first quarter, up 34.9% from 2007.
And in human terms, many — perhaps most — individuals thrive. Dave Kelly, P. Eng. was president of BCP Engineering in Saskatoon until 2004, when he merged his company with Wardrop Engineering, taking all 20 employees with him. Wardrop has since grown to 1,100 employees, with offices across Canada and overseas. Most of the staff of BCP stayed on with Wardrop. Kelly says, “We tracked it closely for the first couple of years, and I think we lost only two people.”
Kelly believes that he has personally benefited: “I am now vice-president of one of Wardrop’s divisions. I operate a division of 140 people, covering the oil, gas and industrial division for the whole of Wardrop across Canada.” Being part of a larger organization has given him a more globally strategic perspective, he says. “And there are a lot of greater opportunities in terms of larger projects and portfolios.”
Another engineer who sold his firm is Steve Simmering, P. Eng. He merged Simmering & Associates in Ottawa with Golder Associates in July 2005. Simmering’s company had 10 employees, while Golder is a Canadian company of 6,000 people employed in 150 offices worldwide.
His former firm was “like a little boutique company,” Simmering says. It was a group of “hand-picked, really high-skilled people.” Despite the switch to a much larger corporation, “every single person who came over has not only stayed, but really done well here,” Simmering says. The only employee who has left Golder is Simmering’s wife, who retired two years after the merger.
Both Kelly and Simmering decided to sell their firms partly to ensure that after they retired the staff would still have employment. Otherwise the owners would have to pay severance packages. But Kelly and Simmering were also acting out of personal concern for their staff, who were almost like family. When Simmering announced that his company would be joining Golder, he discovered that he hadn’t been the only one concerned about Simmering & Associates’ future if he were to retire. “It’s funny how you find these things out later,” he says, “how much they [the employees] were worried about what would happen.”
Dr. Rosie Hyde, P. Eng. was with Keen Engineering in Vancouver, a mechanical engineering company of 250 employees bought by Stantec in 2005. She now works out of the large corporate steel and glass tower Stantec occupies, along with AMEC, on Dunsmuir Street in downtown Vancouver. She says being with Stantec has broadened the scope of her work: “The major adjustment for me,” Hyde says, “is that Stantec is a much bigger company, which is very stimulating. I now serve two dozen offices across Canada, with over 4,000 people and five times as many practice areas as before. Some of the practice areas have closer ties with academe than is common in building design. As a doctorate holder, I appreciate that connection.”
But the picture isn’t all rosy. Everyone knows of situations where people found an acquisition difficult and couldn’t adjust. In one case, a person saw about a third of his former colleagues leave after a corporate takeover. An engineers’ recruitment agency in Toronto chose not to be quoted in this article, but they acknowledged that once there’s a rumour a firm is going to be sold, the employees start calling the agency to field new job opportunities. Those who do split from their new employers earliest, tend to be senior managers involved in business operations.
Stephen Nutt, P. Eng. left as soon as he could after he sold his former company to a large U. S. corporation. He is now a cofounder and partner of another company, XCG Consultants of Kitchener, Ontario. XCG has about 75 people in southern Ontario, Edmonton and Cincinnati.
Nutt’s trouble wasn’t so much with the U. S. company in itself, which he still holds in “high regard,” but with the administrative procedures that he found too constraining.
“Moving from a small company of about 50 people to a very large, U. S. company, I found the freedom to be able to make decisions and do things quickly became very limited compared to what I was used to,” Nutt says. He found it frustrating, for example, having to go through head office for approval in order to hire someone locally. The corporation needed to make sure they did not already have someone on staff to fill the vacancy. But “It made it very time consuming,” Nutt says. “You would have a candidate that you wanted very badly to hire, but by the time you got approval, he or she had gone somewhere else.”
Even those people who are happy after a firm acquisition, admit they face a heavier load of administrative procedures in a large corporation. Steve Simmering, for example, reflects: “If there’s a negative it is in going from a small, simple company — I think I wrote a half-page memo once! — to a very large company with offices all over the world. There are lots of systems to provide the stability. It takes a while to adapt.” Similarly, Dave Kell
y: “There is always slightly more bureaucracy to run a larger organization: paperwork, compliance, internal communications; approval processes.”
Derek Whitehead, P. Eng., is with RWDI in Vancouver. He prefers working for this privately owned company, having been through several experiences of working for large, publicly owned corporations. His experiences during the 1990s were not good. After graduating he went to work for a small Canadian subsidiary of a large U. S. construction company. The parent company fell on hard times and began to cut staff in Canada. Desks were left vacant, severance packages got smaller, and only a skeletan crew remained.
“When the parent company filed for Chapter 11 bankruptcy,” Whitehead recalls, “our firm was sold to another large American corporation.” Whitehead was dismissed with no pay. “Only three top executives were retained for one year, then let go. The new parent owned a competing technology and shelved ours. I guess that’s one way of getting rid of the competition.”
Whitehead went to work for another U. S. corporation that was buying up smaller engineering firms. He watched as the corporation first swelled in size, then “imploded.”
During his third experience, with a large Canadian corporation, he found it frustrating that even though it was a multi-disciplinary working environment, the architects and engineers tended to work in their own silos.
What is cultural fit?
Companies have different strategies to manage the transition after a merger. When BCP joined Wardrop they established a buddy system to help BCP employees become familiar with Wardrop procedures. It was “very successful,” says Kelly.
As another way of smoothing the waters, corporations will often let the small company continue to operate under its own name and identity, at least for a while.
Most agree that the important factor for success is to ensure from the start of negotiations that there is a good cultural fit between the two firms.
But what they mean by “cultural fit” varies. For one principal it meant finding a buyer firm that shared his democratic approach to his employees. For another, it meant finding a firm that followed the same professional ethics, one that “doesn’t just give clients the answers they want to hear.”
For Brad Wilson of PSMJ, cultural fit comes down to business: “We classify all the engineering firms that we run into by two categories,” says Wilson: “those that are primarily focused on the practice of engineering, and those that are primarily focused on the business of making money doing engineering.” When it comes to a merger, the models don’t mix: “Like companies attract one another in mergers and acquisitions between engineering firms.”
Mergers and acquisitions lawyer Howard Burshtein agrees that cultural fit is difficult to define, but it is also very real and important to get right: “Every professional services firm, whether they are engineers or lawyers, has a culture. And culture is amorphous. You can’t necessarily describe it. You can’t feel it. You can’t touch it. But you know when it’s right, and you know when it’s wrong. And you know when you feel that you are a part of it.”
Legally and financially there are tricky aspects to an acquisition. One especially, according to Wilson, is the “Earn Out,” where the selling owner does not receive full payment for his company until after a period of three to five years. The goal is to encourage the purchased firm to continue performing well after it is taken over.
Too often, however, the owner is working so hard at his own business to ensure he receives the payout, he doesn’t work at integrating his business with the parent firm.
If the purchased firm doesn’t measure up, then the blame starts flying. Wilson explains, “One of the seller’s key arguments to the buyer is: ‘You messed around with my business so much, I couldn’t earn my earn-out. You took over too many things. I couldn’t get my key people. You told me what I could and couldn’t do on my contracts, and therefore I couldn’t bring in the business that I was bringing in before. So it’s your fault, and I want to be paid anyway.'”
“Any time there are earn-outs in place, there’s always some reason why somebody got cheated,” says Wilson. PSMJ therefore doesn’t advocate these arrangements, but at the same time, Wilson says, “We don’t have any other real alternative structure to help bridge that valuation gap.”
Ceding to the Empire
In the future, corporations seem destined to continue to get larger as they absorb the small and medium-sized firms. It seems that the consulting engineering business in Canada is undergoing a transformation, with ever larger agglomerations of firms.
This might be good for business, but there’s no doubt that every time a small firm is absorbed by a large corporation, something unique, some team spirit, disappears.
As one employee who preferred to remain anonymous explained, the day their staff were called into the office and told that their company had been sold came as a complete surprise. It also came with an unexpected gut reaction: “The most fascinating thing about the acquisition was the visceral, ages-old feeling of being the vanquished,” he says. “Funny. … Despite all the possibilities of the new alignment, and the graciousness of the acquisitions team, there was a feeling like, “We have been sold up the river. … We have just been taken over by the Roman Empire.”