BUY AND SELL FEVER
Asked what are the best and worst scenarios he's seen, Brad Wilson only has to think for a few seconds. Wilson is with PSMJ Resources, the business management gurus for architects and engineers in the...
Asked what are the best and worst scenarios he’s seen, Brad Wilson only has to think for a few seconds. Wilson is with PSMJ Resources, the business management gurus for architects and engineers in the U. S. and Canada. He’s in charge of mergers and acquisitions.
For the worst case he recalls a situation three or four years ago that happened close to his home: “I’m in Columbus, Ohio and there’s an example right here in town where a large firm purchased a smaller firm that had been around for 50 or 60 years. Within three years the small firm was completely gone and the big firm abandoned the Columbus market. The big firm screwed it up. They came in and made all the employees mad, made all the clients mad, and the business basically evaporated around them.”
On the bright side, he has a recent example of huge success. “We just facilitated the sale of a small transportation firm in Pennsylvania to a large U. S.-based firm. The large firm didn’t have any railroad expertise at all. The small firm specialized only in railroads, but the railroads had projects that were too large for it to take on. As soon as the owner of the small firm had the resources of the big firm behind him, he used all his client relationships at the and his company has just exploded. It has not been a case of 1 + 1 = 3, it has been a case of 1 + 1 = 10. The owner is in a position to make himself a multi-millionaire.”
Becoming richer, or at least comfortable in their retirement, is the desire of many consulting engineers who are looking to sell their businesses. After decades of running their own companies, principals of small firms are selling out to large corporations. Merger and acquisition mania is happening across North America.
In Canada, almost every week a new takeover is announced, with the large publicly traded corporations such as Stantec, SNC-Lavalin, Aecom/UMA, and Genivar at the forefront of the buying spree. The firms they acquire might have as few as 15 employees, or more than 500. Acquisitions by the privately owned companies are not so well broadcast, but take place behind the scenes.
The risks of failure when an engineering or architecture firm merges are high. Wilson says that in 2004, it was estimated that of all the deals that took place, 70% were unsuccessful. Since then the number has declined to 50%, but still there is only a 50/50 chance that things will work out. The definition of an unsuccessful deal, Wilson explains, is one where a year later, given a choice, either the buyer or the seller would not to do the deal again. “Somebody was disappointed,” Wilson says.
Despite the precarious chances of success, firms are still anxious to buy and sell. The phenomenon became noticeable at least a decade ago (see Big Fish, Little Fish, August-September 1999), and it continues apace.
The consulting engineering associations in Canada’s two largest provinces have seen the effects of this merger mania. Every time two firms merge the associations see their list of member firms shrinking, while the number of employees those firms represent grows. Quebec’s situation is the most extreme. In 1987, the Association of Consulting Engineers of Quebec (AICQ) listed 270 firms as members, but had only 70 firms by 2007. Those 70 firms, though, represent 16,000 employees. In 1987 the 270 firms represented only 6,500 employees. Similarly, Consulting Engineers of Ontario listed 325 firms 20 years ago; now it has 250. Yet the total number of employees has risen from 8,000 to 17,000 in those two decades.
In western Canada it’s difficult to analyze merger activity from these kinds of statistics because so many new firms have sprung up thanks to the economic boom. So even though there has been lots of merger activity in the last 20 years in B. C. and Alberta, the consulting engineering associations have seen their lists of firms grow.
What’s the attraction?
What is driving so many acquisitions? Why the magnetic attraction between big and small firms?
Economic factors are paramount. On the seller side, owners of small firms simply want to cash in on the value of the businesses they have built up. Sometimes the owners are nearing retirement and are thinking altruistically. Instead of winding the firm down, they decide to sell it so that the staff has some job security.
The buying companies have several motives, but the most immediate and obvious one is to acquire more revenues. By acquiring a profitable firm, they also acquire its profits. And on the stock market a company that demonstrates rising earnings is attractive to investors and sees its share price go up. Of course, the trick is to keep the acquired company profitable in the long term, which is not always the case.
Both private and public engineering companies have more strategic reasons to go out shopping for other firms: for survival and to keep up with client demands.
Vlad Stritesky, P. Eng., president of Trow Associates and Trow Global in Brampton, northwest of Toronto, explains what has prompted his company to pursue a series of acquisitions over the last 10 years. The employee-owned, multidisciplinary company has just celebrated its half-century, but in the last five years alone Trow has grown from about 450 to 1,100 people. Some of that was organic growth within the firm, says Stritesky, but about half was by acquiring other companies. Over the past 18 months, for example, Trow bought six companies, including Dave McManus Engineering, a land development and municipal engineering company in Nepean, Ontario that has 40 people; ABH Experts-Conseils, a multi-displinary company of 11 engineers in Montreal; and SRQ, a firm of 50 that does engineering and legal land surveying in northern Ontario.
According to Stritesky, “In our case there have been at least 10 to 15 different reasons why we decided to follow the path of growth rather than retaining the status quo.”
One of Trow’s most important rationales was to keep the wolf from the door: “We want to have increased stability during economic downturns, and to preserve shareholder value,” says Stritesky. “That requires significant expansion into different lines of service, and geographic diversification so that we can get a foothold in more than one market. We eventually want a foothold in four or five markets, so if one or two markets are down, we can always rely on the others.”
“Another reason,” says Stritesky, “is that we want the ability to compete on larger, long-term projects. They usually require strong finances and a company that is stable. Also, to compete internationally means that we need a strong balance sheet to be able to spend a lot of money on proposals and gain the trust of foreign clients. You need to be fairly strong and large, and you need to have a good history of success behind you.” Trow currently has approximately 20 international projects, mostly in infrastructure and structural design.
Clients want national coverage
Genivar Income Trust of Montreal bought seven consulting engineering companies across Canada last year, and had bought another three by early February this year. Among the latest acquisitions was RFA, an electrical engineering firm of 30 people in Vancouver and Victoria, B. C.
Genivar’s inauguration on the Toronto Stock Exchange was two years ago. According to the company president, Pierre Shoiry, ing., the decision to become a publicly traded company (the partners retain a 40% ownership) was precisely so that it could expand.
“We wanted to continue our growth and establish ourselves as one of the leading companies in Canada,” says Shoiry, “and we needed a proper valuation, a proper currency, to do acquisitions to fund our growth. We thought that going to the market was an appropriate way to do it. Last year we raised $50 million. When we went public we had about 1,200 employees. Right now we have about 2,400. Obviously we grew.”
Shoiry says Genivar needed to grow to meet the changing needs of clients and the market: ”
We are seeing a lot of clients now who are looking for a multi-disciplinary firm.”
As a Quebec firm, Shoiry explains, Genivar also wanted to break into other regions across Canada: “We want to follow our clients nationally, so we want to diversify our geographic exposure, to be not just in one jurisdiction. When we started off 10 years ago we were totally in Quebec, and now Quebec is about 60% of our business, so we are growing into other regions. The work we do for cities or ministries is mostly local, but we also have clients in the energy and mining sector, and industrial and commercial clients, who want national coverage.”
Genivar looks to buy firms that can fill any voids in their national coverage. “We have a business plan and we look at where there are areas of growth for us — either geographically or by market. We would target the companies that could complete our service offering in that region.”
But not any company will do. “We want companies that are really well established in the market they serve. We are looking for complementary businesses to ours — successful and respected firms.”
Then Genivar makes its move: “We initiate talks with them and see if they share our vision and our corporate culture. Then we propose to them our model, where they join our group and become part of a larger entity.”
The Perfect Storm
No-one appreciates as well as Brad Wilson of PSMJ just how busy the market in mergers and acquisitions is for engineering and architecture firms. “Right now we are as busy as we have ever been in proposals and live assignments,” says Wilson.
PSMJ is one of several companies that specialize in mergers and acquisitions for consulting firms, brokering delicate negotiations between the parties, and charging a success fee based on the value of the firm being sold. PSMJ has about 40 firms on its books at the moment, and Wilson says that number only represents a fraction of the activity, because smaller firms often prefer to deal with their own lawyers or accountants, rather than using a special consultant such as PSMJ.
Wilson doesn’t see any slowdown likely for the next 15 years. “I think you would find from us or any of our competitors that the business activity for consulting firms in mergers and acquisitions just continues to grow.”
“There are two reasons behind that,” continues Wilson. “First is the retirement of the baby boomers. There is a huge demographic wave of people who started architecture or engineering firms when they were in their 30s and 40s, and now they’re in their 60s and they’re trying to figure out how to cash out.
“The other reason,” Wilson says, “is that during the dot.com boom years, when computer technology and the internet were in this crazed stage in the late 90s, the young kids, the best and brightest people, didn’t go to the universities to become architects and engineers. They went for technology. That situation, in combination with the baby boomers nearing retirement, has left a huge shortage of qualified engineers in North America. The amount of work available to the companies outstrips the availability of labour many times over.
“So it’s almost impossible for a firm to grow at the pace that it needs to grow by hiring one new person at a time,” Wilson explains. “The only way they can keep up with the demand for their services is by scooping up the little firms that have owners at retirement age, and who are willing to sell and are looking for a way to cash out. So it’s almost ‘The Perfect Storm’ of merger and acquisition activity right now. Lots of sellers available and lots of buyers needing those smaller firms to be ready to sell.”
Whenever there’s a big storm, there’s a danger people will get hurt. And given the 50/50 success rate for mergers among consulting firms, obviously many people find themselves floundering in rough seas when companies change hands. Employees feel dislocated, and principals of both buyer and seller firms sometimes feel they got a raw deal.
In the second part of this article, we’ll look at what stirs up these rough waters, and how the firms who venture into them are learning to steer a careful course.
Besides the pursuit of more profits, there are strategic reasons why firms go out shopping for other firms — for survival and to keep up with client demands.
“The only way companies can keep up with the demand for their services is by scooping up the little firms that have owners at retirement age.”