What’s fueling the firm mergers and acquisitions trend? Growth.
In the summer of 2007, two large American architecture firms made news when they announced they were being sold to larger European firms. The 1,000-person RTKL was acquired by 11,500-person Dutch environmental and infrastructure engineering giant Arcadis. And, 350-person Hillier by 750-person Scottish architecture firm RMJM. Why are these firms selling? And why now? Do these moves represent a trend, and if so, what is its significance for the rest of the U.S. architecture profession?
RTKL and Hillier ranked eighth and 25th, respectively, in the 2006 Top 150 Architecture Firms [record, June 2007, page 71] list, compiled by architectural record’s sister publication, Engineering News Record. The firms’ change in ownership follows that of 61st-ranked, formerly 100-person Davis Brody Bond, which joined the 1,700-person British-based architecture firm Aedas in 2006.
It is easy to understand why a large firm might want to buy a smaller firm. SmithGroup, for example, has successfully grown in the past 10 years from 500 employees to more than 800 today by acquiring or merging with five other firms from all over the United States (Keyes, Condon, Florance; Stone, Marraccini & Patterson; Architects Four; Tobey + Davis; and AREA Design). As a result, SmithGroup now enjoys a broader geographic reach and a greater diversity of talent. The smaller firms have presumably benefited from sharing the prestige and expanded resources of the parent firm. But why would an already large, prestigious firm like RTKL or Hillier opt to sell to an international firm? Why not form a more-equal partnership to reap some of the same advantages, as the merger of Kling and the Stubbins Associates did in 2003?
Mergers and acquisitions have been a component of business practices within architecture firms for decades. In Texas, CRS grew from a two-architect practice in 1946 to become, by 1985, the largest AEC company in the United States. They expanded by acquiring interior design, engineering, construction, and construction-management firms. Eventually known as CRS Sirrine, the company undertook environmental and infrastructure engineering projects that dwarfed its architectural work. In the process, CRS went public, becoming the first architecture firm on the American Stock Exchange.
Authors Jonathan King and Philip Langdon describe the culture clashes CRS experienced with some of the firms they acquired in their fascinating book, The CRS Team and the Business of Architecture. There were differences of opinion, for instance, about the size and type of preferred projects. In some cases, the owners of purchased firms took the money and ran, leaving a demoralized staff. The CRS partners eventually learned that mergers were better than acquisitions because midlevel staff could be better motivated to stay and work for a merged firm. But CRS Sirrine suffered other problems, such as the 1982 collapse of the Saudi construction industry, in which they were heavily invested. By 1994, the architecture group was sold to HOK and the rest to Jacobs Engineering. It was a sad end to what had been by far one of the profession’s most innovative practices.
Anatomy of an acquisition
According to Steve Gido, a principal with the consulting firm ZweigWhite, the distinctions between the terms “partnerships,” “mergers,” “sales,” and “purchases” can be subtle, even misleading. He prefers to call them all “external transition plans.” Regardless of which term is used in the press release, the new ownership structure is probably not a true partnership. Ninety-five percent of “mergers,” Gido says, are actually structured financially as acquisitions. But to promote family harmony and help smooth the coming integration, many of the deals are publicly described as mergers. So there have probably been many more outright architecture firm sales in recent years than are generally acknowledged.
There are many reasons a firm can consider selling to another entity. One is to provide a path to ownership succession for a firm headed by one or a few partners who are planning to retire soon. In many cases, the firm is sold internally to the younger generation of associates. But sometimes this is not a viable option if, for instance, the younger staff lack the capital, leadership skills, or entrepreneurial ambition to become owners.
Another motivation for selling externally, says Gido, is that it can be a quick way to grow. Although many firms are content to stay small and manageable, growth has its advantages. “At ZweigWhite, we’ve been big promoters of growth: It’s exciting, it challenges people, and it enables more people to have a share of the ownership pie,” Gido says. “It expands career and professional opportunities. Organizations that don’t grow can get stale; they’re forgotten about if they’re not keeping up with their competitors.”
James P. Cramer, Hon. AIA, principal and chairman of the consulting firm The Greenway Group, is another expert in the area of ownership transition planning. He notes: “It’s a complex profession, and good leadership is rare. Consolidations can bring together leadership to create stronger firms.” He has observed more architecture and engineering firms joining recently, blurring disciplinary differences in form and process. “Now that we have single-technology platforms,” Cramer says, “this is going to require that each discipline works simultaneously and interactively, no longer linearly. This is bringing everyone on the team closer together. BIM technology is one reason there will be more integrated professional teams.” He sees mergers as a coming together of the talents of successful firms. “They’re trying to integrate as a more collaborative profession. I think the quality of the design can often be enriched because of these collaborative minds working in concert.”
Cramer says some firms sell to realize the built-up equity. He claims there is more wealth creation in ownership of firms today than in the history of the profession. “It’s because of the strength of management and leadership in practices,” he states. “The return on investment for being an owner of a design firm is often better than the ROI in other investment categories.”