What’s fueling the firm mergers and acquisitions trend? Growth.
Cautions during transitions
The owners of CRS Sirrine were not the only ones to recognize culture clashes as serious dangers for merged firms. Both Gido and Cramer consider this issue as important as negotiating financial terms. Selling a firm is not like selling real estate because a firm is largely an intangible collection of talent and good will. Staff who feel disrespected, or who don’t respect the work of the parent company, can walk out and devalue the sale.
According to Gido, the hardest, riskiest part of a merger is not the hammering out of terms but the integration of the resulting combined firm. “How do you link these global forces together?” he asks rhetorically. “Who’s going to be a practice leader? If one firm is organized by geography and another by market sector, how does that work? A lot of time and energy has to go into the integration process.” There can be culture clashes between two architecture firms if one takes pride in high-end libraries, for instance, and the other cranks out chain stores. Or one firm may be internally competitive, while the other is more collegial. One way to maintain the cultural identity of the combined firms is to make sure the leaders remain even after they’ve benefited financially from the sale. Gido says, “The real challenge is to get them motivated to grow the organization under the umbrella of a new, larger organization.”
The Greenway Group has developed a method to evaluate firm compatibility. Their proprietary LEAP Analysis tool measures firms on leadership, empowerment, accountability, and processes. The evaluation looks at the culture of an organization through the quality of financial management, operations, marketing, and professional services. It probes questions such as, “Is the leadership of the organization steady and strong and without an alienating, egotistic pride?” and “Is there healthy rapport, respect, and admiration among members of the staff?” Once the firms considering a merger have undergone this evaluation, Greenway can graph the results on a diagnostic scoring sheet and produce an overlay indicating how likely the firms are to be able to work well together. Cramer says this comparison is useful in helping prospective partners assess the risks of culture clashes and predict whether the merger will be exciting or a turnoff for staff.
An article in the August 2007 issue of Principal’s Report, a publication of the Institute of Management & Administration, suggests several ways to ease the transition by keeping key staff happy. Open communications are important, including honesty about who is likely to lose their job in the combined firm. The article advocates “rerecruitment,” offering challenging new positions to existing staff. Retention bonuses can be useful, but only if they are tied to ongoing performance. Timothy J. Galpin, of Katzenbach Partners, is quoted: “Managers will be doing well to have retained 80 percent of the employees they wanted to keep.”
Should you sell?
Given all the apparent advantages of successful sales and mergers, how can a firm evaluate if it’s right for them? According to Cramer, if the sole owner of a firm is close to retirement, it’s probably the wrong time to sell. He notes, “We like to see an ownership transition plan designed five to 10 years prior to retirement, whether it’s an internal or external transition.”
Nevertheless, the number one reason AE firms decide to sell, Gido believes, is because they can’t put together an effective internal ownership transition plan. “A lot of small firms sell because they don’t have the managerial talent, the recruiting resources, the financial resources to compete. For those firms (fewer than 200 people) it is attractive to join forces with larger firms because they may offer more opportunities.
Selling may also be a good option, says Gido, for midsize firms with $75–500 million in annual revenue. “They’re too small to compete with national firms to get existing client work or lack broad leadership and financial resources. But they’re too big to be nimble, to compete with the 50-to-200-person firms who are dedicated to a certain client sector or geographic region. I think these firms have to decide which strategic direction they want to go.”
As the examples of RTKL and Hillier show, a firm suitable for selling is not necessarily small or weak in leadership. Indeed, according to Cramer, sometimes a smaller firm will buy a larger firm to quickly develop the capacity to address a strong backlog. Or a large firm may want to buy a small one because the smaller firm has stronger leaders, who will become top leaders of the merged organization. Underlying all these decisions, Cramer advises, should be the goal of improving future service to clients.
Firm salability is the focus of Paul Collins, managing director of Equiteq, a firm specializing in mergers and acquisitions in the consulting industry. His article in RainToday.com, “11 Must-Dos for Creating a Highly Profitable (Highly Sellable) Firm,” cites the strengths a firm should have if it expects to profit from a merger. He lists quantitative factors like a work backlog and repeat clients and qualitative factors like prominence within the profession and a strong marketing history. Depending on the strength of these factors, the sales value of the firm could range from 5 to 15 times the firm’s annual profit.
Do the Hillier and RTKL acquisitions foretell a trend? The experts think so. The globalization of the construction industry makes it desirable for large firms to have a presence in many locations. The currently weak dollar, compared to European and Japanese currencies, makes U.S. firms attractive purchases for large international companies. There may once have been “conventional wisdom” about architecture firms being poor investments, but the booming domestic construction economy, under strong architectural leadership, has weakened that truism. Don’t be surprised by news about more changes in firm ownership soon.