Proactive Approaches to the Mergers and Acquisitions Environment In an effort to provide a clearer view through the windshield for firms contemplating a future merger or acquisition, Engineering Georgia magazine talked to a pair of highly respected consultants, as well as two local business leaders who have a personal perspective from the rearview mirror of their own merger and acquisition experiences. According to Steve Gido, CFA of Rusk O’Brien Gido & Partners, LLC, there are two major milestones in the evolution of any business: first, knowing when to start a business; and second, knowing when it’s time to get out. When speaking in terms of mergers and acquisitions (M&A) – if done correctly – this could be an extremely rewarding and welcome change represented by the blending of two separate entities to create a whole that is more valuable than the sum of its parts or the acquisition of one entity by another to acquire new practice disciplines or geographic markets. During the dark days of the Great Recession, the M&A environment was mostly about larger firms acquiring smaller firms that were in distress. Now, with the economy heating back up, the M&A discussion is much more about proactive approaches to evolving business structures. The good news is, savvy, confident, growth-oriented CEOs throughout the state have built up the financial resources to acquire other promising firms both within and outside of Georgia. Looking beyond state lines, Gido believes that a number of Georgia engineering firms are likewise going to prove to be extremely attractive to firms in other markets. Atlanta is a prime hub for industry due to favorable migration and building patterns, not to mention its role as home to the busiest airport in the world. Gido believes that – from a big picture perspective – a large segment of the engineering industry is aging out and consolidating. Many CEOs who are looking toward retirement may be asking themselves “How do I unlock the value of my firm?” There are generally two options open to them: 1) To sell within the ranks of their own company to an up-and-coming generation of engineers. 2) To become acquired by a larger outside firm. The second option is often the most popular, but comes with its own set of challenges. The number one deal breaker, which is typical in most transactions, is the price gap between what a selling company believes it is worth and what the acquiring company is willing to pay. To help mitigate valuation gaps, the buyer might offer the seller an opportunity to earn out with a pay-for-performance agreement. In these agreements, the seller may have a chance to earn more on the sale of their company – the price of which is contingent on hitting future goals. It’s similar to a strategy often employed by sports teams to acquire talent and motivate performance. Once companies have successfully leapt the price gap hurdle, the second largest challenge is in the merging of company cultures. “This is particularly true of architectural and engineering firms: People are the assets of the company,” explained Gido. “Acquiring companies will want to hold onto talent – which requires a blending of cultures. To have a truly successful merger of company cultures, it’s vital to seek companies that are compatible from the start. To overcome cultural challenges, companies should spend more time in the ‘courtship’ process in order to gain an understanding of one another’s value drivers.” If a firm is fearless in the face of these potential challenges, Gido suggests they take the following steps to prepare for a merger or acquisition: 1) Become Educated on the Process – Managing expectations is half the battle, so read articles, attend seminars and start a dialogue with trusted consultants. 2) Make Sure Your Company is Showcase-Worthy – Just as you would before selling a classic car or house, ensure that your company is in the best condition to showcase to potential buyers. You want it to be in good working order with a clean balance sheet and history of profitability. IN THE END, GIDO INSISTS THAT A SUCCESSFUL M&A SHOULD HAVE ALL OF THESE ELEMENTS IN PLACE: Integration of Assets: Retention of leadership and key employees of the selling firm and blending of cultures is truly the secret sauce to a successful merger or acquisition. Clear Communication from Start to Finish: A change event of this magnitude needs to be clearly communicated to employees and customers so they understand the ways in which the company as a whole will be effected and the rationale behind it. Aligning of Strategic Intent: It’s vital to know the “whys” and motivations behind the transaction from both parties in order to move forward effectively. IT’S ALL ABOUT ATTITUDE While Gido paints a pretty picture of how a successful M&A might appear, Dr. Ruth Middleton House of Middleton-House & Company warns that the wrong attitude and intentions can derail a potential merger or acquisition from the start. She believes that many companies consider an evolution with a primary focus on cost reduction. In doing so, they may actually run the risk of developing avoidable costs and limiting their ability to generate revenue. “It’s especially important to pay attention to two success factors,” Dr. House points out. “First, ensure respectful treatment for people on both sides of the merger or acquisition... even when you’d like to scream! You don’t want to lose your good people. It is likely to take more than a year for a person to get up to speed in many engineering jobs. Replacement costs for a strong performer – including training, customer contacts and so on – are likely to be three to four times that person’s salary. Second, take a broad view of financial impacts: include cost reduction, cost avoidance and revenue generation. It’s very easy to get focused on cost reduction alone and, in the process, both generate avoidable costs – like unwanted turnover – and limit your ability to generate revenue.” She also added three cautions: This is NOT Self-Rising Flour: There is no straight line between then, now and the future, and several tweaks to the organizational chart may be necessary to find the right mix. It’s important that executives continue to watch their design and do collaborative work to correct issues. There is No Silver Bullet: Between things like conflicting agendas and bumps in customer satisfaction, mergers and acquisitions can be a messy, complex business. There is no way to identify just ONE issue and force the transition into a simple plan. Dr. House suggests that companies embrace the mess for a time and focus on getting people moving in the same direction. Minimize Culture Shock: It’s difficult to merge corporate cultures, so it’s vital that everyone treats one another with civility while you work together toward a good outcome. Of course, some companies may ask themselves “WHY would we put ourselves through all that?” From increased revenue and market share to creating a broader line of services, the benefits can be great and far-reaching. That’s where attitude comes into play. “Whether you are seller or buyer, envision a good outcome and then match your behavior to that picture,” said Dr. House. “You can’t always be the person in charge, so shift from the role of director to the role of coach as things unfold. If you want people to make this journey with you, it’s important that you help them be successful. For those who must be laid off in the transition, make sure they have a ‘soft landing.’ When you feel as though you don’t have any control, realize that you DO control your response. Throughout the transition, give support: connect people with others who can help, broker knowledge and influence. Keep lines of communication open and teach your employees to become problem-solvers and collaborators. The failure to merge cultures often comes from too much time ‘doing the deal’ and not enough time in making the deal work.” To make your company attractive for a potential merger or acquisition, Dr. House recommends you do a self audit to see how your company is performing in four key areas: backlog of projects; reputation for quality delivery; extensive, regular and cordial customer contacts; and outreach to the market. Even if you determine that a merger or acquisition may not be in the cards for your company, a self-audit is a great practice to undertake and the insights may lead to better performance and profitability.
Published by American Council of Engineering Companies of Georgia. View All Articles.
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