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FEBRUARY 2012
Professional Services Management Journal
IN THIS ISSUE:
Strategies for Successful
Mergers & Acquisitions
n It’s Here... Leading Edge M&A
Wave Making Landfall! ...................................1
n How to Set Yourself Up
for Success in M&A. .........................................1
n A Quality Transaction Partner Might
Be Right Under Your Nose. ..............................2
n Don’t Forget These Often-Forgotten
Priorities in a Transaction... .............................2
n Reluctant to Sell the Company?
There’s Another Option. ..................................4
n What Do Your Employees Really
Think of Your Company? .................................5
n Who’s Buying and Selling. ...............................5
n 3 Strategies for Achieving
Integration Success. ........................................6
n Dealing With The Unsolicited Offer. ................6
n Stay Focused On What Is Important
In The Deal. .......................................................7
n Industry Trend Spotlight. ..................................8
n Get Serious About Cultural
Compatibility. ...................................................8
n The Business Systems Rule
Claims Its First Victim! ......................................9
n Thinking About Getting Into M&A?
Don’t Forget The Basics. ..................................9
n Survey Quick Hits. ............................................9
n 5 Questions On Mergers & Acquisitions. ......10
n Leadership Is So Yesterday! ..........................11
n PSMJ Hot Products. .........................................11
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VOLUME 39
•
NUMBER 2
www.psmj.com
It’s Here...Leading Edge of M&A
Wave Making Landfall!
200+ transactions in 2011 brings M&A activity in the A/E industry back to
pre-recession levels. New project inquiries with PSMJ’s M&A consulting
team are at historic highs. Market confidence is gradually improving.
Combine these observations with an impending wave of retiring Baby
Boomers, complex intergenerational dynamics, and plain old supply
(company stock coming available for redemption and/or sale) that outstrips
demand (up-and-coming shareholders willing and able to purchase stock)
and you’ve got the makings of major industry consolidation through
mergers and/or acquisitions.
Ownership transition challenges are proving to be a major catalyst for M&A
activity. What makes ownership transition particularly challenging is that it
so often gets pushed aside as a result of more pressing day-today priorities.
Internal ownership transitions can be very complex transitions that take time
but, in many cases, months and years go by with no action and firms end
up in a scenario where an external sale is their only option as opposed to
simply the most desirable option.
Undercapitalization is often the most visible symptom of an ownership
transition that has gone off the rails and this is an issue that is more
prominent now than ever before as a result of aging Baby Boomers
positioning for retirement. As part of their retirement plans, senior firm
leaders are seeking to create liquidity and monetize their equity holdings.
These redemption liability “bubbles” can pose significant financial
obligations for even the healthiest of firms. Further, the unfortunate news
(and the force that will drive merger and acquisition activity in coming
years) is that internal ownership transition isn’t going to get any easier.
(continued on page 2)
How to Set Yourself
Up for Success in M&A by Brad Wilson
In any acquisition, buyers and sellers must have a clear vision of why the
deal makes sense. This may sound like an obvious statement. However,
even in today’s economic climate, firms continue to jump headfirst into
deals with little strategic direction. This trend is especially true for potential
buyers, who are currently presented with an abundance of acquisition
opportunities.
Still not convinced? Consider this example of a potential transaction that
lacked any strategic focus. At an association convention last year, an office
manager from a large Midwestern A/E firm met one of the principals of a
small Northwestern civil engineering firm. Their firms seemed very alike in
types of work and clients served but neither was especially in the market to
buy or sell.
The two individuals stayed in touch after the convention. Later, the
(continued on page 3)
It’s Here...Leading Edge of M&A Making Landfall
(continued from page 1)
Looking at broader census data in the United States, the bubble
of retiring Baby Boomers far outweighs the demographic
groups behind them and this is the dynamic that is playing out
in many A/E firms of all shapes and sizes...senior shareholders
want out and there isn’t sufficient demand to replace the void
left behind.
Gregory Hart is an M&A consultant with PSMJ Resources.
According to Hart “Transaction activity is back up in 2011
but the numbers don’t tell the whole story. Just having the
volume coming back around doesn’t mean, as Leo Reisman
sang back in the early 1930s, that ‘happy days are here again’.
The marketplace isn’t nearly as forgiving as it was before the
downturn and, as a result, buyers are proceeding with caution.”
Some highlights from the M&A transaction activity in 2011
are as follows:
• Small tuck-in strategic deals were the name of
the game — Other than a few larger deals [e.g. the
Jacobs Engineering Group’s (Pasadena, CA) acquisition
of KlingStubbins (Philadelphia, PA) or the CH2MHill
(Englewood, CO) deal with Halcrow Group (London,
England)] 2011 was the year of the tuck-in deal. It was
still a risk-averse environment and few acquirers had the
confidence to make big bets.
• Smaller and smaller buyers along with more and
more first-time buyers — M&A isn’t just for the ‘serial’
acquirers anymore. With current market conditions and a lot
of small niche firms seeking to align with a more recognized
brand in their market, smaller and first-time buyers were
quite active.
• Earnouts are bridging the valuation gap — We’re still
not out of the woods and nobody is overly confident on
what the future holds for market conditions. Accordingly,
in this uncertain economic climate, earnouts are gaining
popularity to bridge valuation gaps and make deals happen.
Looking forward, PSMJ is forecasting 2012 to be another
year of 200+ transactions and consolidation will continue
to change the shape of the A/E industry for years to come.
The smaller niche firms will always have a place in the
industry and the larger powerhouses will certainly represent
a growing presence. However, putting ownership transition
aside for a moment, the mid-sized firms that are sandwiched
in between these two ends of the spectrum will be facing
the most significant pressure to “eat or be eaten”. Layer this
industry reality on top of the aforementioned ownership
transition pressures and then toss in the fact that some of the
more forward-thinking firms are looking to put stored-up
cash to work in the face of sluggish organic growth and weak
investment returns. You’ve now got a recipe for very active
M&A market. Additionally, with economic conditions and
market confidence (very) gradually improving, look for more
fast-growing firms to pull the trigger on some larger bets that
have been on hold for some time now. n
2
FEBRUARY 2012
Professional Services Management Journal
•
VOLUME 39
A Quality Transaction Partner
Might Be Right Under Your Nose
So many firm leaders, both prospective buyers and prospective
sellers, voice frustrations with finding quality firms that would
be candidates for a prospective transaction. Some frequent
sentiments are along the lines of “None of the good ones are
interested in talking” or “They all want too much money”.
Well, the truth is that great merger or acquisition partners don’t
often fall in your lap. But, the good news is that finding quality
merger or acquisition partners can often be a whole lot easier than
it may appear. Consider the recent merger of E/A firm I&S Group
(Mankato, MN) and civil engineering firm Kuehl & Payer (Storm
Lake, IA). These two firms came into transaction discussions not
by one knocking on the other’s door and simply asking to dance.
Rather, it was a process that inherently got them off on the right
foot. As Chad Surprenant, President and CEO of I&S Group
puts it “We had long wanted to expand our geographic service
area and, specifically, to get to a certain area. In the meantime,
we were aware of Kuehl & Payer, and knowing that we were
not direct competitors (our geographies somewhat touched but
did not overlap), we had contacted them in somewhat of a peer
review scenario where we could ask them operational questions,
learn of shared opportunities, and simply learn from each other.”
This initial discussion to compare notes then turned into
something good. According to Surprenant “As we talked about
our vision of expansion, they were compelled by it and asked
if we would consider merging them in as opposed to us leapfrogging them or competing against them. We have long been
admirers of their work in their specialty areas, but we also knew
that we had services and vision from which they could benefit.”
If you are spinning your wheels in finding quality merger or
acquisition partners, don’t get the cart before the horse by seeking
a firm that will immediately engage in transaction discussions and
then putting on the hard sell. That can frequently be a turn-off for
many successful firms. Instead, always keep the golden rule in
mind and you just might find a successful transaction to be closer
than you thought. n
Gregory Hart is a consultant with PSMJ and specializes in mergers
and acquisitions, valuation, and ownership planning. He can be
reached at 617-965-0055 or at [email protected].
Don’t Forget These OftenForgotten Priorities in a
Transaction...
• Key employee retention
• Clear and consistent communication (internal and external)
• An open and honest process
• Effective due diligence...asking the right questions
• Early identification of problems
Above all else, don’t be afraid to walk if the deal just doesn’t
smell right! n
•
NUMBER 2
www.psmj.com
How to Set Yourself up for Success in M&A
(continued from page 1)
leadership team from the larger firm casually brought up the
idea of an acquisition (largely because another large firm
nearby had been making several transactions over the last few
years...a ‘keep up with the Joneses’ strategy). The principals
in the small firm were flattered but were not prepared to
offer a clear picture as to what a suitable transaction would
look like. Many critical issues were avoided by both firms
during six months of discussions, and by the time the larger
firm decided to get PSMJ involved to help close the deal, the
principals of the small firm had been distracted by this for so
long that their business was in decline and the financial results
would not be attractive to any buyer. In the end, both firms
wasted eight months of time and the smaller firm’s owners
took a significant hit in the wallet as a consolation prize.
While there’s nothing wrong with being an opportunistic
buyer or seller, deals will almost always end in trouble if the
opportunity does not fit within your strategic or personal plan.
Advice for buyers
Just because you can buy another firm doesn’t mean that you
should. Take time to define the major objectives you hope to
achieve in making an acquisition. Be as specific as possible.
Is an acquisition truly the way to go or could you achieve the
same objectives through internal development or by opening a
branch office?
List some good reasons why you would want to buy, as well
as bad reasons. Good reasons would include:
• Strategic infill as part of your strategic plan for
growth. In other words, the firm’s leadership has
recognized a specific geographic region or service type
that the firm is not reaching and an acquisition will most
efficiently serve that strategic need.
• Following a high-quality client. Your firm may have
a client with needs in a different region or state and
acquiring a strong presence in that area may help you to
serve that client right away, as opposed to slowly process
of building a branch office from the ground up.
• Growth to drive employee opportunities. Firms that
stop growing can stagnate and you need growth to retain
and develop the top designers and managers who may
someday become firm leaders. An acquisition may bring in
new and exciting work to keep your people happy.
On the flip side of this, some bad reasons are:
• Keeping up with the firm down the street. There are
many firms that are saying “Everybody else is acquiring,
so we should too.” This reasoning will only lead to failure.
• Thinking you have an opportunity to acquire a firm
at a really good deal. You may find an amazing deal out
there. But, more often than not, it is just too good to be true.
Is the firm in trouble? Is the owner desperate to sell the
company? Why? Are there any skeletons in the closet? Deals
that seem too good to be true most likely are.
Advice for potential sellers
It can be flattering to be approached by a firm you have always
looked up to, but are you sure that becoming part of that firm
will help you achieve your strategic goals? Ask yourself a
number of serious questions before you begin the potentially
gut-wrenching process of selling. Most importantly, what are
your:
• Financial goals?
• Personal and professional goals?
• Goals for the firm?
Do you want to get as much cash for the firm as possible and
leave it forever? Do you want to continue to be involved on a
daily basis, on a project basis, or in some other way? Do you
want to see the firm strengthened on its current path, or taking a
new direction, or doesn’t this issue matter to you? n
Brad Wilson is a consulting with PSMJ specializing in mergers and
acquisitions. Brad has significant experience in all aspects of the
transaction process from target sourcing and identification to
valuation, due diligence, deal structuring, and post-transaction
integration. He can be reached at 857.255.3204 or via email at
[email protected].
Did You Know...
The popular financial website investopedia.com ranks
Quaker Oats Company’s acquisition of Snapple Beverage
Company among the greatest M&A failures of all time.
According to the website:
Quaker Oats successfully managed the widely popular
Gatorade drink and thought it could do the same with
Snapple. In 1994, despite warnings from Wall Street
that the company was paying $1 billion too much, the
company acquired Snapple for a purchase price of $1.7
billion. In addition to overpaying, management broke a
fundamental law in mergers and acquisitions: make sure
you know how to run the company and bring specific
value-added skills sets and expertise to the operation. In
just 27 months, Quaker Oats sold Snapple to a holding
company for a mere $300 million (or a loss of $1.6
million for each day that the company owned Snapple).
• Overhead economies of scale. Large firms with
strong HR and marketing departments in place can
have false notions that expansion will add little to their
overhead. PSMJ survey data shows that as your staff
grows, your overhead will continue to rise.
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please call 800-537-PSMJ. Allow 4-6 weeks for change of address. Copyright ©
2012 by PSMJ Resources, Inc. All rights reserved. Partial quotation with attribution
is encouraged. Reproduction without permission is prohibited.
3
Reluctant to Sell the Company? There’s Another Option
As the Baby Boomer generation continues aging, within the
next two decades, the U.S. will witness a huge wave of business
owners looking to sell their privately held companies. It has been
estimated that some $10 trillion worth of ownership will change
hands.
with the ownership transition. Additionally, an ESOP has the
ability to borrow money to fund the transaction and the individual
employees don’t have any out-of-pocket requirements. On top of
that, the shareholder has the ability to potentially defer gains on
the sale.
Structured properly,
ESOPs provide
owners with both
liquidity and
succession at a
controlled pace
The most common exit strategy for a private business owner is an
external sale to a strategic or financial buyer. The external sale of
100% of the firm is usually a clean break and often provides the
highest available price for the company. However, the decision
to go with an external sale isn’t always simple. In some case, a
suitable buyer is not available. Additionally, the objectives of a
firm owner may go beyond the monetary gains associated with a
sell. What is a seller to do?
The ESOP essentially is an
“inside” buyer of stock. It
can buy as little or as much
of the company’s stock as
the shareholders desire.
Typically, the ESOP buys
30% or more of the stock in
order to realize some of the
tax benefits. The company
can take a tax deduction
for both the interest and
the principal of the debt that the company borrows to fund
the transaction. Structured properly, ESOPs provide owners
with both liquidity and succession at a controlled pace, while
simultaneously creating an employee benefit where the future
payoff to the employees is based largely on the success and
productivity of the business.
While it might be ‘all about the money’ for some sellers, there are
many A/E firm founders who place the financial benefits of a sale
fairly low on the list of priorities. Any of these sound familiar to
you?
• Ensuring that the management team has a fair shot at taking over the reins.
• Allowing the owner to transition out of day-to-day
management over several years rather than all at once.
The benefits of an ESOP can be substantial. However, this isn’t to
imply that an ESOP is appropriate in all situations. As with any
financial transaction, a fair amount of education and analysis is
required to determine if it will be an appropriate fit. But, if you
are wrestling with an external sale and looking for other options,
seek out a seasoned professional firm that specializes in ESOPs
and find out if an ESOP just might be exactly the solution you are
seeking. n
• Protecting the legacy and mission of the business so it can
continue indefinitely; and ensuring that employees will not
be left in the dust once the company’s ownership passes
hands.
If you are a firm leader reaching a point where you wish (or need)
to create some liquidity, but aren’t convinced that an external
sale is the right move, there is a solution that could allow you to
achieve some or all of these objectives while also taking some
money off of the table. That solution is an Employee Stock
Ownership Plan (ESOP). An ESOP is frequently overlooked as
a viable option because its pros and cons are either unknown or
misunderstood.
Steven R. Allison, CEPA is a Senior Vice President with SES Advisors
of Texas who specialize in business development, advisory services
and transaction execution of ESOP leveraged buyouts. He can be
reached at (817) 712-2362 or via email at
[email protected].
Did You Know...
What exactly is an ESOP?
An ESOP is a qualified retirement plan that can purchase and
hold stock of the company sponsoring the plan. However,
more than just a new employee benefit plan, an ESOP can be
a “win/win” solution for the shareholder, the company and the
employees. In particular, the government provides tax benefits to
the ESOP as an incentive to assist private company shareholders
According to The ESOP Association
(www.esopassociation.org), there are approximately
11,500 Employee Stock Ownership Plans (ESOPs) in
place in the United States, covering approximately 10%
of the private-sector workforce. Here are some more
interesting ESOP facts from the ESOP Association:
• Fewer than 2% were financially distressed when
they established their ESOP.
UPCOMING INDUSTRY EVENT
• Approximately 3,000 are 100% owned by the
ESOP.
Employee Ownership Conference
presented by the
• At least 70% of ESOP companies are or were
leveraged, meaning they used borrowed funds to
acquire the employer securities held by the ESOP
trustee.
National Center for Employee
Ownership and Beyster Insitute
April 25-27, 2012 in Minneapolis, MN
For more info: www.nceo.org
4
FEBRUARY 2012
Professional Services Management Journal
•
VOLUME 39
•
NUMBER 2
www.psmj.com
What Do Your Employees Really
Think of Your Company?
Here is what a project manager in a large A/E firm thinks about
his company:
Pros: The management and people in the office are personable.
The office technology is up to date. The location in the city is
great.
Cons: Never seen morale lower in this office or any other A/E
firm. This is due to upper management’s ridiculous processes
and asinine spreadsheets. We are encouraged to work 50 to 60
hours a week, but allowed to only post 40 on the timesheet.
Absolutely no room to be promoted and rarely recognized for
good work. Had more clients give kudos than anyone in the
office. Forget any type of bonus or perks. This place is just
another big firm sweatshop.
Advice to Senior Management: Get rid of the ‘matrix’
Who’s Buying and Selling...
Consolidation continues to shape the future of the A/E industry.
To keep you up to speed on the M&A activity, following are
some notable recent mergers and acquisitions:
• I&S Group (Mankato, MN) merged with Kuehl & Payer
(Storm Lake, IA). Kuehl & Payer provides civil engineering,
environmental engineering, and land surveying. The
combination of these two organizations will create an even
more effective and comprehensive full service architecture
and engineering firm and expands the geographic service
area of I&S Group to include northern Iowa. Additionally,
the merger adds specialization in water and wastewater
treatment, highway design, and bridge design to the civil
engineering services provided by I&S Group. The merged
company will maintain the I&S Group name.
PSMJ provided valuation and advisory services for I&S Group
and Kuehl & Payer on this transaction.
organization, the cumbersome processes, and spreadsheet
programs. Quit sending out daily emails on how well the
company is doing and how happy we are. The corporate reps
that come through the office once a year do a lot of talking,
but really aren’t interested in listening. When the economy
improves, 80% of our local staff will be out the door.
• Global engineering, construction, and technical services
firm URS (San Francisco, CA) acquired the assets of CATI
Training Systems (Daleville, AL). CATI designs and
develops virtual visual environments for flight simulators
and a variety of other training systems for the Department of
Defense as well as commercial customers.
How do we know that is what he really thinks? Because he posted
his opinion online for all to see (along with 176 postings from
other employees of this firm).
• Architecture and design firm Callison (Seattle, WA)
acquired Barteluce Architects & Associates (New York,
NY). The deal adds 75 staff members to Callison’s New
York presence and grows the firm’s luxury retail client base.
According to Callison, since January 1, 2011, the firm has
added more than 200 professionals to its global offices and it
plans to make more strategic acquisitions and investments in
the future. The company achieved 35 percent revenue growth
for the fiscal year ended September 30, 2011.
Welcome to the new world of social media! If you think social
media is not important to your business, think again. Your (mostly
younger) employees aren’t just telling their friends about what
they think of your firm, they’re posting it on sites like Glassdoor.
com for the entire world to see. If you were a project manager
interviewing for a job at this large firm and you saw this posting,
would it influence your decision? If you were a client and you saw
this posting, would it influence your opinion of this firm?
If this article got your attention, look up your company on
social networking sites like Glassdoor.com to find out what your
employees are saying about your firm. Better yet, take control by
encouraging your happy employees to post their opinions on these
sites. Like it or not, social media is here to stay. You can either
benefit from it or be victimized by it – the choice is yours. n
David Burstein is a consultant with PSMJ and frequently speaks and
writes on matters such as strategic planning, marketing, project
management, human resources, corporate finance, and ownership
transition. He can be reached at 770-723-9651 or at
[email protected].
Did You Know...
According to a 2011 PSMJ survey, finding quality
targets and successful integration are the two greatest
challenges for acquirers in the A/E industry. Fortunately,
with the right experience and knowledge, both of these
challenges can be managed effectively.
• GHD (Perth, Western Australia), an international
engineering, architecture, and environmental consulting firm
merged with RobsonWoese (Syracuse, NY). RobsonWoese
provides mechanical, electrical, plumbing and fire protection
services. GHD has 6,500 employees worldwide with about
900 in the United States. According to a press release
announcing the transaction, the RobsonWoese merger will
diversify GHD’s services and capabilities.
To get the latest M&A tips and insight from PSMJ, along with
highlights on all of the latest announced M&A transactions,
subscribe to PSMJ’s M&A Insider today! This free weekly
electronic newsletter has everything you need to stay informed
about A/E mergers and acquisitions. Additionally, if you are a
potential buyer or seller considering a merger or acquisition,
don’t go it alone. PSMJ has the insight and experience to make
your next transaction a success. n
If your firm is considering selling or buying, contact Susan LeComte
([email protected]) or (800) 537-PSMJ to capitalize on the
active M&A market.
5
3 Strategies for Achieving
Integration Success by Chris Klemmer
Dealing with the Unsolicited Offer
by Brad Wilson
Every so often, a firm receives an unsolicited offer or an offer
comes unexpectedly early in the getting-acquainted process
of a potential deal. Here’s what NOT to do when you get an
unexpected offer for your firm:
Conceptualizing a deal is relatively easy. However, achieving a
successful merger or acquisition requires not only imagination
but also hard work; and it is too important to be left solely
in the hands of dealmakers who won’t have to live with the
consequences after the closing.
• Don’t abandon your day job. Small firm leaders can
become so focused on the transaction that they neglect their
core responsibilities. Keep the excitement level down and take
your time hammering out the deal. In a truly strategic fit, the
acquiring firm will understand that you need to slow down the
pace for meetings.
When it comes to post-transaction integration, it is critical to
have a plan that works. Some tips for successful integration
planning include:
1. Empower the Team. Carefully select the leader and
integration planning team members from both sides. Make
sure that transaction goals, team roles, and management
expectations are explicitly clear. Remove competing
assignments and attention-grabbers from team members and
publicly demonstrate their authority with total executive
support. Insist on an organized and flexible project plan
with questions to be answered, an approach to be followed,
information to be gathered, and measures for progress.
Distribute the project plan to stakeholders for feedback and
buy-in.
• Don’t get too many people in your firm involved. Most
small sellers that are majority owners want their key people
to know about the offer and invite them to be a part of the
decision-making process. This can lead to a “too many cooks
in the kitchen” predicament early in the process as things
become bogged down under the effort to give everyone an
opinion.
• Don’t call your attorney just yet. There is an appropriate
time to bring in your attorney, but you only add unnecessary
costs and complexity if you do so while you are still working
on a strategic fit with the buyer.
2. Dig Deep. Make sure the team gets to know each other
and understands how their respective organizations tick as
they develop integration plans. Objective information such
as examples, models, templates, prototypes, and stories of
operational processes are important. However, a subjective
understanding of each other’s people, culture, operations,
philosophy, and values may be more valuable in the long run.
This is the time to mine for conflict, competing imperatives,
sacred cows, resistors, and revolutionaries for appropriate
action. Investigation is done when there is sufficient
information to design a robust integration plan and make an
informed Go/No-Go decision.
• Don’t focus too intently on the up-side. Architects and
engineers can be eternal optimists, but this can lead them to
having unrealistic expectations of value. Potential sellers need
to stay realistic and spend time considering the (admittedly
less exciting) downsides of the offer.
• Don’t let the buyer have insider knowledge of your
clients, processes, etc. Don’t give them any information
except marketing material at this point. Concentrate on
building their image of your reputation and status.
3. Assess Critically. Mergers and acquisitions are among the
• Don’t negotiate on your own behalf. This leads to
riskiest projects a firm can pursue. The planning team must
consider alternatives for office organization, management
structure, marketing approach, operational consolidation,
etc. Outline each alternative, how it would be pursued, the
risks, likely outcomes, and costs. Costs include not only cash
expenditures but also key staff demands, lost clients, and
employee departures. Be realistic; not every client or employee
will survive or want to stay with the merger. It is essential
that the most significant foreseeable risks are identified and
workable contingency plans are developed. When evaluating
the recommended plan, focus on the outcome, confront
difficult issues, and insist on clarity. If the integration plan does
not meet or exceed expectations and provide a viable response
for every identified risk, there are fatal flaws. Stop. Do not
proceed.
negotiations that are 10% business and 90% emotion, as small
firm or founding owners find it difficult to separate themselves
from the company when negotiating terms and dollar amounts.
If the offer is legitimate and you wish to respond, consider
bringing in an M&A advisor that has been down this road
many times before and can guide you through to a win-win
transaction. n
PSMJ TOOLBOX
M&A Target Evaluation Form
In the initial discussions between a prospective buyer
and seller, there are a some key pieces of information
that will inform a go/no-go decision. If you are on the
acquisition hunt, send an email to PSMJ’s Managing
Editor David Whitemyer, AIA ([email protected])
for a complimentary M&A Target Evaluation Form and
make sure this form is completed for every potential
target that you are evaluating!
If you can’t afford your best managers to plan, manage, and
implement post-transaction integration like a “real project”,
you likely cannot afford the transaction in the first place! n
Chris Klemmer, P.E., LEP has 40 years of project management
experience in industry and consulting. He can be reached at
[email protected]
6
FEBRUARY 2012
Professional Services Management Journal
•
VOLUME 39
•
NUMBER 2
Stay Focused on What is Important in the Deal by Donald J. Skowron, AIA
Once you have a Non-Disclosure Agreement executed, several
“feel good” meetings are in order between a prospective buyer
and seller. These initial meetings will serve to test the waters,
establish a working relationship, and start a chemistry process.
Once these meetings have taken place, more formal meetings
and information exchange can occur. As you get into the more
detailed meetings, things can get busy and it can become easy to
get buried in the details. To stay focused ALL important aspects
and successful integration, consider establishing the following
working groups:
• Steering Committee
• Human Resources
• Marketing & Business Development
• Project Management
• I.T. Integration
• Finance
The various committees listed above should meet weekly and
report on progress to the general group meeting bi-weekly.
The meetings are organized with a clear agenda and are actionoriented. Specific tasks of the working groups are:
• Steering – Responsible for coordinating overall management
issues, including those of other working groups, development
of a memorandum of understanding, integration strategies, legal
issues from potential claims or pending litigation issues, and draft
purchase agreement.
• Human Resources – Two firms are rarely alike. One may have
more paid vacation days, a better health insurance plan, varied
benefits. In the integration process, resolution of these differences
will need to be completed with the understanding there are some
winners and some losers, but in the end, a win/win for all.
• Marketing & Business Development – What are each firm’s
Depending on the size of the transaction, you can scale up
or down these groups. But, open communications between
buyer and seller on issues raised by these groups will mean the
difference between success or failure after the transaction has
closed. n
Donald J. Skowron, AIA is the Senior Vice President and COO of
Foit Albert Associates Architects, Engineers, Surveyors, PC. He
can be reached at [email protected].
Complimentary Fees &
Pricing Benchmarking Tool!
The window to participate in the 2012 PSMJ Fees &
Pricing Benchmark Survey is closing soon! PSMJ needs
your help to accumulate critical information on current
conditions. In return, we’ll help you better manage your
clients and compare your firm to those of your peers.
We’ve made this survey as easy as possible for you to
complete. It is in a Microsoft Excel spreadsheet format
for inputting and you can simply e-mail your response
to us. Interactive instructions and on-screen editing help
you provide correct information.
When you participate in the survey, you will receive the
exclusive 2012 PSMJ Fees & Pricing Benchmark Tool
that will benchmark your firm to other firms by your
choice of criteria: size, type, or client type. Your data
will be preloaded and the tool will be ready to provide
to your firm’s key management with charts and graphs
on how your firm compares!
• Project Management – Each firm may have a different set
Our survey questionnaire was e-mailed out for
participation on January 5th. If you didn’t receive this
e-mail, please go to www.psmj.com to download the
questionnaire, or send a message to PSMJSurveys@
psmj.com with your contact info and we’ll make sure
you’re on our e-mail list. Act fast because the deadline
for participation is January 27th, 2012. n
• I.T. Integration – Chances are the operating systems for finance
Did You Know...
markets, clients and opportunities past and present? Determine if
you have similar clients. Explore rebranding, name changes and
eventual PR opportunities. A solid plan for the eventual change
is absolutely necessary and may need the expertise of outside
professionals.
of guidelines for project management and production. A careful
review of these documents is necessary to determine the best
practices and how best to integrate each firm’s approaches into
one new policy and procedures manual. It should be noted that
this is a time consuming process and may take additional time
beyond the signing of the final agreement.
and production are different in each firm. As an example, an
architectural firm acquiring an engineering firm may find that the
engineering firm utilizes Civil 3D instead of AutoCAD. System
compatibility and the necessity of combining systems is critical
and may have financial implication as the deal goes forward.
• Finance – A careful review of each individual firm’s debts,
project liabilities, insurance policies, special benefit deals,
banking relationships, accounting procedures, A/R, profitability
(loss) and other obligations. A clear understanding of this data is
essential and cannot be overstated.
According to PSMJ’s tracking of M&A activity in the
A/E industry, the most active acquirer in 2011 was
GENIVAR (Montreal, QC). This multi-disciplinary
firm with 5,000 employees topped the charts with seven
transactions on the books for the year. GENIVAR has
completed more than 50 acquisitions since its inception
in 1959.
7
INDUSTRY TREND SPOTLIGHT
Run Your Business as Though it’s for Sale EVERYDAY!
Every buyer is looking for a good investment – whether that buyer is an internal shareholder or an external acquirer. Of course, many
elements must be considered in a sale, but two factors that bring buyers to the table are strong profits and good cash flow. You can
quickly benchmark both by looking at PSMJ’s Return on Working Capital Assets (ROWC) data. This metric reflects the profits being
generated through use of the firm’s assets. In most firms, A/R and WIP represent the majority of a design firm’s assets. Here’s how
the RoWC is calculated:
ROWC = [Net Profit] / [Total Accounts Receivable + Work in Process]
High ROWC gives buyers insight that your firm has good client relationships and closely manages billings and collections.
Generally, smaller firms have the highest ROWC, as do firms that provide services to the industrial and healthcare markets. Firms
that support clients in the commercial and residential markets typically see the lowest ROWC. As shown in the chart below, while
engineering (subconsulting) and A/E firms saw significant decreases in return on working capital this year, architectural firms
reported significant increases.
How does your firm stack up? n
The data presented in this graph are results of PSMJ’s 2011 Financial Performance Benchmark Survey. For more information, visit www.
psmj.com.
Get Serious About Cultural Compatibility
2. When you identify an acquisition candidate that
appears to be of interest, ask their principals to take the
same profile. How closely the profile of the buyer matches
Everyone knows that most failed acquisitions are a result of
cultural incompatibility between the buyer and seller. If you are
a buyer, the last thing you need is to acquire a firm whose culture
is at odds with yours. If you are a seller, the last thing you want
is to spend the rest of your career tied up in an employment
agreement with a culturally incompatible boss. Yet, few buyers
or sellers really incorporate this factor into their acquisition
process. A 2011 survey conducted by PSMJ indicated that
many acquirers conduct very limited assessments of cultural
compatibility and few firms are satisfied with their efforts.
the profile of the seller will tell you how culturally compatible
your firms are likely to be. If you appear to be reasonably
compatible, move on with discussions; if not, break them off
early.
3. Once you have reached agreement on the key terms
of the acquisition, develop an integration plan that
incorporates all the corporate culture elements that need
to be considered.
Here are some simple steps to take to incorporate cultural
compatibility into your acquisition process:
Follow this simple approach and you’ll be much happier,
regardless of whether you are the buyer or the seller. n
1. Develop a culture profile for your firm. (PSMJ has
developed such a profile that we use successfully for our
M&A clients. For a complimentary copy, just send an email
to [email protected].)
8
FEBRUARY 2012
Professional Services Management Journal
•
VOLUME 39
•
NUMBER 2
The Business Systems Rule
Claims its First Victim!
Thinking about Getting into
M&A? Don’t Forget the Basics
by John Stunson
It has been said by many who have participated in M&A
transactions that firm culture is the most important aspect of
the deal. In this industry, people make the deal a success and
therefore you must make every effort to keep them involved,
starting with day one of the integration process.
U.S. Navy Withholds Funds from Shipbuilder
My article in last month’s issue of PSMJ, “Famous Last
Words – “That Rule Doesn’t Apply To Us!,” warned readers
of the risks of non-compliance with the new Federal Business
Systems rule for Government Contractors. Since writing that
article, I can say it is no longer a warning, but a reality as the
rule has claimed its first victim! This rule, which was put
into effect mid-year 2011, defines over 100 control objectives
for six key contractor business systems (i.e. Purchasing,
Accounting, Estimating, Earned Value Management System
(EVMS), Material Management and Accounting System
(MMAS), and Government Property).
In late October, the Navy notified shipbuilder Huntington
Ingalls Industries that it would withhold 5% of progress
payments for the $698 Million contract awarded in September
for the construction of an Arleigh Burke-class destroyer. This
decision makes for the first withholding applied using the new
DOD Contractor Business Systems Rule.
At issue was one of the six key business systems, the Earned
Value Management System (EVMS). The Defense Contract
Management Agency (DCMA) made a determination that
16 of the 32 EVMS rules were found lacking and therefore a
“significant deficiency” existed within the system.
Huntington Ingalls has submitted a formal corrective action
plan which is currently being reviewed by DCMA. Regardless
of the ultimate disposition, it is clear that the Government
intends to enforce the Business Systems rule.
Surprisingly, many contractors are still avoiding taking
preventive measures to deal with this new regulation.
Measures such as performing risk assessments, specific
training, compliance checks, and bolstering policies and
procedures will certainly be required, among other more
technical, Government contract specific requirements. Given
these recent events, Government Contractor Management
should assume that:
• The Business System Rule does or will apply to them,
• The Rule will be enforced,
• The DCAA will audit the systems specified in the Business System Rule.
Will you let your company be caught non-compliant? n
John Stunson leads the Government Contract Services Practice
of Auxis, Inc, a Management Consulting and Outsourcing
Firm. He has extensive experience working with government
Contractors to assist their compliance needs, from gap
identification to system implementation. He can be reached at
[email protected] or at (954) 236-4000.
by Donald J. Skowron, AIA
Having been through many transactions over the years, here’s
what you MUST be thinking about as you enter into the
process:
• Understand what you are looking to buy (or sell). Establish your criteria and your goals.
• Above all be honest in your approach and in your dealings.
• Keep key people in the loop. Word will get out, you can count on it.
• Share important information with the buyers/seller.
• Be patient. It takes time especially with first time buyers or sellers. Original founder(s) will be the most difficult to deal with.
• Don’t cause unrest or panic among staff.
And, most importantly, your first step in discussions and
negotiations with a prospective buyer or seller is a
Confidentiality Agreement. Especially if you are a seller,
you’ve got a lot at stake here! n
SURVEY QUICK HITS
Is your firm ready to go to market?
From profitability to leverage, just about every aspect of a
firm’s financial condition will be a factor for buyers figuring
out what to pay in a merger or acquisition. To this end, here
are just a few noteworthy findings from PSMJ’s 2011 A/E
Financial Performance Benchmark Survey:
• Firms in PSMJ’s 2011 Circle of Excellence achieve
significantly higher return on working capital assets than
the typical firm— 39.4 percent versus the overall median
of 9.3 percent. (PSMJ’s Circle of Excellence is selected
from the top twenty percent of firms that participate in
PSMJ’s Financial Performance Benchmark Survey.)
• Some firms in the upper quartile results are using
considerably more debt (leverage) than the average firm
to finance their capital needs. A quarter of firms report
a total debt-to-equity ratio of at least 161.64 percent, in
comparison to the survey median of 89.81 percent. n
For more information on PSMJ’s latest Financial Performance
Benchmark Survey, visit www.psmj.com.
9
5 Questions on Mergers & Acquisitions
Each month in PSMJ, we’ll be featuring five questions on the
theme for the month with one of PSMJ’s expert consultants. This
is our chance to ask some candid questions and get some straight
actionable information from seasoned pros that are in the trenches
with some of the most successful and forward-thinking firms in
the industry.
make a valiant attempt to preserve profitability as revenues
declined. Have key metrics like utilization and overhead
rates trended better than the broader market conditions?
What kinds for core competencies were protected during
the recession that might support stronger financial
performance expectations going forward?
For this month’s issue, we sat down with Brad Wilson of PSMJ’s
M&A consulting team. Brad has been with PSMJ for just about
a decade and has seen just about everything when it comes to
M&A. Here’s what we gathered from our five questions with
Brad:
Q: Where are the hot markets?
A: We’re seeing a lot of interest in the energy,
environmental, water, and healthcare markets. These
markets are appealing to the strategic and financial
buyers because of the connection to overall economic
and demographic trends. Geographically, it is still really a
mixed bag…though parts of the South and West are getting
more interest than they’ve had in the past couple years. On
the global scene, Australia is very attractive as are some of
the emerging markets.
Q: What’s your outlook for M&A in the A/E industry?
A: Transaction activity was up in 2011. In fact, the number
of transactions was back up to pre-recession levels. With the
growing wave of retiring Baby Boomers and the pressure
that is putting on internal succession plans, we are expecting
consolidation to be a major force shaping the A/E industry in
2012 and beyond. And, it isn’t just the ‘serial’ acquirers doing
big deals anymore. More and more smaller firms are getting
into the market and firms that have historically grown solely
through organic means are also getting into the game. This
trend is going to continue and better economic times will add
to the attractiveness of a “growth by acquisition” strategy.
Q: When considering a sale, how can sellers be
confident when entering into discussions with the
‘right’ buyer?
A: This is a worry that goes through the minds of many
sellers, particularly first-generation owners who are selling
a firm that they have built from the ground up. Sellers want
to know that the firm’s brand recognition and employee
loyalty aren’t thrown out the window after the sale. What’s
important for sellers here is to do their homework and be
pro-active. First, define what the ideal buyer looks like…
financially, strategically, and culturally and then put your
resources to work to identify the most relevant buyers and
ask the pertinent questions early on. At PSMJ, we have
several tools that we use for our clients to gauge the ‘fit’
of a prospective buyer or seller. Relying on your gut and
instinct is good but relying on proven, objective techniques
is even better!
Q: How has the current economy impacted
transaction activity?
A: Whenever this industry goes through a ‘bust’ cycle,
transaction activity slows as buyers become risk averse and
sellers decide to ride things out for a bit. This downturn has
been no different. But, three years out now from the initial
meltdown, everyone has started to come out of their bunkers.
Nonetheless, buyers are being more careful in finding targets
and closing transactions. Deals are getting scrutinized more
within the buyer organizations, due diligence efforts are more
thorough, and we’re seeing more buyers looking to shift
some of the transaction risk onto the seller through payfor-performance provisions or earnouts. M&A can unlock
significant growth opportunities for buyers and sellers but,
now more than ever, this isn’t for the timid. You need the right
team with the experience to get it done right. If you are going
in with limited experience, keep the first transaction small and
uncomplicated so you can build on success.
If you have more questions on M&A that you’d like answers
to, you can contact Brad Wilson at (857) 255-3204 or via
email at [email protected]. Otherwise, look for our five
questions next month with another one of PSMJ’s experts! n
UPCOMING INDUSTRY EVENT
Q: What are buyers looking for most right now in a
seller?
PSMJ Merger & Acquisition
Senior Executive Roundtable
A: Well, many sellers have been hampered a bit over the
past few years and most buyers will understand this. So,
recent historical revenue and earnings might not be the best
indicator of future value. There may still be some considerable
forward-looking value or value that isn’t necessarily reflected
in the financial statements. So, while they won’t always be
looking solely to last year’s financials they will be looking
for some degree of business-like behavior and discipline to
10
FEBRUARY 2012
Professional Services Management Journal
•
VOLUME 39
February 28 – 29, 2012 in Orlando, FL
April 3 – 4, 2012 in San Diego, CA
For more info: www.psmj.com
•
NUMBER 2
Leadership is so Yesterday!
by Bob Kelleher
I have an amazing revelation I’d like to share with you. After
spending a career helping companies engage their employees to
drive business results, I suddenly realized that having engaged
employees by itself is not the answer. I still believe engagement
is the secret sauce that separates you from your competition,
but engagement, along with profit, revenue growth, innovation,
quality, and customer satisfaction, are by themselves all
outcomes of something bigger.
This revelation occurred to me during a recent keynote talk
while discussing how iconic New England companies such
as Digital Equipment Corporation, Polaroid, Arthur D. Little,
Stone and Webster, and Wang all went bankrupt. These firms
employed satisfied employees, were led by extraordinary
leaders, and in most cases, had exemplary cultures. But they all
went bankrupt. Why?
My conclusion was simple. Employee engagement, profit,
growth, and client satisfaction by themselves are not
sustainable. Neither is solid leadership, as these organizations
were led by very talented leaders. So, my historical definition
of leadership has now been carted off and tossed in the “no
longer needed” dumpster, along with the CD player, help
wanted newspaper ads, corner video stores, job descriptions,
and employee service award programs. I’ve often defined
leadership as the ability to lead people, build fellowship, and
make money. But, this archaic definition of leadership is so
yesterday! Today, leadership is about creativeship; defined
as the creation of sustainable cultures and business models.
Creativeship will allow a business to compete and thrive in this
world of unprecedented technological advances, globalization,
shifting economic drivers, government intervention, changing
workforce demographics, vastly different motivational
drivers with Gen X, and the emergence of corporate social
responsibility as a motivational driver.
For firms to be sustainable, they need to shift their leadership
model from the historical definition to creativeship and invest
their energies and resources in six prominent and overlapping
business priorities: Purpose, Engagement, Performance,
Innovation, Branding, and Growth. Following are brief
highlights if these six priorities for creativeship:
Purpose. Organizations need to articulate both their “what
we do” and their “why we do it.” A firm’s employment value
proposition (EVP) needs to identify its “why” if they want
to retain, attract and hire the best employees of tomorrow. It
has been proven for some time now that socially conscious
organizations, driven by improving the world, outperform those
organizations solely committed to beating the competition
(Logan, king, and Fischer-Wright, 2008).
Much has been written about Generation Y (the Millinium
generation) being a purpose generation. A pararell trend is
the increasing role Baby Boomers are playing in leading and
initiating corporate social responsibility activites as they push
their employers to donate to charities, reduce their carbon
footprint, and support volunteerism. After years of focusing on
wealth accumulation and climbing the corpoate ladder, boomers
are now re-focusing their priorities.
(continued on page 12)
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UPCOMING INDUSTRY EVENT
A/E/C Industry Human Resource Summit
March 22-23, 2012 in San Francisco, CA
PSMJ’s A/E/C Industry Human Resources Summit is
designed to provide the insight and information that every
firm leader needs to foster excellence in this people-based
industry. Through energetic panel discussions and top-notch
presentations, you learn through examining successful
real-life case studies, receive A/E/C survey results, and be
given ample opportunity to network with your peers who
have overcome challenges just like yours.
This years event will feature the following exciting pre-con
program: Best in Class Recruiting and On-boarding
Strategies for the A/E/C Industry. Led by industry HR
expert Bob Kelleher, attendees will learn about various
online technologies, proven processes, and best in class
examples on delivering efficient talent acquisition
& on-boarding strategies.You’ll leave this program
equipped with the information you need to:
• Leverage Social Media to find “passive” candidates (and overcome Social Media Myths)
• Reduce your use of “headhunters”
• Develop an effective Employee Referral Program
• Understand and brand your EVP (Employment
Value Proposition)
• Co-brand your EVP with your marketing and corporate communications staff
• Identify the ideal behaviors and traits for your company
• Put in place an effective on-boarding program
Space is limited. Visit www.psmj.com to learn more
and register today!
11
www.psmj.com
Branding. There’s no denying that social media has taken
the world by storm. Facebook boasts some 640 million
users worldwide. Twitter receives 95 million Tweets every
day. Social media is a huge engagement, staffing, retention,
and increasingly, branding tool. Over the years, I’ve
touted the benefits of linking one’s employment brand to
one’s service or product brand, a process I called product/
employment co-branding. To build sustainable cultures
and business models, I now believe a third dimension is
necessary - a dimension I call tri-branding. Tri-branding
occurs when companies build tenacious customer brand
loyalty and passion – a process made easier today with the
emergence of social media as an everyday communications
(and branding) tool. Think Apple. They build cool
technological products and hire technically cool people
who are avid Apple consumers themselves.
Leadership is so Yesterday!
(continued from page 11)
Engagement. Luckily, we’re seeing evidence that more and
more leadership teams are asking their human resources and
organizational development staffs to build engaged workforces.
According to December 2010’s Economic Intelligence
Unit, 84% of C-Suite survey respondents reported that that
“disengaged employees” is one of the biggest threats to their
business. Successful initiatives will link engagement efforts
to high performance while minimizing employee satisfaction
goals. The last thing you want is a team of satisfied but
underperforming employees.
Performance. Creating
sustainable cultures of
performance at both the
company and individual
level is key. Every Sunday
during football season, I’m
reminded that you don’t
need to be a charismatic
person to be a great leader.
Bill Belicheck, coach and
general manager of the
New England Patriots, has
literally put me to sleep
during his post game press
conferences. However,
he is a great example of
a leader who lives in the
world of creativeship. He
does an extraordinary job
of creating a sustainable
culture of high performance.
He is willing to let his super
bowl hero placekicker go
to his division’s chief rival rather than risk upsetting his salary
structure to ensure a sustainable period of high performance.
He holds his players accountable – a key engagement driver- as
evidenced by last season’s decision to trade his disgruntled star
wide.
According
to December
2010’s Economic
Intelligence Unit,
84% of C-Suite
survey respondents
reported that
that “disengaged
employees” is one
of the biggest
threats to their
business.
For those who don’t embrace social media as a branding
opportunity, beware that former employees and customers,
not to mention applicants and other key stakeholders might
be. Sites such as Glassdoor.com are increasingly becoming
popular with departing employees who feel their companies
did not treat them fairly.
Malcolm Gladwell highlights in his best selling book The
Tipping Point, the importance of “connectors” – employees
and the like who know how to get things done, know
your organizations’ key players, and are the people most
connected with other people. In the world of social media,
connectors are your brand ambassadors.
Growth. The old business adage, “Grow or Die” is at
the core of creativeship. In this era of globalization and
technological advances, companies need to understand
that they will perish if they don’t evolve, grow, expand,
and morph. For every one Levi Straus (producing the
same product the same way for 100 years), there are
100 companies who become extinct because they don’t
grow or evolve. Companies who are local need to think
regional; companies who are regional need to think
national; companies who are national need to think global.
As Thomas Friedman points out in The World is Flat,
technology is creating a level playing field regardless of
where you produce your product or perform your service.
At the employee level, creativeship is about creating
cultures of personal growth and development. Recent
studies show that Gen Y’ers are 3X more motivated by
career development opportunities than financial rewards.
Innovation. Creating cultures of innovation fosters both
engagement and sustainability. Companies fail when they cease
evolving their product or service, or internal processes. Why
did Ken Olsen and DEC continue to produce minicomputers
while startups were building personal computers? How was it
that Jeff Taylor, founder of Monster.com, was able to launch
Monster.com and not the New York Times or the Boston Globe,
who employed thousands of talented employees? Creating
cultures of innovation and sustainability requires investing
today’s cash to discover tomorrow’s new technologies, products,
services, geographies, and approaches.
Publisher: Frank A. Stasiowski, FAIA
Managing Editor: David Whitemyer, AIA
Graphic Design: Marc Boggs
Published by: PSMJ Resources, Inc.
12
Coming Next Month:
Headquarters/Boston, Massachusetts:
10 Midland Avenue • Newton, MA 02458
Tel: 617-965-0055 • Fax: 617-965-5152
Email: [email protected]
Web: www.psmj.com
FEBRUARY 2012
Professional Services Management Journal
Bob Kelleher is a noted speaker, consultant, and author of
Louder Than Words, 10 Practical Employee Engagement Steps
That Drive Results. Additionally, Bob is the founder and CEO
of The Employee Engagement Group, a global consulting
firm that works with leadership teams to implement best-inclass leadership and employee engagement programs. He
can be reached at 781.239.8713 or via email at rkelleher@
employeeengagment.com.
•
VOLUME 39
Managing Your Staff: Hiring,
Firing, and Inspiring.
•
NUMBER 2