My thoughts come from being part of different stages and results of the M & A process…and also from years of observing attempts and sad to say, numerous failures.
—Last edited Nov. 7, 2013—
I have tremendous respect for my colleagues in the consulting business, especially those who through the years have made a noble attempt to guide firms in their quest to merge with and/or acquire firms.
I am, though, generally perplexed when they think it can succeed based solely on the merits of the business deal. The relatively short period of time dedicated toward merging cultures often strains the process.
Consider how long it took to establish those separate cultures in the first place. That said, it is usually the acquiring firm’s culture that prevails. I would argue that architectural firms should not attempt mergers & acquisitions (M & A) without far more planning and communication. My thoughts come from being part of different stages and results of the M & A process—early discussions, the process itself and of course several of the end results. It also comes from years of observing attempts and sad to say, numerous failures.
Let’s examine why firms merge. In a marketplace that continues to accelerate its process and business cycles, architectural firms have been notoriously slow in making market or firm shifts. Often decision makers are too hands-on to gauge market shifts early on, and more often, they just don’t know to do it early. This is a universal problem for small and large firms alike. The other scenario is the opposite end of the spectrum, more often seen in large firms, where a person or two is gauging the market, but the firm is too large to allow the informed few to make a decision for a monumental business shift. Small changes generally don’t work and large ones get bogged down in firm politics, so the decision that might have been appropriate at the time is either diluted by consensus or is just too late for market entry. So a merger or acquisition becomes the mechanism of choice for quicker change that carries many problems.
Let’s return to why firms merge. The broad answer is somebody has something to offer that the acquiring firm wants. These usually fall into a few areas. First is location, location, location …usually the desire to be in a certain city. There is a market sector penetration that the acquiring firm desires. The sectors du jour are science and technology and healthcare—but less than five years ago it was entertainment. I hesitate to throw higher education into that mix mainly because that market is redefining itself in terms of “mini-segments” that require a depth of expertise. However, several recent acquisitions have been based upon the higher education market. Sometimes M & As occur to add service lines such as interiors, strategic planning, or landscape architecture. Sometimes firms just want to be bigger. And finally—and I leave the best for last—it can be to add big “D” design; always the most challenging reason and often the most fraught with problems. There are other reasons, but these are the usual drivers. Imagine a big A or A/E firm comes into town and acquires a long-standing design firm with a hot designer. Big A firm is not known for design, probably because the culture didn’t allow or nurture it. If it did, they would already have that design component. The long-standing local firm known for design often ignores the business of architecture and despite a strong legacy can no longer sustain itself. So this could create an interesting hybrid practice.
Actually, one firm I know was a 45-year old family-run practice. Known for quality design and thoughtfulness, this firm of 50+ people was so bogged down in internal politics that it was paralyzed. To their credit they periodically brought someone into a key position to try to shake things up a bit. But after about six months to a year that person or persons had to fight against the malaise of returning to past and unsuccessful business patterns. The challenge is to foster constant renewal and innovation. Too few do it well, but they are out there. This firm consequently started to go downhill and became a target for firms wanting to enter their geographic region. The firm was challenged by lackluster management aided by malaise, and the major stockholders tired of supporting a firm losing money. So they became a ripe target for an acquiring firm wanting Big D design. While they were essentially in the “fire sale” category because of challenging financials, they had a great deal to offer because of a very talented staff. The acquiring firm, a nearly 60-year old international architectural/engineering firm with 10 offices, had a strong desire to bolster their design presence in a region where they had been for five+ years with little recognition other than from a particular market niche from a previously acquired firm. So what complicated their road to success?
The acquiring firm thinks the local firm spends too much money on perks. Admittedly, that’s a “sticky” area, and perhaps one thing that got the local firm in trouble. The designers from the acquired firm think that while the large firm cares about design, they really don’t want to invest in it. The designers from the acquiring firm no longer believed they are valued. The design firm also thinks the acquiring firm doesn’t understand the local business atmosphere, which is true. If handled correctly these issues could be a platform from which the firms may start to bond. Then there are the usual issues: What happens to acquired staff? When people fear for their positions they get nervous; they sometimes leave or start to act more defensively. How long do you carry the name of the previous firm? It might have been three years, but ended up being about a year and one-half; shortened in part because the internal confusion of the two names was a manifestation of the external confusion. Everyone understood that acquisition had occurred, not everyone understood where it was going. Generally, six months to a year should be allowed for the name transition. Sometimes it is longer when there is value in exploiting the acquired firm’s name (important long-standing clients or a design cache). There have been cases when there has been an immediate name change, dropping the old one completely. That strategy can backfire if the acquiring firm is really an unknown.
Many of these issues were present in this particular scenario. And while the feelings were real, they could have been and should have been easily mitigated early in the process so the path to being one firm or one office was smoother. The jury is still out in this particular case. Working under the banner of one name now, they have created a unique design studio within the firm. While in theory creating a high design practice within a practice is interesting and may help bolster their design recognition, it may in fact strain an already fragile level of trust in the firm.
There are many stories like the one I just shared, but there is a common missing thread; trust must be established between the firms before the acquisition occurs, or at least very early on. This should be simple, right? But usually priority is given to the business end first. Financials are shared, valuations are made, and most meetings are brokered by the highest management of the parties involved. The principals, owners, and market sector leaders meet confidentially to discuss aspects of the deal, ownership, name changes, and the easing (sometimes) in or out of key persons. But rarely is the rest of the staff engaged enough to offer a possible solution to issues. Granted, some secrecy is necessary, but it often leads to rumors “hitting the streets” before these deals are done. Think how awful it is when your staff finds out from outside the company that their firm is about to be acquired. But that is just a symptom: The issue is more about getting buy-in early on so that your staff will support the big idea rather than constantly trying to second guess you—or worse, feel so threatened that all they can do is constantly look over their shoulder or leave.
What often amazes me is that the acquiring firm thinks they are assured of the core staff. That’s a huge presumption in this marriage of convenience. The children don’t have to stay if they are unhappy, nor do they have to buy into a company line that they were not educated about or able to comment on. For an M & A situation to work there should be a process in place that addresses transition strategies. The first few years are critical to the success of these transactions, and if firms do not address engaging the next level of leadership they are making a critical mistake. This can take several paths. Certainly engaging your next level of key staff will be enlightening. These people are often so well-linked to the pulse of architecture in a respective city that they can bring valuable information about both firms, get prospective employees interested and provide a fresh perspective to get the brand out. Engage the dissidents. You certainly do not wish to surround yourself just with “yes people.” What you really want are good ideas. And think how they will feel being a part of an important process. They might even stay, have a positive effect on direction and even promote the outcome.
I am equally amazed when firms considering acquisition don’t test the waters by teaming on a prospective project. When firms team strategically they capitalize on the strengths of each firm. When firms are in an acquisition mode, the same should happen with additional criteria, so they can start to determine possibilities for success and discover areas to be addressed. Too often the M & A process forces firms into the defensive mode. Wouldn’t a series of facilitated workshops, intra-office visits, and mingled teams go a long way before the deal is getting done? This rarely occurs. Think of the staff you wish to mentor as the foundation of this future firm. And while the deal is in process, think of the positive message you send when you actually ask the staff of both firms what they think. It may cost a bit more up front and take a little extra time, but it will be worth it in the end. Trust and honesty repay themselves.
(Bio dated Oct. 2003)
Phyllis Dubinsky is a Principal of PDK Market Strategies, a firm specializing in strategic marketing and business services. Prior to forming her own firm, she was a Principal for the southern California practice of Perkins & Will.