Sheena Sood considers the due diligence necessary to ensure a successful acquisition
Consolidation remains rife in the construction industry. Last year saw numerous deals, including the acquisitions of Louis Berger by WSP, Peter Brett Associates by Stantec, Alun Griffiths by Tarmac and Freedom Group by NG Bailey. Many of these deals were driven by overseas buyers looking to gain access to the UK and international markets (particularly US and Canadian buyers) or to obtain particular expertise in a specialist area.
Construction innovation and digital delivery will spearhead a further round of consolidation as companies seek to acquire skills and SMEs struggle to keep up with technological advances. Despite the ongoing fallout from Brexit, it looks likely that UK construction firms, particularly consultants with higher profit margins, will remain an attractive target.
Growing through acquisition can be an effective way to bolt on complimentary services and to gain access to new markets (both locally and internationally) and scale. However, we have seen how some acquisitions fail to meet their pre-deal expectations. A McKinsey study of 160 mergers found about 40% failed to achieve at least 90% of the expected cost synergies.
The principal areas in which deals flounder are fourfold: inadequate due diligence, loss of key people, poor performance of the target and failure to achieve deal goals
The success or failure of a deal begins before signing on the dotted line and cracking open the champagne. The integration process should start as soon as you have chosen a target and only end when key objectives have been achieved or rejected. An acquisition is a process, not a point in time.
In our experience, having been involved in numerous deals on both the buying and selling sides, the principal areas in which deals flounder are fourfold: inadequate due diligence, loss of key people, poor performance of the target and failure to achieve deal goals.
Information is the lifeblood of a deal. What might look like a profitable and successful target from the outside can have a quite different appearance from the inside. Too often due diligence becomes a tick-box exercise, run by disparate teams. The information obtained from the target must be acted upon. This might mean a change to the legal documentation to alter the apportionment of risk, or a post-completion action to review a loss-making contract. When looking at acquiring an architect or engineer, it is prudent to look wider than general commercial due diligence. Drill into their professional indemnity claims record, their appointments, whether they are on any frameworks, whether their work in progress can be converted to cash and their health and safety record.
Drill into their professional indemnity claims record, whether their work in progress can be converted to cash, their safety record
As such deals are confidential, your contact with the target might start and end with the selling shareholders. In an SME, the shareholders and directors are often the same people. They are usually incentivised to get the deal across the line and might only remain with the target for a brief period. Many sellers are too restrictive about who they tell about the deal, but the involvement of the right individuals can help to smooth the process. Too often involving key staff is left to the end of the process, which can result in animosity. Look at ways of retaining and incentivising future leaders. Consider structuring the sellers’ consideration so it is not all paid on completion and is tied to the retention of senior staff.
The deal process can be draining for everyone. The sellers will be focused on answering due diligence queries, negotiating the transaction documents and ensuring clients are on board.
It is common for the target’s performance to slip. Likewise, the integration process can negatively affect performance as attention is drawn away from winning work and servicing clients.
Ensure integration happens quickly. Task key individuals within the business with responsibility for hitting agreed targets. Monitor them frequently and avoid blame. Look at having a dedicated team from outside the target who can provide integration assistance. The target should focus on hitting agreed targets. A dedicated team might incur additional costs, but these should be recovered over the long term.
From the start, the buyer should identify the benefits and risks of the deal and communicate these to key stakeholders in the integration team. If a bolt-on acquisition gives access to specialist skills and entry to new markets, then consider what objectives to set to take advantage of that opportunity. Do you need to approach key clients before the deal completes as part of due diligence? Is there a risk that those clients will object to the deal? Hold “what if” planning meetings to test your assumptions and analyse how you would react to different circumstances.
Acquisitions can be a highly rewarding activity but you need to be realistic about the time and cost involved in sourcing, investigating and integrating a target. Time spent before completion should result in dividends well after the champagne glasses have been cleared away.
Sheena Sood leads the construction, engineering and infrastructure team at Beale & Co