Some companies’ merger strategies are little more than an attempt to puff themselves up and appease the egotism of senior management. So, if you get the urge, ask yourself whether your purchase is really necessary
The world of construction consultancy has been in the news. Organisations such as Baqus and Erinaceous, with names that seem more suited to I, Claudius than the business section of the FT, have been making headlines. Cyril Sweett has launched on the alternative investment market and we’ve seen architects such as Pascall + Watson flirt with engineers such as Atkins.
Perhaps spurred into action by talk of the credit crunch or a flattening of the South-east commercial sector, organisations in our market are buying into the “big is beautiful” dream. There are now more vehicles in their car park and they feel a warm glow as the letterhead changes to reflect their new status.
One can see why. Every week there are deals crossing our desks that appear attractive. Words and phrases such as “synergy”, “opportunity leverage”, “the realisation of the economy of scale” jump enticingly off the page in offer documents. But all that glitters is not gold and one can see in the example of the Erinaceous debacle that growth for growth’s sake is a flawed strategy.
A merger is a bit like forcing someone to come and live with you. It takes time to build a relationship, adapt your living conditions and reach a workable compromise. There are many “soft” issues to manage, whether they be the transfer of skills, migration of clients or the combining of cultures. These are not readily apparent when your accountants look at the balance sheet during due diligence. But you ignore them at your peril.
The opposite strategy, that of organic growth is, however, often deemed unattractive in the eyes of the City as it does not show a quick return. The idea of growth through long-term investment would seem to be grounded in the vocabulary of business people who are treated as though they originate from the Jurassic era, especially when dealing with slick City professionals who see life through the distorting lens of their M&A bonus.
You soon find there is a stronger cultural fit between the US and Iran than between you and your new subsidiary
Nevertheless, in the market of the construction consultant, our expertise is founded on the knowledge, skills and expertise of our people. It is not about capital invested in machinery, it is about ensuring that you have the best talent available to service and assist your clients. This is where Erinaceous and those on the acquisition path flounder; they just buy business after business, making no attempt at integration, growing like a bloated Topsy.
Often it is the smaller entrepreneurial consultancy that is offered up for sale. You are informed that they would appear to be making a sound profit, have a reasonable reputation in the market and can grow your business with the swipe of a pen. Once the purchase goes through, however, it is not long before you realise that the promised solid contracts have disappeared, having been founded on a personal relationship with the previous owner. You find that there has been little investment over the years since the owner would rather have bought a new car than subsidise a training programme, and there is a stronger cultural fit between the US and Iran than between you and the newly purchased organisation. Soon it becomes apparent that there is little sense of team spirit. And when you change job titles to fit the group structure, there is an open revolt.
Recently quoted sources estimate that more than 80% of mergers fail in the US, and more than half don’t meet financial expectations in this country. The length of time to research, develop, buy and integrate a business should not be underestimated and all too often it can be your existing customers that suffer when you become distracted by dreams of growth.
That is not to say that acquisitions are bad. We have merged operations in the US and Australia and both are profit centres, feel a sense of independence from the mother ship but are still wedded to our culture. Surely it is human factors that make or break a merger; it is not just about accountancy. It is rewarding new ideas, not punishing mistakes and giving people the autonomy and freedom to progress. It is also about remembering that mergers are hardly ever a marriage of equals, and for the employees it brings massive insecurity that can lead to low morale, which in the end affects customers.
For me, it is about serving our clients, developing our team and ensuring that our values remain embedded in the DNA of our organisation. If that works through joining with others, then we will grow through acquisitions. But as for flotation or plc status – we’re just too busy.
Richard Steer is senior partner in Gleeds