The last three years of architectural finance have been characterized by a succession of high-profile mergers and acquisitions.
By Matthew Lynch
Anecdotal evidence suggests that M&A momentum will continue unabated throughout 2009 and into 2010. ZweigWhite reports in its 2009 Merger & Acquisition Survey of Architecture, Engineering, Planning & Environmental Consulting Firms that 71% of firms expect to be a party to a merger or acquisition in the next five years.
To date, M&A transactions have supplied the architectural industry with a portfolio of more robust and re-energized firms.
In June 2007, the UK-based RMJM merged with the US-based Hillier to augment its existing architectural practice with design-intensive expertise. RTKL Associates has been providing its master-planning expertise to its acquirer Arcadis since its takeover in July 2007. AECOM – having previously merged with EDAW in December 2005 – acquired Earth Tech in July 2008, and Susman Tisdale Gayle Architects merged with BMG Architects in late 2008.
Most mergers and acquisitions have shared a common motivation to expand the financial, operational and regional capabilities of the invested parties.
There are, however, myriad risks associated with mergers and acquisitions, particularly if the transaction is hostile or is motivated by financial desperation.One year ago, the giant engineering and architecture firm HDR completed its takeover of the science- and technology-driven CUH2A. ‘The merger was driven by both firms’ long-term business strategies,’ says Scott Butler, President of CUH2A. ‘It has added significant diversity for both firms in terms of services provided and locations served.’
‘It was also an opportunity for growth,’ adds Doug Wignall, Director of Healthcare at HDR. ’Yet it was about balance and diversity – that in and of itself brings stability because there’s a balance of a larger variety of building types.’
M&A transactions have remained central to HDR’s growth strategy throughout this recession – since the start of 2009 it has acquired Devine Tarbell & Associates to consolidate its emerging interest in renewable energy; merged with G+G Partnership Architects to strengthen its presence in eastern Canada; and as recently as last week acquired e2M to bolster its capability for federal projects.
The union between HDR and CUH2A represents the success that can be achieved by a strategic, consensual and carefully evaluated decision to merge or acquire – HDR’s architectural revenue rose from $194.8M in 2007 to $340.6M in 2008. If the potential combination of two firms appears to be beneficial to both parties, then a merger can be a welcome strategy to ensure growth during an economic downturn.
There are, however, myriad risks associated with mergers and acquisitions, particularly if the transaction is hostile or is motivated by financial desperation. M&A specialists advise that these transactions are far less likely to succeed compared with those motivated by growth.
‘Whether it’s a horizontal, vertical or congeneric merger or acquisition’, says Jack Reigle, President of SPARKS Strategic Planning, ‘the participating entities need to ensure that the decision is motivated by the desire to expand financial, operational and regional capacities.’
‘Where other industries have generally experienced collaboration and support, the architecture industry would also benefit from such marriages and synergies,’ explains Reigle, ‘but only when service partners are carefully selected and assembled using strict criteria for the right fit.’
Reigle delivers his warning on the eve of one of the biggest deals in the history of architectural restructuring as Chicago-based OWP/P is set to finalize its merger with Cannon Design in early July.Reigle delivers his warning on the eve of one of the biggest deals in the history of architectural restructuring as Chicago-based OWP/P is set to finalize its merger with Cannon Design in early July. OWP/P, ranked 79th on Architectural Record’s list of Top 250 firms in 2008 (with $43.6M in architectural revenue), will add institutional and commercial expertise to Cannon Design, which is placed 20th on the list (with $106.43M in architectural revenue). Details of the cash and stock transaction have not been publically disclosed, but based on 2008 revenues the combined firms would be the 14th largest in the U.S.
Despite taking place in the midst of a recession in full swing, Rosalyn Ryan, Director of Business Development at OWP/P, is confident that the merger will be successful. ‘The strength of the merger is expected to be driven by the opportunity for growth – as any good business decision should be.’
‘The business practices of both companies must inform and assist each other,’ explains Ryan. ‘Cannon Design will provide a larger group of resources and a strong model of performance, while OWP/P offers a strong history in the mid-west – together these strategies will grow the business.’
Both firms remain optimistic and excited. ‘If we both work toward building and not taking apart, the results will be formidable.’
And her advice to other firms considering a merger or acquisition? ‘Keep in mind the huge volume of changes that are inevitably catalyzed,’ she says. ‘During this process people need to remain flexible and look for realistic outcomes, not just a good cultural fit. I would suggest that people be completely honest in their transactions and promises. Any successful merger or acquisition needs to be built on trust.’
Matthew Lynch is a New York-based journalist and architect. Lynch graduated summa cum laude from the University of Sydney with the Bachelor of Architecture.