Mastering the “Merger of Equals”

Posted on: 04/19/18

Written by: PSMJ Resources, Inc.

Topics: Mergers & Acquisitions

Particularly in smaller metropolitan markets where larger players are entering and putting significant competitive pressure on the local independent firms, we are seeing it more and more. Whether the rationale is to boost market presence and create a stronger competitive force or simply combine overhead cost structures to squeeze out some efficiencies, the “merger of equals” strategy is alive and well in the A/E space.

Most often, these are two (or more!) architecture or engineering firms that have known each other—sometimes competitors and sometimes partners— for many years and one may even be looking at the combination as a way to solidify some long-term succession planning. Generally speaking, there is nothing inherently wrong with this model and there have been many cases where it has created significant value. However, putting these transactions together is not easy. Accordingly, the risks and opportunities for disaster are many. If you have ever considered a “merger of equals” or if you are currently in the throes of structuring a transaction, here are some tips from our 30+ years assisting firms on matters such as this:

Strategy comes first. The first questions need to relate to what each side is truly looking to get out of this and what the combined organization might look like. At the most fundamental level, are the cultures compatible? Who will run the combined firm? What will the name of the firm be? In many cases, this will be a “merger of equals” from the external marketing perspective…however the reality, internally, is that this is an acquisition with a buyer and a seller. The bottom line is to clearly articulate where the “1+1=3” is coming from.
Due diligence is no less important. The two firms have been crossing paths for decades…is it really necessary to pry into details about quality of earnings and client relationship matters? Yes. Think of the due diligence exercise not only as a chance to confirm assumptions and identify any issues that will require further negotiation. It is also a chance to truly understand the culturally compatibility and identify where post-transaction integration efforts will need to be focused.
Speak now or forever hold your peace. There is nothing worse than entering into the deal for the wrong reasons. You’ve had great autonomy, some nice ownership distributions, and have been able to do what you love. Be honest with yourself and potential partners about your own expectations on life after the deal. You only get one chance to sell!

If you are the owner of a relatively small A/E firm and see industry consolidation changing your operating environment, joining forces with another local firm might be the right option for you. In many cases, this can be a bit of a mid-point between selling to a larger regional or national powerhouse and attempting to transition ownership internally. You’ll still be locally-owned and, potentially, retain considerable flexibility and autonomy. Just make sure that you are going into it with eyes wide open!

Need some more ideas for building an acquisition pipeline and get to a winning transaction? Check out our popular two-day A/E/C Mergers and Acquisitions Senior Executive Roundtable designed exclusively for A/E firm leaders!