A financial or human transaction?

January 2006 » Business
In the consulting engineering business, how often have we heard, “People are our most important asset” or “Our assets walk out the door each evening”? These comments are indeed true. So why do firms in this industry persist in viewing mergers and acquisitions (M&A) as merely a financial transaction, agonizing over the price, as if a 5 percent difference will define success?

BY STEVE WINCHESTER AND PETER POUNTNEY

In the consulting engineering business, how often have we heard, “People are our most important asset” or “Our assets walk out the door each evening”? These comments are indeed true. So why do firms in this industry persist in viewing mergers and acquisitions (M&A) as merely a financial transaction, agonizing over the price, as if a 5 percent difference will define success? The success or failure of a merger is dependent upon many items, but most of them relate to the human aspects of the deal. When two businesses merge, the needs of various constituent groups must, to a large degree, be satisfied for the merger to be successful.

Constituents and their needs

Owner(s) of the acquired firm - More often than not, the sale of the firm represents an exit strategy that will allow the owner(s) to retire or move on to other endeavors eventually. However, these people generally put their heart and soul into the development of the business and have deep ties to the people in the company. A prime consideration for owners is how the business will continue in the future, what their short-term role will be, and most importantly, the opportunities the merger will afford their employees.

Employees of the acquired firm - Change is the watchword for this group.

While the staff will have some positive expectations, fear often is associated with change as well. In the near term, employees want to know if and how they fit into the new organization. In the long term, they will hope for more opportunities, ideally from being part of a larger organization.

Employees of the acquiring firm - This group will be interested in understanding how the acquired firm makes the combined firm better, both in terms of serving clients and allowing the new firm to win larger, more challenging projects.

Owner(s) of the acquiring firm - This group is interested in increasing the long-term value of the firm, satisfying important strategic objectives, better serving its clients, and increasing opportunities for all employees.

What are the implications of these needs?

In thinking about this question, it is best to break the M&A process into component pieces: activities prior to merger discussions, preliminary merger discussions, due diligence, and - after final merger discussions - the integration process.

To complete M&A activities successfully, firms must start out with a wellthought- out vision and strategy before the initiation of merger discussions. This vision and strategy will form the basis for evaluating target candidates and for communicating with them about the benefits of combining the two firms. Before approaching a potential acquisition firm, the benefits of a merger, from both the owner's and employees' perspectives, must be conceptualized well. Whether the process moves to the next step will depend upon the ability to articulate the benefits of a combined firm.

Preliminary merger discussions afford the opportunity to “sell” the benefits of the merger to the potential target. However, this is also the time to listen to what is important to the selling firm's owners, their attitude toward the firm's employees, and how they wish to continue to be involved in the merged firm. Additionally, it is advantageous to gain insight into the firm's culture. All of this information will be critical in determining the fit of the firm and hence the potential for success.

In addition to the items normally addressed during due diligence, such as financial information, assets, liabilities, or legal issues, there should be a fair amount of effort devoted to “soft” due diligence.

The process of soft due diligence should focus on understanding the culture of the selling firm more deeply. It should also allow you to discuss with key staff from the selling firm their career goals, their expectations from the merger, their capabilities and, frankly, the likelihood of their staying with the firm for the long term. Honest, open communication is critical during this, as well as other phases, of the deal. There is nothing worse than raising expectations and then not delivering.

Once it is apparent that a merger or acquisition will occur, a significant amount of time must be devoted to develop an integration plan. This detailed roadmap should describe how everything - from benefits to marketing - will be handled in the combined firm. Any organizational or operational changes should be part of the plan. This roadmap will ensure that the merger's strategic objectives are achieved and that the key expectations of both the sellers and buyers are met as the new firm moves forward.

Steve Winchester, vice president of Psomas, is responsible for expanding the firm's water and wastewater practice in the western United States. Peter Pountney was the president of Pountney Consulting Group, Inc. Following a merger, he serves as the San Diego regional office
manager for Psomas.

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Psomas and Pounty Consulting: A win-win merger

In early 2003, Psomas, a 630-person, Los Angeles-based firm specializing in civil engineering, surveying, planning and entitlements, and construction management, began negotiations with Pountney Consulting Group, a 35- person civil engineering/surveying firm with a single office in San Diego.

Merging with Pountney met Psomas's strategic goals by providing a geographic expansion into San Diego and Imperial County; offering access to a range of new public and private clients; and strengthening the firm through additional expertise in forensic engineering, water and wastewater facilities, and transportation and transit design.

The owners of Pountney Consulting desired to undertake larger, more challenging assignments; to grow outside of the San Diego region; to create opportunities for their staff; and to lay the groundwork for a long-range exit strategy.

Key dealmaker factors

This deal progressed to a successful close because the two firms had highly compatible cultures that were employee oriented.

Negotiations were consummated on Jan. 1, 2004, creating Pountney Psomas, a wholly owned Psomas subsidiary.

To ensure a continuity of business relationships, the key employees of Pountney continued in roles similar to those they held under the former firm. Employment contracts for a 36- month period assured the Pountney principals of ongoing employment and allowed Psomas ample time to transition the business relationships that would be critical for the long-term success of the merger.

The organizational form of both firms permitted an attractive tax-deferred stock exchange opportunity. All employee benefits enjoyed by Pountney employees were transferred to the Psomas equivalents, ensuring that the Pountney staff felt fully integrated into the new firm.But a successful merger requires more than a similar business culture, providing for continuity, and protecting employee benefits. It comes down to the human element.

Senior employees from both firms were slow to take advantage of the opportunities the merger afforded. In spite of corporate good intentions, during the first few months of the new relationship,work sharing and referrals did not occur to the extent anticipated. It soon became apparent that the root cause was simple human nature. Just as clients will give work to consultants they know and with whom they have a longstanding relationship,there was a natural hesitancy to transfer work from one entity to another until a professional relationship had been established and trust developed.

This hurdle was surmounted through a series of orchestrated work sessions to facilitate the development of trust and confidence between working teams. These relationship-building efforts formed the foundation for the full integration of Pountney Consulting into Psomas.

As the second year of the new firm comes to a close, Pountney Psomas is doing well. All key management personnel from the original Pountney firm were retained, and they continue to manage the local office, as well as significant projects and clients. Construction management and GIS expertise have been added to the firm's service offerings, thanks to the transfer of two important Psomas employees to San Diego.Also, the Pountney transportation and water resources capabilities are being leveraged through worksharing programs throughout Psomas.

At the time of the merger, there was to be a three-year transition period under the name Pountney Psomas. But by now, all original Pountney Consulting Group clients recognize Pountney Psomas as being a part of Psomas.As a result,Pountney Psomas converted to the San Diego regional office of Psomas on Jan. 1, 2006, just two years after the initial merger.The resulting relationship is well on its way to long-term success.

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Environmental deals on the rise

By Steve Gido,CFA

While overall M&A activity has been strong across the entire AEC sector, there has been resurgence in the number and scale of environmental consulting transactions, and elements appear to be in place for continued dealmaking.

Last year's stretch of devastating natural disasters and surging energy prices have refocused the American public to the importance of protecting, cleaning, and restoring our natural resources. In addition, there is growing demand for environmental services, including water quality, water resources management, health and safety,water/wastewater,regulatory compliance, and remediation services. Rather than slowly building staff through traditional recruiting or cold starting branch offices, firm leaders are buying as a means of strategic growth and competitive positioning.

In 2005, some eye-popping deals radically altered the landscape for environmental consulting and engineering. In September, AECOM Technology Corporation (Los Angeles) acquired 1,600-person ENSR International (Westford, Mass.), and Arcadis (Arnhem, The Netherlands) purchased 900-person Blasland, Bouck & Lee (Syracuse, N.Y.). Earlier, Bureau Veritas (Courbevoie, France) scooped up Clayton Group Services (Novi,Mich.) and their 600 personnel. Each of these transactions was seen as a means to strengthen a global organization's U.S.footprint.

Partly in response to these behemoth transactions, there also have been deals involving smaller and mid-sized environmental firms.

Additionally, there has been increased interest and activity from private equity firms looking to invest in the environmental arena. I usually receive several calls a quarter from private equity partners surveying the industry for opportunities,and many indicate the industry is ripe for continued consolidation. Internal growth is fine, but mergers are how the big firms get bigger. Given the nationwide scarcity of talented environmental scientists and engineers, along with continued public awareness and client demand for a range of environmental services, time will tell if this consolidation activity will continue into 2006 or if many of these active deal participants will take a breather!

Steve Gido, CFA, is an associate with ZweigWhite who specializes in corporate financial advisory services. He can be reached via e-mail at sgido@zweigwhite.com.


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