Engineering Inc. - May/June 2008 - (Page 14) biggest drivers is the ability to design, build and operate projects in-house,” he says. Firms with engineering roots now are looking outward to expand their portfolio of offerings. Over the last few years, a spate of companies has moved beyond core engineering functionality and into architecture and construction. “Executives at larger companies understand that it is one of the biggest drivers for building market share, increasing revenues and expanding a market presence,” notes Kenner. So far, his firm has done a good job of delivering on that promise. PBS&J has emerged as an industry heavyweight— partly due to its ability to absorb strategically significant firms in the right geographic areas. That list includes EIP Associates, a 100-person environmental and urban planning services firm with headquarters in Sacramento, Calif., and approximately $12 million in revenues (October 2007); and Eco-Science, a 22-employee Raleigh, N.C.–based firm specializing in environmental services (March 2008). Still, not every deal has lived up to expectations. Kenner says as many as one-third of the company’s acquisitions have fallen short of pre-established goals, though these transactions mostly took place in the 1990s. 14 ENGINEERING INC. MAY / JUNE 2008 “It’s important to learn from mistakes and get better over time,” he says. PBS&J has amassed a team of experts that can hit the ground running when a potential deal arises. The team includes M&A experts from finance, human resources, operations, legal, compliance and other areas. Their objective: to “get a fix on things quickly and efficiently,” says Kenner. Gaining an Edge The first step in any merger or acquisition is ensuring a strategic fit. It’s relatively straightforward to determine whether a target company has potential to reinforce or expand the core business and enhance shareholder value. An engineering firm might seek to add architectural and construction services to its product portfolio, or address fast-growing niche areas, such as water infrastructure or environmental services. It also might target key geographies. Far more difficult is determining how to mesh two distinctly different cultures. “Culture is a soft and somewhat intangible thing that often boils down to trusting your gut,” says Matheson. “If business goals don’t match and the companies have incompatible styles, the merger or acquisition is doomed.” Dealmakers have to think about company values, attitudes, work habits, ethics, principles, goals and pay and benefits. They also have to engage in face-to-face meetings and give executives time to observe activities and business processes. “Understanding culture can feel like trying to nail Jell-O to a wall,” says Stantec’s Franceschini. He advises companies to create a list of no more than a dozen of the most crucial elements and to use some type of metric or scorecard to track compatibility. “Unless we feel that we can operate as a single team with a balanced organizational structure, we pass on the deal,” he says. “If the cultural fit isn’t there, it really doesn’t matter how good the strategic or financial aspects appear to be.” No merger or acquisition can be justified by a balance sheet alone. “You’re buying a lot of intangibles, including intellectual capital,” says Franceschini. Firms must deal with people and client contacts. If executives don’t buy into the approach or they’ve already got one foot out the door, the deal is in trouble. But if those pieces fall into place and executives like what they see, they can move from exploration into the due diligence phase of the process. Due diligence involves scrutinizing the suitor’s finances, IT systems, project management practices, human resources, compliance and other factors. It’s vital to understand how competing networks and enterprise applications would merge. An acquiring company also must set a valuation for the target firm. Getting a fix on assets, a firm’s inventory of projects and cash flow is paramount. “When you acquire an engineering firm, you really are buying existing contracts and a backlog of work,” says Matheson. It is important to know where the target company stands on various projects. “Whether they are ahead of schedule, on schedule or behind schedule determines how income is measured and it can skew the valuation significantly. The acquiring firm can wind up overpaying or underpaying for the target company.” There also is a need to address compensation and benefits. An acquiring firm usually wants to retain the principals of the target company for three years or longer or have them sign non-compete agreements, charly franKlin/Getty iMaGeS
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