Engineering Inc - September/October 2017 - 50

MERGERSANDACQUISITIONS

Deal-Making Stays Strong;
Some Buyers Behaving Badly
BY NICK BELITZ

ENGINEERING INC.

SEPTEMBER / OCTOBER 2017

Reported Annual A/E M&A Activity
400
348
300
# of Deals

s previously reported in this column, mergers and
acquisition activity in the A/E industry has somewhat
lessened since the back-to-back record-setting years of
2014 and 2015. However, as measured by the number of transactions, overall interest in deal-making in the sector
remains high.
The 2015 high-water mark of 352 global deals-which came
after 2014's then-record tally of 341 deals-was followed by 347
deals in 2016. Morrissey Goodale's data as of this writing indicates
the current deal volume is down just 3 percent over the most
recently completed 12-month period.
Indications are that robust M&A activity is here to stay: The
average number of A/E deals over the last five years (2011 to
2016) stands at 331 per year, which represents an increase over
the preceding five-year average of 275 from 2007 to 2010. That
mark is a dramatic increase over the five-year average of 132 deals
for 2002 to 2006. More deal activity means more firms are in the
market; however, willingness to acquire does not convey expertise.
The following is a short list of common errors we see in potential
buyers:
Going hot and cold. If a buyer finds good reason for moving
forward after the first conversation, the buyer should clearly communicate continuing interest and suggest next steps to the sellers
without delay. One of the most common errors buyers make in
the early stages of an M&A discussion is to disappear after a positive initial exchange. There may be legitimate reasons for doing so,
such as client issues or high-priority proposals. When a seller hears
radio silence for a month or more following the initial conversation, buyers will find diminished enthusiasm and perhaps a reluctant seller when, and if, discussions resume.
Demanding lengthy nondisclosure agreements.
Nothing kills the fire of corporate passion quicker than 10 pages
of legalese dripping with threats of liquidated damages. Buyers
need to remember that, in most cases, it is the larger firm that initiated the conversation. Asking a seller that responded to a letter
or phone call to sign a dense legal document may end the conversation before it starts. With the vast majority of industry firms at
100 staff and smaller in size, typical sellers do not have a general
counsel or corporate attorney with M&A experience standing by
to review a document that, to the uninitiated, appears to invite
costly litigation. A standard two-page agreement providing mutual
protections without unreasonable terms and conditions is the best
bet to give security to both sides.
Asking for exclusivity without pricing or other
terms. We have seen a rise in the number of letters of intent

254

200
141
100

104

2000

2005

2010

2016

issued by buyers that contain all the secondary aspects of a formal
offer but lack the most critical details: the price and purchase
terms. The intent of these so-called letters of intent is to lock up
the seller while the buyer figures out what the price may be and
evaluates one acquisition opportunity against another. While helpful for the buyer, the request is unreasonable. It's analogous to a
homeowner going under contract with a buyer before the price
and closing date are specified. Sellers need to know the buyer's
contemplated purchase price and payment terms before taking the
firm off the market, even for a short period of time, via an exclusivity arrangement.
Refusing to accept risk. In 2017, we have seen letters of
intent from buyers that demand a seller deliver at closing a minimum amount of working capital (which is normal), a minimum
amount of contracted backlog (abnormal) and a written guarantee
of a certain dollar amount of revenue after the deal closes (ridiculous) all at the same time. As if this wasn't enough, such letters also
include penalties for failure to perform on one or more of these
terms. We all want security in life, but buyers must understand
that sellers may not and should not provide promises for items
beyond their control. Contracts go away, checks may not come in
on time and long-standing clients may go bankrupt. Performance
targets and measured safeguards are acceptable, but setting a
limited number of reasonable goals will pave the way for a better
business relationship following a deal.
Finally, we recommend buyers approach every deal remembering
that most sellers will only complete one deal in their careers; due
consideration should be given to the deal from the seller's point of
view. Doing so will set the stage for a win-win situation for all.

Table of Contents for the Digital Edition of Engineering Inc - September/October 2017