HOMEWORK AND RESEARCH ARE KEY TO A SUCCESSFUL MERGER AND ACQUISITION
BY DEBRA WOOD
With the construction market starting to pick up, particularly in certain sectors, many U.S. companies are re-evaluating their growth strategies and are looking to expand into other areas through acquisitions or mergers.
“There is a lot of acquisition activity out there,” says Landon R. Funsten, managing director with FMI Capital Advisors in Raleigh, N.C., an AGC member of multiple chapters. “It’s a very active market, dominated by contractors buying contractors.”
While Funsten has found building contractor deals down, certain sectors are active, including multifamily, health care, industrial, power and infrastructure, which are tough to grow into organically. Additionally, he has noted a trend of union shop contractors acquiring open-shop firms, driven by pension liability concerns.
“We see contractors that have excess capital using acquisitions when thinking about getting into market sectors or geographies they are not in, and they are successful,” Funsten says. On the other side, “Sellers normally sell because an exogenous event occurs. They are tired of the industry, they want to retire or their surety company is requiring personal indemnities. Those are the reasons people typically sell. There is a personal or exogenous reason.”
M&A growth is not universal. PricewaterhouseCoopers (PwC) “First-quarter 2013 global engineering and construction industry mergers and acquisitions analysis,” reported a decline in such activity during the first three months of the year.
“There has been some uncertainty in the marketplace in emerging markets and funding for future projects in some of the more established countries,” says Kent Goetjen, U.S. engineering & construction leader for PwC in Hartford, Conn.
Colin McIntyre, engineering & construction deals partner at PwC, adds that geopolitical
uncertainty outside the United States has caused companies to focus on growth stateside in sectors such as oil and gas and health care.
“It is an opportunity to enter a new segment or to expand and take out a competitor and play on the position of strength,” says McIntyre, adding, “A merger and acquisition can be a great way to fuel expansion and to drive growth, but it also can bring complications to the existing business and create financial heartache. What’s critical is spending the time up front.”
WEIGHING THE OPTIONS
“Acquiring something is to improve something, to have something bigger than you had before,” says Lars Leitner, senior vice president and chief strategy officer for Turner Construction Company in New York, a member of multiple AGC chapters. “It’s a question of what is your vision for your company.”
Turner recently acquired a 51 percent in Clark Builders in Edmonton, Canada, which specializes in the construction of institutional, commercial, industrial, recreational and multiunit residential facilities. It expanded Turner’s presence in Canada and enables Clark to grow its brand in the market.
“There must be benefits for both sides, to strengthen the two companies,” Leitner says.
Determining whether to organically enter a new market or to obtain an existing company depends on how quickly the company wants to enter that new market and the risk factors, adds Leitner.
“A big issue is the client portfolio,” Leitner says. “We live for our client relationships. It takes us a long time to build those relationships.”
Scott A. Silverman, senior vice president and chief financial officer of Industrial Contractors Skanska in Evansville, Ind., a member of multiple AGC chapters, agrees that acquisitions can help companies achieve their goals more quickly, but “it takes considerable effort and management attention to get it right.”
Skanska purchased Industrial Contractors in 2011, giving it a greater civil construction presence in the Midwest and adding expertise in the industrial market.
“We saw the industrial and power construction areas were growing and we wanted to boost the capabilities the company had in those areas and expand geographically,” Silverman says.
Balfour Beatty Construction in Dallas, a member of multiple AGC chapters, always starts by evaluating organic growth options first, due to the costs and management time required and risks associated with a merger or acquisition, explains John Parolisi, chief strategy officer at Balfour Beatty, which acquired SpawMaxwell Co. in Houston in 2009.
“A construction company should only consider being an acquirer when the new growth opportunity that is being targeted carries some major elements that it would be difficult to grow organically over the necessary timeframe,” Parolisi adds. Alternate to purchasing another firm, Parolisi says, companies might considering hiring the necessary talent to grow into the desired market on its own.
When Balfour Beatty has grown through acquisition, it takes on only one new element at a time. For instance, Parolisi says, “if we are moving into a new geography, it would be in service lines that we already understand and, if we are moving into new service lines, it would be in a geography where we are already present. Having too many new elements at play in an acquisition increases risk significantly,” Parolisi adds.
Goetjen cautions that the acquiring firm should consider implications on financial capital and its relationships with banks, bonding companies and shareholders as well as its people, who will be distracted from their traditional work.
TAKING THE INITIAL STEPS
Do your homework before taking the first step. That means conducting research and understanding the market, the drivers and the participants, Leitner says.
“It’s a very dry thing, but the second thing is to talk to people in that market to get a real connection to it,” Leitner says.
Once a company decides an acquisition would best meet its needs, Parolisi says, the next steps are to decide upon the evaluation criteria and screen all potential candidates coming down to a short list. Balfour Beatty would assess a potential acquisition candidate’s platform for growth, how it identifies and manages risk, potential exposures and synergies, and how that firm relates to the rest of the enterprise.
“For geographic acquisition, this could include items such as company size, markets served, reputation and industry rankings,” Parolisi says. “Next, we would meet with the short list of players and identify which ones were cultural fits. At this point, we would select our priority target and spend the time to build a relationship with them, since more often than not, they are not up for sale.”
Although Funsten recommends companies go through a third party due to concerns about confidentiality and the risk of poaching employees, several successful deals have occurred when companies acted on their own.
For instance, Skanska approached Industrial Contractors, even though it was not for sale, because it seemed the company would make a good fit, which it has.
Paul Verhesen, president and CEO of Clark Builders, said in a statement, that he “approached Turner for this partnership because of our very similar culture and our shared interest with serving local markets.”
EVALUATING THE CULTURE
People learn to work in different ways and if you try to merge firms with disparate cultures, it may not work.
“Acquisitions often fail, and a high percentage of that is because the culture didn’t fit,” Leitner says. “There are different expectations, and they are shocked they have a different approach.”
Silverman says understanding the new culture requires meeting with the leadership of the prospective company and through the due-diligence process, the acquirer can assess operations, people and culture, including attitudes and approaches to work, safety and ethics. Skanska also asks the prospective company to give its employees a cultural survey, which it then compares to the results of the same survey given to Skanska’s employees.
MAINTAINING THE CULTURE
Understanding the value structure of the prospective company and how they interact with their people is critical, Goetjen says.
“The most valuable asset any firm has is its people,” adds Funsten, who recommends telling employees as late as possible. Most companies will not touch the staff, informing them that the deal will create multiple new career opportunities.
“The first way to mess up an acquisition is to start firing people,” Funsten adds. “Seldom does that occur.”
The people make the culture. Once Turner has found a match, it makes a huge effort to keep the existing employees on board. “There’s a trust issue on both sides,” Leitner says. “It’s a very sensitive approach to bring the right people together.”
With construction, the value is in the people, Silverman adds. Therefore, Skanska carefully crafts messages with staff during the announcement and transition into the company. It helps them understand new career opportunities within Skanska and explains how support systems, employee benefits, information technology systems will change.
“We don’t want to fundamentally change the company we’re acquiring, because the value is in what they have achieved,” Silverman says. “We marry that with the scale of Skanska and the opportunity to grow.”
The key to making a workforce comfortable for employees is to see senior leadership excited about the opportunity as a means of moving the organization forward, adds Parolisi.
“To ensure that this occurs, it is critical to spend the time working with the leaders of the company being acquired as to what the strategy and future for their organization can look like post-deal as part of us,” Parolisi continues.
The next step is communicating with clients to ensure their understanding and comfort level with the acquisition.
WATCHING FOR RED FLAGS
If key customers or partners do not support the acquisition, Balfour Beatty considers that a red flag, as are unsound operational and management processes, leaders who do not plan to stay on and culture. A cultural mismatch will cause Balfour Beatty, as well as Turner and Skanska, to put the brakes on the process.
Funsten adds that buyers should be wary if there are claims and litigation pending in the firm they are considering, or if there is a history of profit fades. Also he worries if there is not a second in command at the prospective company.
Additionally, McIntyre expresses concern that some companies fall in love with a target, the brand and the opportunities and ignore the fact it doesn’t fit the targets for financial returns or meet other hurdles.
“Companies that do acquisition and integrations well are those that have a model and stick to the model and are willing to walk away,” McIntyre says. “That’s a well-disciplined company.”
McIntyre says the last thing a company should do is close on an acquisition that complicates its core business or jeopardizes its future.
DETERMINING HOW LONG IT WILL TAKE
From start to close, the process may take from six months to two years. Leitner figures a year for planning and a year for action.
Parolisi calls analysis the easy part, three to six months, followed by three months of reaching out to players and one to three years for the courting process. Once an agreement has been reached, due diligence and deal structuring can take about three months and integration one to three years.
“Needless to say,” Parolisi concludes, “this process is not for the faint of heart.”