When Two Doesn’t Go Into One—The Mistakes and Pitfalls and Mergers and Acquisitions

In Outlook & Trends
November 3, 2017
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by Gregg M. Schoppman, FMI

Experts will tell you that the mergers and acquisitions market is ripe for activity. Several conditions lend themselves to creating an attractive marketplace. First, the industry is seeing continued positive traction in revenue growth and more importantly profitability. Secondly, the demand for construction services, specifically in the infrastructure arena, provide a stimulus thus further improving the attractiveness of many candidates by inflating potential backlog. Finally, the industry still continues to age, leaving many firms seeking a quick and expedient succession plan. There are arguably plenty of other reasons driving firms to seek acquisition or seek to be acquired. While valuations will vary and due diligence abounds, there are plenty of hazards that firms fail to identify long before the transaction is complete.

It’s the Strategy!

Mergers and acquisitions often fulfill the strategic needs of a firm. It may be a niche market or geography that enables the buyer to claim an additional competitive advantage. However, there has to be more to a firm than either of those characteristics. Using this rationale, if a buyer moved to a new city, any residence would be acceptable. In reality, the sector, niche or geography should be the starting point to engage in deeper conversation rather than a terminal point to make an offer. An acquisition target should have some other compelling feature(s) that makes them desirable. For instance, it may be that firm’s strategy in dealing with customers or maybe some internal system discovered during the due diligence phase. So often a firm acquires another only to conduct a wholesale overhaul, leaving very little semblance of the original target. By forcing an integration or wholesale change to the parent firm, teams, customers, vendors and trade partners become disenchanted and there is flight, leaving that parent with nothing short of an office. Leverage the acquisition appropriately and view the target as something with more intrinsic value than simply an office and equipment. It should be attractive for multiple reasons. Find a way to learn from this new organization and bring those lessons back to the mothership.

It’s the Technology!

It sounds simple but so many firms forget the costs of integrating multiple and sometimes incongruous systems. This is more than just transferring data from Timberline or Viewpoint or Spectrum. Think about all of the costs and challenges associated with some of the following:

Estimating platform—Whether it is some customized, elaborate macro-enabled spreadsheet or some off-the-shelf estimating program, there is a level of integration that must occur.
CRM platform—Are customers and activity tracked via a database or by a cloud-based application?
Accounting—This is normally the item that has the most hair and gets the most attention, but integrating disparate systems can sometimes be a big-dollar proposition.
Web sites and social media—The good news is the firm will be able to announce the assimilation of the new firm. The bad news is does this look like one firm or two firms that share an accounting system and a light bill?
Infrastructure—With a mass migration to the clouds, there seems less emphasis on hardware and storage. Regardless, this takes time and requires a great deal of thought.
Phones and hardware—Apple vs. PC. Samsung vs. iPhone. VOIP and rotary phones. Hopefully no one is concerned about the latter but the mechanics and costs associated with simply determining the “right tools” opens up Pandora’s box.
Other considerations—There are no shortage of tools outside of the traditional spreadsheets and word processing programs. Scheduling, BIM, document control, project management, close-out/punch list control, etc., are just a sample of considerations that may or may not require additional transition time and energy.

Often, firms look at the equipment with a heavy emphasis on yellow iron. In today’s construction world, acquisitions would be better suited to look equally at the integration of these new tools. The raw costs are one serious consideration, but when one adds in the effect of transitioning 10, 50, 100, 500 people onto a new system, as well as all the training and heartache associated, it may drastically change the complexion of the deal.

It’s the Culture

In the end, it all comes down to the people. For all of the bluster about strategy, information technology, yellow iron, offices, etc., it truly is about the people. The bells and whistles of the deal lie within the most important asset within the transaction. These are the people that know the market, know the players, know the customers, know the “hot buttons” and know the intricacies of doing business within that sector or geography. The fascinating aspect is that this is the one variable of the deal that is NOT guaranteed. In the end, the computers, the office, and the equipment will stay put. If the people do not buy in, they will leave. One of the most common reasons for acquisition failure is the failure to recognize the impact of culture. This amorphous, intangible component that so many leaders wrestle with has such an important impact on strategy and tactics yet defining it accurately is almost impossible. In the end, there has to be a cultural fit between the two companies. Hostile takeovers resembling an episode of “Dallas” or “Dynasty” are farfetched and usual fail. Think of an acquisition as a marriage—it is an intricate blending of two individual firms into one that often begins with a relationship predicated on similar compatibilities. The people must buy in so careful consideration should be given to the following:

Communication—How frequently will the parent and target be in communication? How will this transaction be portrayed internally? In the marketplace?
Leadership—How will the satellite or target firm be lead? Who will lead this initiative from the parent company’s perspective?
New opportunities—How will the satellite or target be brought into new opportunities within the firm? For instance, as promotions and advancements spring up, how will the new target’s team be tapped as potentials?
Culture integration—As said previously, what can the parent firm learn from the target? What can be brought back “home” to make everyone better and demonstrate a truly symbiotic relationship?

All signs point to a fertile market, ripe for organizations to expand their empires. Growth can often occur organically through key leaders migrating to a new market or sector and plopping out their shingle. There are no shortages of challenges associated with this strategy, but it is clearly another perspective to consider. Mergers and acquisitions are an excellent vehicle to allow firms to grow quicker. However, in the haste to do something, it is always important to do it right.

As a principal with FMI, Tampa, Fla., Gregg Schoppman specializes in the areas of productivity and project management. He also leads FMI’s project management consulting practice. Prior to joining FMI, Schoppman served as a senior project manager for a general contracting firm in central Florida. He has completed complex and sophisticated construction projects in the medical, pharmaceutical, office, heavy civil, industrial, manufacturing, and multi-family markets. He has also worked as a construction manager and managed direct labor. Furthermore, Schoppman has expertise in numerous contract delivery methods as well as knowledge of many geographical markets. He can be reached at (813) 636-1259 or gschoppman@fminet.com.