Elemental

Those who follow me on Twitter will have seen my slight obsession with the acquisition story of the past few weeks, as URS and CH2M battled over Scott Wilson.

My obsession has as much to do with the fact that I get to look at financials of listed companies in my industry rather than any particular interest in Scott Wilson (although we did poach one very good member of staff from there recently).

When I was doing my MBA I was fascinated that so few companies in our industry are publicly listed (I’m guessing because it’s a mature industry with stable but low returns, so not particularly attractive to investors?) and it meant that learning about financials felt a bit removed from ‘real’ life. So takeovers interest me, as I get to pore over the numbers and test my learning.

The Independent did a good synopsis here:

The winning bid from the San Francisco-based engineer comes at a massive 233 per cent premium to Scott Wilson’s closing share price of 87p on 4 June, the last trading day before it confirmed that it was in talks about a takeover.

A rival suitor, the Colorado-based engineer CHM Hill, will confirm this morning that it cannot match the new £233m price tag, and will withdraw its 245p a share offer made on Monday evening.

On Monday afternoon CHM became Scott Wilson’s biggest shareholder when it bought a 12.97 per cent stake in the group at 245p a share, hours after URS’s first offer of 210p a share had been recommended to shareholders. CHM is now likely to sell its stake to URS in a move that could net it a £4m profit in less than a week.

The initial offer was for £161m. CH2M countered with £189m, with a final value of £233m. How did URS settle on their first offer?

One rule of thumb used is that a company is worth a multiple of the profit – 7x is often quoted (I would love to know if this is correct for our industry – gut feeling is it should be a bit lower?). Scott Wilson’s profit for the last financial year was £23.9m which makes the initial offer 6.7x profit. The final offer was 9.7x profit which is quite high. However, when the first offer was made, the market cap (capitalisation) was in the region of £67m, which was only 2.8x profit.

How does this compare with other acquisitions in the industry. It is quite hard to compare, as I said, most companies are not publicly listed and it makes it a bit harder to get information for free (you can pay to download any companies financials from Companies House database for £1 – useful to know if you are for instance contemplating doing work with someone or contemplating potential job offers etc. Alternatively, the information is available at British Library if you are a member). I’m no financial wizard, but if the market cap is significantly lower than the 7x profit rule of thumb, then probably ripe for takeover?

At a market cap of over half a billion, it would take very deep pockets indeed to acquire Atkins. Pre-tax profit came to £96.6m for the year to 31 March 2010, which at 7x profit, would mean the company is ‘worth’ £676.2m (very close to the market cap of £682m as I write this).

As White Young Green dropped into AIM in February, I haven’t looked at them. Instead I’ve looked to another W – Waterman. Current market cap at £14.3m, last year’s profit was a tiny £0.5m on a turnover of £42.9m. Here, they have optimistic investors who are valuing the company at nearly 28x profit! The previous profit was £3.1m which is 4.6x profit on today’s value.

Of course, I’m not looking at other factors here such as how much debt or assets companies have.

I suspect the next company to be acquired will be a medium sized privately held company. So is it possible to become a millionaire by selling your company? Let’s look at a hypothetical company. Imagine you wanted to set up and sell a sustainability consultancy for £1m. Let’s work back from that and see quite how big an ambition that is. For £1m at a 7x profit multiple, you would need a profit of around £143k. OK, let’s assume you’re above average and manage to get a profitability of 15%. For that, turnover needs to be around £950k. I’m imagining this hypothetical company provides both sustainability and building services consultancy. Typically fees are about say 3.5% of capital cost (depending on the size of the job). So the capital cost of projects supporting this company is £27m. The company could probably support 12 full time staff. If we leave out building services and assume sustainability only at say 0.5% of capital cost, projects of £190m would be required. This is say, half a Shard. Or about in the region of 40 BREEAM assessments on sizable projects. In black and white, it sounds quite easy, doesn’t it! Ha! As I said before, another option would be for the top layer of your staff to buy you out, rather than be acquired. But if you’ve valued your company at £1m, will the top layer of your 12 staff be able to afford to buy you out? Depends what you’ve been paying them and how long they’ve worked for you. The days of staff leveraging loans against mortgages to buy into partnerships are surely numbered given today’s financial landscape?

I do find all this stuff fascinating. My thirst for financial intelligence is currently being sated by finally getting round to reading Niall Ferguson’s The Ascent of Money. Expect more ruminations on finance and capitalism as I get further into the book.

admin Management acquisitions

There were a lot of mergers and acquisitions in the last decade. Last year alone we saw DEGW merge with Davis Langdon, Parsons Brinckerhoff acquired by Balfour Beatty and Fulcrum merge with Mott MacDonalds. Earlier in the decade Whitby Bird, Hilson Moran and RYB:Konsult all, in different ways changed company ownership, mostly in order to reward their founders.

Building services consultancy is not the place to find get rich quick entrepreneurs. If it was, founders would be targeting IPO, and companies would be floating on the stock market. This doesn’t happen because consultancy is a fairly mature market and the average profitability of companies in the sector is low – somewhere between 5-10%. Typically, founders build up their companies because they love what they do, not because they want to become a millionaire. But the day (usually) comes when they want to retire. There is nothing wrong in founders wanting to exit a business and wanting to be rewarded for the work they have done in setting it up. But in the current economic climate, what options are available to them? And what of the staff who are left behind?

The tried and tested option used to be the partnership. It’s a common model in both architecture and consultancy. But I think partnerships are increasingly a less attractive option as employees increasingly cannot afford to buy into the company (effectively buying out the top layer of partners to finance their retirement). There are plenty still around – for example Gifford has 51 working partners, and as a company is 59 years old. The expansion in number of partners took place fairly fast over the past 2 years, and in theory defends them against predators.

But what if your staff cannot afford to buy out the top layer? What are your options then?

Merging with a larger organisation (who are interested in gaining the staff and probably your reputation) seems to have been the favoured route for consultancies in the noughties. Whilst good for the exiting founders (and despite protestations that the merger is in everyone’s interests, blah, blah, blah – they do tend to exit the merged company within 3 years), is it good for the staff?

Scott Berkun has a great post on why big companies can suck:

Status quo / Follower mentality – The bigger a company gets, the more it’s main attractive power for new employees is job security, rather than opportunity to grow, learn or take risks. The Innovator’s dilemma is real, and leaders who have big success are often the last to recognize when it’s time to move on. For anyone interested in progress, risk taking, change or growth potential, a large company is incredibly frustrating, as the dominant psychology is one of play it safe and political correctness. A running joke at Microsoft used to be that the best way to get a product idea to ship at Microsoft was to have a competitor do it first.

Some figures suggest M&A successes are as low as a third. Whilst this is US data, I suspect a similar picture is found in the UK. So not only do the staff gets disillusioned and leave, but the acquirer loses the key thing he bought – in a knowledge industry – your people are your assets.

So what will the next decade bring? There will undoubtedly be more acquisitions. Some disillusioned employees will leave and set up their own practices. But company structures may have to change to reward both founders and employees. Perhaps given the very low profit margins in the industry we would be better to look at alternative forms of legal enterprise (community interest companies)?

admin Management, Opinion Balfour Beatty, Fulcrum, Mergers and acquisitions, Mott MacDonald, Parsons Brinckerhoff, Scott Berkun

It’s that time of the year again. Q3 results are in and thoughts turn to next year’s business plans.
I have decided to draft a business plan for my final MBA project, rather than a traditional academic piece of work. Having spent the last two years discovering what can go amiss in engineering consultancies, I’m trying my hand at coming up with a model which might better suit the world today. I’m currently looking at vision, strategy and mission statements. Prior to the MBA, I thought they were mindless pieces of fluff. At some stages during the MBA, I started to feel quite evangelical about them. I’ve finally settled somewhere in between – useful things, but no need to shove them down the throats of your employees.

admin Management MBA, mission statement, strategy, vision