Now that the long, troubling recession is winding down—or so the experts say—consolidation in the A/E industry is heating up.
Fueled in part by the economic downturn, the pace of mergers and acquisitions (M&A) accelerated in the past year as large, multidisciplinary firms cherry-picked small, medium, and even big firms at advantageous prices. Eager to fill in geographic gaps in their service coverage, enter new markets, and deepen expertise in various sectors, these firms are taking advantage of an industry in flux and the many victims of the recession who are uncertain about their firms’ future prospects. “It has been a rough two years for many architecture firms, so everything is on the table now, from considering mergers to acquisitions and closely evaluating a firm’s strategic goals,” says Steve Gido, a principal at A/E consultancy Rusk O’Brien Gido + Partners.
Indeed, deals have been popping up everywhere. And three of them, in particular, reflected the broader forces reshaping the industry.
RTKL Associates bolstered its presence in China by adding AHS International, a prominent healthcare design firm in Beijing. Seattle-based NBBJ, a multioffice firm that previously had grown organically, went outside the box and acquired Chan Krieger Sieniewicz (CKS), a highly regarded Boston boutique. And Canada’s Stantec, already one of the world’s largest design and engineering firms, continued an aggressive acquisition strategy by taking over the 600-person staff at Burt Hill, adding that firm’s 13 offices in the U.S. and abroad. Terms of the deals, which were structured as mergers or asset and stock buyouts, have not been disclosed.
Besides the slack economy, which made financing cheaper for those on the prowl and softened the hearts of some initially unwilling brides, a number of other factors have helped propel the buying binge.
One is expanding global markets, especially in emerging economies in the Middle East and Asia, which will become a new source of business and require a local presence. Another is the need to fill in services at the growing number of one-stop-shop firms, which seek to offer a client everything under one roof. And, finally, specialization is gaining ground as a major marketing driver. “Clients want to know that you’ve done a project like theirs not just once but a dozen times before, and if you don’t have these skills, it’s difficult to start on your own,” notes Lance Josal, RTKL’s CEO and president.
The desire to expand its China presence is what led RTKL to purchase the assets of AHS, which had built a thriving business in Beijing and Shanghai servicing a burgeoning healthcare sector with a staff of 43. RTKL had a Shanghai office, but it also wanted a presence in the nation’s capital, where it has good government connections. As with the other deals this year, the firms involved had already worked together. Mostly, however, the deal provides RTKL with a readymade operation and clients in a fast-growing market. “You buy a portfolio and contacts and hit the ground running. It pays for itself,” Josal says about such acquisitions, noting that starting an office from scratch is often costly and time-consuming.
In a similar way, Edmonton, Alberta–based Stantec was on the prowl for new acquisitions, and Burt Hill, with its strong, decentralized East Coast and overseas presence and client base, as well as its expertise in science and technology, was “on our radar screen as a firm that would be compatible,” recalls Stantec’s president and CEO, Bob Gomes. This partner needed some wooing, however. “We were not looking for anything of the sort,” insists Peter Moriarty, Burt Hill’s president and CEO—the kind of pushback that made Stantec try even harder. “They tried to recruit one of our people, but he said no, and then they wanted to talk to me, and I said no, and then I decided to listen, and suddenly bells went off,” Moriarty recalls.
For its part, Burt Hill found itself in a difficult situation. “We were playing in the big leagues against the behemoths of the industry,” Moriarty explains, and the firm needed a new strategic direction. At the same time, its Pittsburgh and Dubai, United Arab Emirates, offices had been hit hard by the real estate and construction crash in the United Arab Emirates, prompting layoffs (although Moriarty says the firm remained profitable). The acquisition gives Burt Hill the heft it needs to be a big player, through Stantec’s resources, as well as continued control of its territory, the executives point out.
NBBJ’s acquisition of CKS, a 38-person office that specializes in urban design and always valued its independence and collegial, familylike work environment, was more of a long, slow courtship between two wary partners.
The two firms were working together on a big project at Massachusetts General Hospital when NBBJ first suggested getting together about three years ago. The idea was rejected. “We all agreed we didn’t want to work for someone else,” says principal Tom Sieniewicz. But in 2009, buffeted by the recession and seeking stability and future growth possibilities, it was CKS that raised the issue again. “We called them and said, ‘Remember our first date?’” Sieniewicz recalls.
At this point, it was acquisition-shy NBBJ that was reluctant but then agreed to talk. “We felt an office in Boston was a strategic advantage for us and our clients, and we had no presence there,” Scott Wyatt, NBBJ’s managing partner, says, noting that his firm wanted to beef up its urban design expertise on the East Coast. One selling point for CKS, Sieniewicz says, was an NBBJ commitment to remain “relatively autonomous and small” within the NBBJ network, while also gaining access to the firm’s large client portfolio and “a chance to build more buildings,” Sieniewicz adds.
Inevitably, however, mergers and acquisitions often mean a loss of identity and a brand name. Chan Krieger Sieniewicz is now Chan Krieger NBBJ, a moniker that will eventually fade away as the outpost becomes NBBJ’s Boston office, according to Wyatt. Burt Hill will keep its name until the deal closes, after which it will “morph into Stantec,” Moriarty says. And you can expect AHS to be “absorbed” into RTKL eventually.
Another issue, analysts say, is that it’s unclear what these mergers and the growing power of one-stop, “super mall” firms will mean for design and the acquired firms’ design sensibility, despite the usual assurances that the individual corporate cultures are compatible. “There will be a lot of work in the future for the large firms, and they will do it all, but how creative they will be is another question,” suggests Hugh Hochberg, a principal at design consultancy Coxe Group.
With the economy slowly recovering but still in the doldrums, expect the M&A mania to continue as the industry adjusts to a new, tougher business reality and further segments into giants and smaller players, architects and experts predict. “Larger firms will continue to find someone who is hurting and take a shortcut to get 10 top professionals for a particular market, at prices cheaper than they were a few years ago,” concludes Jack Reigle, president of Sparks: The Center for Strategic Planning, a marketing and business adviser for design firms.