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Merger Mania

March 2011

In tough economic times many architecture firms are being swallowed in a merger and acquisition frenzy, sometimes with unexpected results.

By C.J. Hughes

For as long as firms have felt the need to branch into new markets, mergers have been a viable option. But those corporate marriages seemed to have hit a fever pitch in the last few years, giving the architecture industry the feel of an Elvis wedding chapel, with practices large and small, local and international, specialized and generic, all rushing to the altar.

Illustration
illustration by Keith Negley
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Whether the trend is real is debatable. The American Institute of Architects (AIA) does not track merger activity. Yet in an AIA survey of 700 firms conducted last spring, 57 percent expected merger activity to pick up this year, versus 35 percent who said it would stay the same. And even if 86 percent in the same survey did not see themselves merging, interviews show that the possibility is increasingly being discussed among designers, who are looking to expand, diversify, fortify, or cash out.

Mergers can lead to better economies of scale for services for the day-to-day workplace; an increased worldwide presence; and better bargaining power for projects where total assets are an issue. Those facts seem indisputable. But mergers, like marriages, are not all happy. Designers who have fused their firms note that culture clashes can result in the transition from a mom-and-pop shop to a boardroom-heavy office.

Plus, critics say, promises that an acquired firm will stay autonomous don’t always come true. In many ways, that loss of identity is epitomized by phone greetings that initially emphasize the hyphenated name of the joined firm for a few months before dropping it in favor of one monolithic brand.

Last, they add, mergers can often be just thinly veiled acquisitions, where squeezing every last drop of cash out of a business is the primary concern, instead of an equal meeting of the minds. In any event, it might be too soon to foretell the upshot of the current merger mania. “We are running a humongous chemistry experiment here,” says architect Paul Nakazawa, a professor at Harvard’s Graduate School of Design who also works as a business consultant to firms, a number of which have recently merged. “Some will end badly,” he says, “and others will turn out to be quite good.” Yet the current allure for many firms seems undeniable, as the entire nature of the profession changes. For one thing, clients themselves are consolidating, as in the medical field, which today is made up of huge hospital networks, meaning architecture firms with a range of expertise under one roof may be well suited to serve them. Plus, a multidisciplinary “issues-driven” approach that combined firms can excel at may serve other large clients well, too, Nakazawa says. Indeed, techniques for lowering carbon emissions on hospital campuses, he explains, can be applied to college and corporate campuses. “Classes of problems are common to certain spatial environments,” he says.

Sometimes adding new firms can broaden a practice’s international reach, whether that means cross-pollinating to China — like RTKL’s adding of Beijing-based AHS International — or expanding the other way, into the United States. Indeed, after years of acquiring many Canadian firms, with about 80 deals in the last decade, Stantec, based in Edmonton, Alberta, began making a strong push in 2009 into the U.S. market, especially by snapping up design groups like Granary Associates, Anshen + Allen Architects, and Burt Hill.

Merging can also give a firm a key toehold in a new region, on a smaller scale. In 2010, Seattle’s NBBJ, a 650-employee firm, joined with Chan Krieger Sieniewicz (CKS), based in Cambridge, Massachusetts, with just 30 employees. It was the first time NBBJ had merged since 1991, when it acquired Wyatt Architects. For Steve McConnell, an NBBJ managing partner, a three-year experience working with CKS to design a new $1 billion wing for Massachusetts General Hospital was pleasantly “synergistic” enough to spur the merger. But he admits that it allowed the nine-office NBBJ a key New England berth, adding, “Boston is a very attractive place for the nature and characteristics of our firm.”

While some firms, like NBBJ and CKS, wanted to augment their shared health-care focus, others, like Los Angeles–based AECOM, want to head out in different directions. The poster child, along with Stantec, for the merger mania of recent times, AECOM shelled out about $1 billion for firms last summer to make a transition from engineering to design.

In some ways, this trend has played out for decades, ever since some engineers at Ashland Oil broke away in 1990 to strike out on their own. Since then, they’ve assiduously added other small firms, under the banner of a holding company, which allowed new arrivals to work independently and keep their brands. But in fall 2009, AECOM — whose initials are an acronym for Architecture, Engineering, Construction, Operations, and Management — reincorporated as an operating company, blending those different divisions while picking up a slew of other businesses, including Minnesota architecture firm Ellerbe Becket.

While big firms are usually doing the seeking out, smaller firms can be excited to have the opportunity to boost their profiles, says Adrian Cohen, president of WWCOT, which last spring merged with DLR Group. Interested in gaining access to the California market, where WWCOT, which designs schools and police stations, was deeply rooted, DLR broached the idea of a merger in 2008, Cohen says. “We were not looking for this, but it seemed like an interesting way to become a national firm,” he adds. WWCOT had five offices at the time, pulling in $30 million in revenue, to DLR’s 14 offices. Battling for commissions against the Stantecs and AECOMs of the world and their marketing muscle, “it was becoming increasingly difficult to get the kinds of projects we wanted to get,” Cohen notes. Now, by tapping DLR’s accounting, IT, human resources, and marketing departments, “I’ve improved my competitiveness,” Cohen says of the deal, whose terms were not disclosed.

But that competitive edge doesn’t just have to come from an established national player. In an anecdote that might reassure tiny firms worried about the future, Vern Remiger, of St. Louis’s Remiger Associates, merged with Suda Architects last year after its founding principal, Larry Suda, died. The nine-employee firm is now known as Remiger/Suda.

Still, that type of merger presents its own hurdles: While all fees received for former Suda projects will go to Suda’s estate, Remiger had to assume the liability for anything that could go wrong with those projects. Rather than expand on his own, Remiger thought it would be better to “get a firm that was up and going” and already had an established network of contacts, especially some with ongoing work, he says.

The most tempting targets for mergers are the midsize firms, like Ellerbe, which has about 400 employees, since they usually don’t have the capital reserves of the Perkins + Wills and Genslers to weather downturns. At the same time, they have more overhead than boutique firms — like, say, Gehry Partners, says Thomas Fridstein, who until January was the head of global architecture for AECOM. Those midsize firms “are having a hard time,” he says. While unable to comment specifically about AECOM’s acquisition philosophy in light of his departure from the firm, Fridstein would say that, in general, demographic factors are driving the merger trend; that is, baby boomers want to retire.

Boomers, who are part of a generation of architects that contributed to a surge in new firms in the decades after World War II, “are looking for ways to monetize their investment in the firm,” Fridstein says. “They want to get their equity out.”

Also casting a wary eye to the future was J. Robert Hillier, of Princeton, New Jersey, who sold his four-office, 350- employee firm to RMJM for $30 million in 2007, when he was 69. At the time, the other principals did not want to pay him what he thought the firm was worth, and they didn’t want to borrow any money to do it, either. ”Those principals know the vicissitudes of the business,” Hillier says.

But in an indication of what can go wrong when firms merge, RMJM was supposed to pay retention bonuses — a year’s salary — to Hillier principals if they stayed, but only forked over half that, so the principals sued last fall, says Hillier, who is a plaintiff in the case. A spokeswoman for RMJM did not return a call for comment.

In a twist, firms that are hoping to escape the crush of debt may not be ripe for a takeover, according to architects who throw water on the theory that the sour economy is somehow fueling the merger trend.

Bob Gomes, Stantec’s president, says that Anshen, Burt Hill, and Granary were profitable when he merged with them. “They were not distressed companies,” he says. And struggling firms often know better than to try to find buyers when they can’t bring much to the table, says architect Rich Barbis, whose firm, Varvitsiotis Architecture, of Eugene, Oregon, closed last year after a 14-year run. A few years ago, when the economy was humming, Barbis had talked briefly with his former employer, the firm Lionakis, of Sacramento, California, about possibly joining forces. But, after a luxury-home subdivision project dried up and an office building was cancelled, Barbis knew the end for his six-employee firm was nigh.

In any case, architects who think that a merger will be instant salvation from their woes might be unrealistic about the bumps that can come along when two businesses are brought together. Cohen, of WWCOT, says he noticed the difference straightaway after the DLR merger in terms of health benefits. With a national, more formal system, it becomes very hard “to bend the rules a bit here and there” on a case-by-case basis, he explains. Moreover, combining two architecture firms is not like joining two factories; personalities need to meld for the merger to work, says AECOM’s Fridstein. “Architecture is a service industry. The only asset it really has is the people,” he says.

Architect Alan Chimacoff was at Hillier in the 1990s, when it began a series of acquisitions, and takes an even darker view. “They always say the culture will stay the same when a merger happens, but it’s all a lie, pure platitudes,” he says.

The way it seemed to him, bringing less talented architects into Hillier created an imbalance, contributing to an erosion of quality in the firm as a whole. Chimacoff left in 2002 and eventually founded the firm ikon.5, also based in Princeton.

That idea that design quality can suffer as a result of mergers is always refuted by firms on the brink of getting hitched. But it was enough of a concern for Cambridge Seven Partners that it rebuffed an offer by Stantec to merge last year. Yes, the company did shed employees last spring, from 70 down to about 40, at the end of “the worst 18 months of our practice,” says Timothy Mansfield, a partner at Cambridge Seven, which has designed aquariums, museums, and hotels.

But even with assurances that Cambridge Seven’s identity could be preserved within Stantec, the partners at the 49-year-old firm weren’t so sure. Mansfield says he and others were worried that “we would lose our design voice.” After a couple weeks of serious deliberations, the principals “politely said that we were not interested at this time,” says Mansfield, adding that “we did not close the door.” In the meantime, with signs the economy is rebounding — the firm has picked up three project in Riyadh, Saudi Arabia, while hiring eight new employees in December — Cambridge Seven will grow the company the old-fashioned way: organically. “We are going to become the biggest design firm we can be,” Mansfield says.

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