Decision time: Should we merge or buy?
By DAVID GODKINFinancing
I remember it like it was yesterday. Standing at the front of the room were senior executives from one of the largest corporations in British Columbia. Seated facing them were managers from the smaller organization waiting anxiously for answers to their questions: Why are we merging? How am I protected in my job? Tell us the truth: Who benefits from this, really?
No, these weren’t construction companies, but they came darn close. ICBC and the Motor Vehicle Branch oversaw licensing and insurance for British Columbia’s construction fleets. I was the communications manager for both. Why they decided to merge in 1997 was a mystery then and remains one now.
SO, WHY MERGE OUR TWO COMPANIES?
It doesn’t have to be that way. Instead, one company can simply buy the other. Caterpillar did it when it purchased Lovat TBM in April 2008, only to close its tunneling division five years later. Martin Marietta did it a year ago when a stubborn slump in building materials presented it with an opportunity to purchase Texas Industries. Sometimes companies simply fall over like dominoes, as in 2010 when the Churchill Corp. (which owned Stuart Olson, which owned Seacliff Construction) acquired Dominion Construction.
Whether you decide to merge your fortunes with another firm, or buy it outright, much depends on the cyclical nature of the economy. When things are going well, as they were in 2007, construction companies snap up other firms like out-of-towners bellying up to a Las Vegas gaming table. However, construction consultant Colin Sutherland likens it more to a stockbroker anxious to make a killing on Bay Street.
“Sometimes they don’t see the trouble on the horizon as a number of companies in the U.S. did with the terrible downturn and financial crisis in 2008. People made acquisitions literally on the eve of things just crashing.” A case in point is Lafarge. For all the ballyhoo around its proposed merger with global cement giant Holcim, some forget Lafarge paid nearly $13 billion for Egyptian-based Orascom Cement just before the 2008 recession.
Lafarge has been struggling to get out from under the debt that resulted from that deal ever since. “They’ve sold off a number of businesses,” says Sutherland, “including some businesses that strangely enough were competitive with Holcim.” Asset sales quickly followed in the U.S., Chile and elsewhere, “which made for an even larger and more troubled combination of the two enterprises.”
Okay, so you’re not Lafarge. And maybe you have no plans to merge with anyone, but even buying that smaller construction firm on the other side of town or province poses challenges. How to decide? Well, obviously the future strength of the economy is one factor. Another is geographical proximity. If you and the other company service the same clientele—but you think you can do it better—then buying the other company increases your customer base and potentially your bottom line.
Or it might make equal sense to acquire a company with particular expertise in areas you’re not familiar with. Spent too many years in highway construction? How about expanding into the booming oil and gas industry? There are other possible synergies, too, says Sutherland.
“If all of a sudden you’ve got a fleet that’s twice as big, you can maybe get a better price buying diesel. A big company will understand the math and be opportunistic when it sees a smaller company that can fit in and result in improved performance.”
Whether it’s a merger or acquisition, it’s all optics, says Sutherland. And Stuart Phoenix agrees with him. A merger may sound like a happy marriage of two equal partners, says the chair of FMI Corp. in Raleigh, N.C., an advisor to general contractors on mergers and acquisitions, but as in most marriages there’s always one who dominates. “Two firms merge and say we’ll do business together. But it rarely happens that way. It’s usually ‘I’m big and you’re small.’” Eventually, the one who controls the purse strings runs the household, Phoenix adds.
One thing we can say for sure is that mergers occur far less frequently than acquisitions, and that part of this may be due to their track record. Citing the Harvard Business Review, Sutherland says between 75 and 80 per cent of mergers fail to deliver value for the money and effort invested. The key to a merger or acquisition is not just the strategic goals that precede a deal, but the tactical plan for allocating resources once the deal is done.
The most important of these are human resources. Human beings are emotional. They see change as a threat and react defensively the moment significant change is proposed. Add to this the near certainty that someone is going to get hurt by this kind of change, i.e. job loss, then the problem of managing a merger or acquisition becomes tougher. And how you do that will largely determine not just how staff fare, but whether your enterprise succeeds or fails.
“If you do it in such a way that you’re going to lose a lot of people or they’re going to quit because they think you’re going to let a lot of people go, then that’s not a very good acquisition,” says Phoenix. “You want to preserve the people; you want to preserve the culture, because that and their expertise are really what you’re buying.”
At the same time, it’s generally agreed that no single organization requires two CEOs. Often you have to choose between two managers or executives, forcing one to leave. Or sometimes you can re-position him or her elsewhere in the new organization. Two more scenarios present themselves, says Sal Bianco, a partner in the auditing group of PricewaterhouseCoopers LLP in Toronto. One occurs in family-owned construction companies when the second or third generation has no interest in taking over this “grand nest egg asset” of a family-run business.
“You don’t want it to go from whatever it’s worth to zero and wind it down. You want to get value for the family. So you look at it as an opportunity to sell to an existing Canadian company.”
Conversely, you may want to take advantage of a recent trend and sell your construction firm to a company from the U.K., Spain, Germany or Italy anxious to expand its international footprint. Is this a good thing? You bet, says Bianco. The new rule of the game—consolidation—demands it.
“There are too many players creating too much competition, which in the end drives prices down. Which means companies are going to perish because they can’t economically deliver the work.”
LAFARGE AND HOLCIM: TWO GIANTS CONVERGE
When it comes to acquisitions as a strategy for securing growth, few have been as aggressive about it recently as Bird Construction. In 2008 the Mississauga-based company acquired Rideau Construction Inc., a general contractor in Nova Scotia and New Brunswick, giving Bird direct access to construction opportunities in the Maritime’s mining, oil and gas sectors. Then last year it purchased Quebec–based H.J. O’Connell Ltd., a player in heavy construction, civil construction and contract surface mining.
Bird’s Vancouver-based director of business development Frank De Luca says providing staff with some comfort early on is key, but talking to preferred suppliers “is a worthwhile conversation, too.” By comparison, talking to clients in advance of a deal when you’re a public company is somewhat restricted given insider trading rules. “If you’re talking about two private companies, yes I would think that clients and vendors might be involved i
n the conversation. Otherwise I would say that most of those conversations happen after the act.” Hardly any conversation about mergers or acquisitions these days gets far before the proposed merger between Lafarge Canada
and Holcim is raised. Lafarge insists it will be business as usual in Canada after the merger, but will the blockbuster deal really escape a demand from the federal Competition Bureau that it divest some of its Canadian assets? Many think not.
In the meantime, one of those waiting in the wings to see how it all falls out is Jim Dick of James Dick Construction in Bolton, Ont. Dick is salivating at the chance to expand his aggregates business by buying what Lafarge and Holcim are forced to leave behind.
The problem, says Sutherland, is that Lafarge and Holcim might prevent this by block-selling their assets. And Sutherland should know; he’s worked for both companies and figures there may be no crumbs for Dick to pick up from the bigger table.
“It would surprise me if they’re not sold as a package. That’s the way the company has operated for 40 years with its integrated group of businesses. Dick’s argument would only hold true if [Lafarge] broke up that Canadian business and sold its constituent parts.”
Bianco and Sutherland agree such a scenario is unlikely. “It will be difficult to make economies of scale out of it,” Bianco says, “unless you have similar business and you’re filling in your regions with leftovers that they have to get rid of.”
Outside of reporting to a global entity in Zurich instead of Paris, another change for Lafarge may be one of philosophy over asset development. Holcim, says Sutherland, has placed enormous emphasis on reinvesting in its assets, i.e. building modern, energy efficient plants. Lafarge, by contrast, “has had more of a tendency across the globe to stay with older plants and older technology to keep them going.” Its Richmond, B.C. and Exshaw, A.B. plants notwithstanding, Sutherland believes Lafarge has much to do to upgrade its facilities in Eastern Canada.
“In Ontario and Quebec their assets are 45 to 50 years old, not state-of-the-art, not as environmentally efficient as they could be, and I would expect that eventually that they will make some investments in Eastern Canada.”