The Truth Behind the Numbers: M&A Success in the AE Industry
Mark Twain famously wrote that there are three types of lies: “lies, damned lies, and statistics.” It is a cautionary note against blindly accepting numbers that support weak arguments. Everyone in business has seen an author or a speaker use a statistic that bolsters a claim that they think is incorrect. My favorite, excluding anything with “9 out of 10 dentists”, is the oft-cited assertion that “70% – 90% of all acquisitions fail”.
At first glance, that statistic would immediately make you think twice about acquiring a firm or merging with another due to the small probability of success. Yet, if we step back from the statistics, the reality is that many firms are successfully growing by using M&A as a key cog in their overall strategy.
The Truth Behind the Numbers
As someone deeply entrenched in M&A transactions, I have trouble accepting the high failure rate as gospel. If roughly 80% of acquisitions fail, why are there so many firms that use M&A successfully? How did Henry Kravis and Steve Schwartzman make all that money?
Evidence to the Contrary, Part 1: Speaking of Mr. Kravis and Schwartzman, Private Equity comes to mind as an excellent argument against the statistics. It is an investment class built on M&A, and it consistently outperforms its public peers in investment returns.[1]
Evidence to the Contrary, Part 2: Also, consider the impressive ascent in the ENR rankings of the three most active acquirers over the past two years: Bowman Consulting Group (21), IMEG (19), and Salas O’Brien (14). Each of these firms has grown into a top quartile firm in the ENR 500 rankings[2] over the past decade using M&A as a catalyst in their growth. Not to mention other firms, such as WSP, CHA, and NV5, who have made M&A key to their growth over the past decade. How do these success stories align with a purportedly abysmal success rate?
Sage Advice from Another Highly Successful Businessperson: Rather than explaining these situations as exceptions to the rule, perhaps the answer is that the studies behind the statistics do not measure M&A as we know it within the AE industry. As Jeff Bezos stated in a recent interview, “When the data and anecdotes disagree, the anecdotes are usually right.”
Mr. Bezos point is not to blindly follow anecdotal data, but rather, you should examine what data you are collecting. When looking at the totality of the studies that are regularly cited, they are often measuring a very narrow set of transactions that are not indicative of overall success in M&A. In addition, there is bias in what researchers choose to study and it is less likely to involve the more mundane corners of our economy.
Public vs. Private Data
Virtually all the studies cited on the subject measure public company M&A activity. The reason is simple: private company data is just that—private. Getting a statistically significant set of private firm data is difficult, if not impossible. It is simply easier to work with public company data because it is plentiful, inexpensive, and consistent reporting standards make it easy to compare across companies.
Additionally, the timing of most of these studies on larger public firms was during the conglomerate and internet era. It was a time filled with public companies that took great risks due to significant competitive pressures from changing technologies and regulatory environments. Unfortunately, many of these deals had high hopes that were rarely realized.
However, the fact remains that you are only looking at one piece of the puzzle, as public companies make up a small percentage of operating firms and are not particularly representative of the AE industry. I have long argued you cannot take data from public companies and make broad pronouncements that apply to private companies. Private firms operate differently than public firms in many respects, especially in how they approach M&A. Having worked in M&A in both public and private firms, I have witnessed first-hand how different the decision-making process is in the two environments. Deals amongst private firms occur at lower multiples, often for a different set of strategic goals, and are done without the specter of quarterly earnings calls with passive shareholders.
Biased Data Sets
In looking at many studies, you notice that researchers often measure the “success and failure” of acquisitions by measuring the change in an acquirer’s stock price between the announcement of a deal and when the transaction closed[3]. The issue with this approach is typically, only the largest transactions are announced prior to closing. The studies also often exclude any deal that involved firms with more than one acquisition during the measurement period. By creating these constraints, studies become biased towards larger transactions, which are more likely to dilute earnings. Consequently, these “high-flying” deals are more likely to show adverse outcomes. It also eliminates firms that acquire many firms on an annual basis and firms that have moved up the M&A learning curve.
Many of these studies use short time frames to filter out other factors other than transactions that might affect stock prices. However, focusing on short periods only reflects market reactions, essentially guesses about the future rather than evidence of how well the deal worked out. A deal’s true success or failure takes years to become apparent, not just a few days. I am not bashing the researchers, it is inherently tricky to conduct a study that captures this long-term perspective, even with all the data available from public companies.
The Good News
Not every study paints a grim picture of mergers failing. Research conducted by McKinsey & Company consultants Coley and Reinton found that the type of merger and relative size of the acquirer to the seller had a very strong correlation to success. For example, acquisitions known as “bolt-ons,” where companies acquire targets within their industry and service lines, boasted success rates of 80%-85%. Meanwhile, ventures into new services within the same industry boasted success rates of 65%-70%.[4]
Interestingly, mergers between companies operating on the same level of the industry value chain (horizontal mergers) had much higher probabilities of success than those that acquire firms upstream or downstream of where they operate. The study’s findings align with common sense and still ring true today: acquiring what you already understand leads to better outcomes. It suggests that companies fare better when they purchase entities they are familiar with, enabling them to assess the deal accurately and make informed decisions.
It All Comes Down to Execution.
The point of this blog is not to give you the sense that M&A is all sunshine, lollipops, and rainbows. On the contrary, M&A is hard. Like any significant investment, M&A carries inherent risks, but with proper planning and disciplined execution, these risks can be mitigated. Ultimately, the narrative surrounding M&A should not be one of unfounded fear but an informed strategy.
To dismiss the benefits that M&A can afford your firm due to often quoted but misleading statistics will deny a path to growth that has been utilized by many firms with great success. To those considering M&A, do not let the scaremongers dissuade you. Rather, take an approach that includes diligent analysis and strategic foresight.
Join our upcoming webinar, Beyond the Myth: Proven Strategies for M&A Success in the AE Industry, as we challenge the statistics, explore what M&A success looks like in the AE industry, and discuss strategies to maximize the potential for a successful transaction.
[1] Cliffwater LLC: Long-Term Private Equity Performance 2000-2022
[2] Engineering News-Record, ENR 500: Salas O’Brien: 2015 – #443, 2023 – #54; NV5: 2011 – #158, 2023 – #22; WSP: 2011 – #65, 2023 – #5; CHA: 2011 – #87, 2023 – #69; Bowman Consulting Group: 2011 – #306, 2023 – #87; IMEG: 2011 – #218, 2023 – #57
[3] Success and Failure in M&A Execution – An Empirical Study, Global PMI Partners
[4] The Hunt for Value, Coley & Reinton – McKinsey Quarterly
