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FROM THE FOUNDER
How one plus one can equal three
P eople talk about “synergy” in mergers and acquisitions of AEC firms, and for some, the word sounds like a cliche. Cynicism keeps many firm owners out of the business of pursuing M&A as a strategy, but they are missing out. This is the math that firm owners who pursue mergers and acquisitions use to create a lot of value in their businesses.
Aside from the client and talent sharing that can and should occur between the buying and selling companies – which certainly can be real as long as earnouts or internal accounting or reward systems don’t work against it – the real synergy shows up in the valuation of the combined entities. Consider this example: Firm “A” is a $20 million revenue company that makes a 10 percent profit and is growing by 10 percent a year. They want to buy or merge with Firm “B,” which is a $4 million revenue company that also makes a 10 percent profit and is growing by 10 percent a year. One might think combining these two companies that are essentially both performing at the same level – although Firm “A” is larger – would result in a company with similar valuation multiples. If each of these firms had a proper appraisal done using the
generally accepted principle of discounted future cash flows based on their historic EBIT (earnings before interest and taxes) that resulted in a valuation of one times revenue, then the combined company would also be worth one times revenue, right? But that answer would be wrong. Here is why. When we combine the two companies (and let’s say for simplicity in our example that it happens on the last day of the year), the acquiring firm (or larger firm in a merger) would have its normal 10 percent growth PLUS the growth of the revenue from the acquired company. Now in this case – a greatly simplified example to make my point – that means that instead of growing from $18.18 million to $20 million in revenue for the year, they would grow to a $24 million company.
Mark Zweig
See MARK ZWEIG, page 6
THE ZWEIG LETTER OCTOBER 14, 2024, ISSUE 1557
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