An array of distinguished panellists provided valued insights and recommendations for successful M&A during Environment Analyst’s panel discussion entitled ‘Impact of Mergers, Acquisitions & Financial Partnership Models in the Environmental & Sustainability Consulting Sector’.
The event featured M&A experts Bob Kloepfer, SWCA’s global strategic management officer; Rupert Brown, senior investment director at Palatine Private Equity; Tristan Craddock, global M&A director at Anthesis; and Stephen Grant, director at Equiteq.
Here, in the first of a three-part series, we summarise the experts’ insights into the three steps that can help ensure companies choose the right M&A partner and optimise the integration.
Step #1: Use your ownership structure to your advantage
Choice of ownership structure within a competitive recruitment market, where top talent is scarce and in high demand, will sway M&A success.
Different ownership structures will offer different advantages to prospective M&A partners.
Both private equity-backed and publicly traded firms in the environmental and sustainability (E&S) consulting sector are experiencing rapid growth under guidance from their stakeholders. Where the former can often be more strategic in their portfolios, publicly traded companies, such as WSP, often focus on acquiring for growth and/or to remove competition. Smaller, employee-owned companies can provide acquisition targets for both types, but also have their own stake in the buying field. Depending on the target company’s ambitions, each ownership type has its own advantages.
The advantages of an employee–owned company include the offering of an alternative culture of collaboration and independence. "We attract companies that want long term retention of their company DNA and talent," says SWCA’s Bob Kloepfer, explaining the company’s focus on small scale acquisitions (<50 FTEs). SWCA adopted the Employee Stock Ownership Plan (ESOP) structure in 1988 and has grown to become one of the largest ESOP pure play E&S consulting players in the world by embedding social impact into its strategy.
"Some of the smaller, niche companies that would be prime targets for M&A have concerns about cultural compatibility [when] becoming part of a large publicly traded engineering firm," Kloepfer explained. "This is why pure-play, environmental and social firms with private ownership models can continue to be part of the ESG consulting landscape."
The advantage for private equity (PE) backed organisations — such as Anthesis and ERM — is that their financial backing allows them to buy regularly and scale quickly. Such firms often pursue impressive M&A initiatives. This type of ownership structure can be an attractive match for target companies, as despite a strong growth strategy, PE-backed firms can retain enough autonomy to keep a "flexible entrepreneurial culture".
Both Anthesis and ERM have acquired aggressively over the past year. Anthesis’ year on year growth in gross revenue topped 82% in 2022 while Stuart McLachlan, its CEO, described their acquisition strategy as "all about identifying where the market’s moving and what our clients’ needs will be" in an interview with EA. Meanwhile, ERM increased its portfolio with four purchases.
Step #2: Aim for purchases that are targeted, synergistic and strategic
Strategic buy-and-build acquisitions that expand the client offering to provide combined sustainability expertise (strategy, operation and delivery) are driving higher margins.
A highly fragmented market valued at "$8.1 billion with 20% CAGR" — according to Rupert Brown — and recent PE investment interest is providing the perfect brew for buy-and-build strategies as consultancies identify holes in their service offering.
For example, following considerable PE investment — first from Palatine, then from Carlyle — Anthesis has deployed a successful buy-and-build strategy, with five successful acquisitions in 2023 alone. The company has diversified their service offering and digital capabilities, breaking into new sectors through the most recent purchase of growth and innovation specialist consultancy Progressive.
Tristan Craddock spoke of how Anthesis’s merger with Walbrook fitted into their growth strategy. He said: "Walbrook provided more work within the governance space, broadening from the E to the S and G. Our acquisitions have focused on adding that breadth and including social and governance".
Many outfits are looking to acquire digital/tech businesses, leading to higher valuations for these types of service provider. "The real sweet spot in this space is [finding how to] combine services and software together, such as workplace safety using reporting of dashboards or analytical tools that can be leveraged or licensed out to end clients," said Stephen Grant.
Step #3: Ensure cultural alignment for successful integration
Enabling cultural alignment early in the process through a people-focused strategy is essential to ensure talent retention.
It’s an old cliché, but cultural alignment is key to a successful M&A. Without it, two entities will never gel, and their synergies never be realised.
Bob Kloepfer revealed details of SWCA’s culture of sustainable growth and its emphasis on transparency and communication: "We always announce an acquisition in person at the largest locations of the acquired firm and create a welcome package explaining our organisation. We also co-brand for a year and set up visits with clients together, and we try to do it fast enough that there are benefits but slow enough that they don’t feel that everything they’ve been doing is wrong."
Palatine’s Rupert Brown understands what it takes to integrate firms: "We have a strategic growth team to help businesses go through the steps. Communication is key to prevent people worrying and being unsettled".
Members can catch up on all the insights from this panel discussion by watching again at this link.