M&A activity has been steadily growing over the last ten years throughout the architecture industry. In fact, a recent study by the research and consulting firm Zweig Group indicates that 62 percent of architecture and engineering firms are actively looking for a merger or an acquisition within the next five years. But as 2018 picks up steam, I feel that we are at a tipping point.
What has changed this year is the convergence of three very distinct trends:
- The way projects are designed, planned, and built is fundamentally transforming.While client demand and project scope continue to grow in complexity, the architecture industry has begun to embrace a more integrated business model. Many firms now offer a boutique of services, such as engineering, design, construction, and landscaping. Some are even selling building and design supplies. As a result, many small and mid-sized firms are realising that they can’t keep up. A merger or an acquisition is a better alternative that allows the firm’s principals to expand their services without shutting their doors entirely.
- The market has become more competitive. Prior to the Global Recession, when the architecture industry was experiencing a healthy boom, many architectural practices big and small grew their staff and expanded their organisational structure. A number of construction and engineering companies did this as well.
Now that the recession has passed, these same practices need to work much harder to sustain their previous expansion even while there is market pressure to keep their fees low.
But this is only part of the story…
Studios are also competing against the very technology that is helping them be more efficient. BIM made a splash quite a few years ago for its ability to speed up the design process and reduce design errors. But, the architecture industry is already starting to move beyond the limitations of this software. With the help of artificial intelligence (AI) and eventually computer learning, architects can easily simulate the built environment, analyse spatial dimensions, predict how people will interact with a space, and test a design against a range of weather conditions.
This is a threat because it means that “technicians” could soon do a significant amount of design work armed with only the most basic architecture training. It practically opens the door for construction, engineering, and planning companies looking to expand their services into the architecture industry.
- Baby boomer practice owners are entering retirement. An increasing number of baby boomer firm owners and principals are heading towards retirement, but don’t have a succession plan in place. An M&A is a practical way to either get out of the business or hand over the leadership reigns to someone else. Many of these firms are smaller and target highly specialised niche markets, which make them attractive options for acquisition.
These three trends are leading to a perfect storm of M&A activity, and in its wake the architecture industry will be fundamentally altered.