Last week I shared my thoughts on the loss of institutional knowledge regarding older engineers and the new generation replacing them. But what happens when companies merge and are acquired? Today’s consolidation of companies--engineering, construction management and construction--are at an all-time high. Buy-out agreements and management replacements can often result in the loss of institutional knowledge regarding what made the acquired company profitable and successful. After all, in our industry, it is all about the people who own, manage and run them--not about a product that can be sold off the shelf. However, despite this most valuable asset, the most common reaction is for management to bail out-or to be replaced. What may have been successful in one firm however, may not work well in another.

Our firm does numerous evaluations of companies before takeovers. We try to determine which assets may be problematic or may be lost once the firm is acquired. We have performed these evaluations over a number of years. Due diligence of firm management and projects are necessary if one is truly to understand whether the decision to “acquire” or “merge” is prudent. Risk management identifies the gaps--whether in project control systems, policies and procedures, or in the cultural/social environment. While financial statements and EBITs are both good indicators whether a firm should be acquired, if the takeover company does not understand how work was performed or under what systems and processes, the financial success can quickly fade away. Often this information is not easily discernable from project records alone. People and institutional knowledge again become key in determining how things “worked”.

Risk assessments should also ascertain whether the current policy, procedures and applications being purchased meet industry best practices. It is not unusual when companies are bought to have systems in place. However, since most of the management may be nearing retirement age, the systems that probably made them successful are not necessarily what is considered best practices. Employees, clients and market penetration remain key asset considerations in any acquisition, but one also needs to know other “soft” assets: hardware and software systems, policies and procedures and the institutional knowledge found in the minds of management and key executives. Without these, financial statements often mean little. I have seen so many acquisitions over the past couple of years, especially those carried out for the sake of market penetration—either for industry sector break-through or geographical break-through--that have resulted in disputes. Any anticipated “value” was not only lost-but was turned into a major liability for the acquiring firm.

Don’t assume that an accounting firm or financial due diligence firm to assist with the purchase decision will provide the proper prospectus. In the past this may have generally worked. But it is no longer the sole measure by which senior management should be making recommendations to its boards. A good look into the management side of the prospective firm is just as important as knowing what the balance sheet looks like. Management of current projects is especially important. Otherwise, the loss of institutional knowledge and/or lacking best practices could lead to potential losses and disputes. A&Ms turn into management nightmares instead of management successes.