Scaled Acquisitions Are Double Edge Sword For Pure Play Engineering Service Providers

Acquisitions are one of the biggest growth levers for both pure-play and broad-based engineering service providers. But scaled acquisition can be tricky for pure-play engineering service providers.

Some of the top pure-play acquirers are getting acquired after a couple of years!

 Refer above exhibit of the top 15 biggest engineering services acquisitions ever till August 2022. We see some familiar names first in the acquirer category and then after a couple of years in the acquired category.

•  Akka Technologies did scaled acquisitions, PDS Tech in 2018 and Data Respons in 2019. It got acquired after a couple of years in 2021 by Modis.
• Altran, which was once the number one engineering service provider by revenue among both pure plays and broad-based engineering service providers, made a scaled acquisition of Aricent in 2017. It got acquired after a couple of years in 2019 by Capgemini.
• Even Harman, which acquired SymphonyTeleca in 2015, was acquired after a couple of years by Samsung in 2017. The Samsung Harman acquisition involved many other Harman businesses apart from engineering services, so it may not be the right example, but interestingly a couple of year pattern is visible here too.

Why are scaled acquisitions a double edge sword?

 For acquisition to be successful, the acquirer should be able to drive synergy with cross-selling and up-selling based on the acquired firm’s expertise, customers, locations, etc. Acquirer ESP needs to maintain a delicate balance between the autonomy of the acquired firm and leveraging synergy. The momentum of the acquired unit should not be disturbed, be it the retention of key people, the continuation of capability building, and maintaining customer relationships. This is easier said than done.

 Many times these scaled acquisitions are financed by debt which might create financial problems for the acquirer. This becomes a key factor in investors opting to sell out the firm in the short term instead of waiting for synergies to show the result in the long term.

 Bottomline: M&A synergy is easier to show in excel and ppt than realize in real life. While scaled acquisition can provide growth possibilities, it is tough to realize it, especially when the stakes are high. If not navigated well, the acquirer can get acquired that too in the short time frame.