This week, architectural and interior design services company Aukett Swanke Group (ASG) has confirmed the acquisition of smart building technology company Torpedo Factory Group (TFG), in a deal that hints at a new potential trend in the commercial buildings sector. While architects have used M&A to broaden their technological capabilities in the past, few deals bridge the building design-operation divide like this one. In this research note, we explore the deal with TFG’s CEO and consider the wider impacts of such vertical integration becoming a trend.

Headquartered at an old WWII torpedo factory in London, TFG is a long-established audio-visual provider that has recently developed into a managed service provider for smart buildings. Through their Intelligent Environments division, they combine embedded systems, information, and communication technologies to enhance occupant experiences. Now operating with about 70 staff over four locations, the firm achieves an annual turnover of around £10 million ($12.3 million).

Also headquartered in London, ASG is a design studio across the disciplines of master planning, architecture, interior design and workplace consultancy. Originally established in 1906, ASG now has a network of over 350 staff in 13 studios across 6 countries across the Middle East and Europe. Unlike most of their contemporaries, they are a publicly listed company on the London AIM Exchange. Talks of a deal with TGF began with a discussion between the two CEOs.

“The initial discussion was actually over a coffee with the then CEO of ASG, Nicholas Thompson, who retired in December after many years at the helm,” Nick Clark, CEO of TFG told Memoori in an interview this week. “He recognised the challenges of architecture businesses for investors and was looking for a way to leverage ASG's superb property connections in a way that could create better returns for investors than has been possible with pure architecture.”

Architecture, like almost every other industry, is exploring the potential value of new digital technologies for a wide range of activities. Typically, however, technology acquisitions by architecture firms have focused on solutions that support the architectural process, such as BIM, AR/VR, cloud or 3D printing. The deal between ASG and TFG is different in that it crosses the design-operation divide that is said to have held back the smart building industry for many years. Externally, however, it is still unclear how synergies will develop between these two types of company within the smart building space.

“I think this is something which is going to become apparent over time, when we've completed a few more transactions we can talk about. We see it as building a group of companies that can tackle some of the challenges in delivering smart commercial buildings. Memoori’s IoT in Smart Commercial Buildings 2022 report sets out a few of these - in particular about the design and construction processes followed by the industry at present and how it often fails to consider the values and potential of smart systems until too late in the process,” Clark said. “We need to do things differently. Architects are the trusted advisers who can guide clients to better ways of delivering projects.”

A survey by the Zweig Group found that 67% of architecture and engineering firms have been considering an acquisition, but within that architecture and interior design firms are the least likely type to consider buying another firm. “The industry’s structure continues to transform to a more integrated business model,” said Jamie Claire Kiser director of merger and acquisitions services at the Zweig Group. “The top performers will be those that embrace change and are able to respond quickly, nimbly, and decisively to the evolution of the industry.”

ASG’s acquisition of TFG could certainly fit that description and its success could trigger a new trend in the smart building industry. At best, the marriage of architecture and smart technology will lead to the deeper integration of smart technology in the design process, which could create new efficiencies and cost savings, enhance commercial buildings performance and the occupant experience, and just make better buildings through more seamless integration. At worst, it combines complementary customer bases and provides a new perspective across the design-operate divide.

“Like almost everything else in today's world, technology is changing the way the built environment is designed, built, and operated. I don't know whether others will copy what we've done, but I do know that anyone who thinks the current industry model works well hasn't thought about it properly,” Clark told Memoori. “Retiring partners cashing out and expecting the next generation to take on huge loans to buy their way in, in the hope of a future generation doing the same for them, just doesn't make sense any more.”

“Our public quote provides a potential route to help architects manage the ownership transition,” adds Clark, “but only if we can show a credible plan to deliver the recurring revenues that smart buildings can deliver, so they can have confidence our shares will be an attractive long-term investment.”

Moving forward, ASG and TFG will begin the process of combining their assets and discovering the synergies that will generate new value for the company. Clark made it clear that his first priority was to inform and reassure staff that the merger was not going to adversely impact their work. “Both companies are the product of mergers so there's already a culture of accepting change - and of course, one of my new colleagues pointed out that architects are in the business of creating and delivering change, it's in their DNA,” Clark said.

“Fortunately because the two businesses are fairly different, this is quite a "shallow" integration, it doesn't really impact on any employees, or even involve much change for the directors of the various businesses within the enlarged group,” he added, “but what we can do is start making use of our stock market quote, and looking at acquisitions to expand our capabilities, without needing to take on debt.”