Smart Buildings

#Podcast 19: Why has an Architectural Firm Acquired a Smart Building Integrator?

In our Podcast series “Sh*t You Wish Your Building Did!”, Memoori explores the intersection between technology and commercial real estate through interesting conversations.

Last month, architectural and interior design services company Aukett Swanke Group (ASG) confirmed the acquisition of smart building integrator 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 Podcast, we explore the deal with TFG’s CEO Nick Clark and consider the wider impacts of such vertical integration becoming a trend.

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Why has an Architectural Firm Acquired a Smart Building Integrator?

Transcript of ‘Why has an Architectural Firm Acquired a Smart Building Integrator?’

James: Nick welcome to podcast.

Nick: Thank you good to be here.

James: Great I’m really glad you’re here and uh I should start by saying congratulations on uh the acquisition of your company and I thank you yeah I think a good place to start today is just tell us a little bit about Aukett Swanke and TFG.

Nick: Sure um so if we start with with TFG because that’s uh that’s where I’ve sort of come from um it’s a company I started when I was at Uni um and we grew it as a technology systems integrator primarily it’s an audio visual systems integrator um serving really two markets um the uh our stage technology business is really venues particularly theaters and other performance spaces and we’ve got a commercial audio visual systems integration so so commercial buildings offices um Health Care settings and so on and we uh We’ve grown sort of Fairly steadily a little slower than I’d like but the various challenges that have beset the world that we’re all too familiar with um and meanwhile Aukett Swanke is the I believe the UK’s only quoted Architecture Firm so it’s on the stock exchange um the ticker is AUK like the uh like the bird um and so unlike a normal architecture practice which is a most commonly a partnership or an LLP it’s a public company that you can buy shares in and the value of those go up and down in line with the performance of the business.

James: Yeah I mean I certainly haven’t come across hardly any um architectural terms yeah that are publicly listed.

Nick: I think I’m right saying it was kind of illegal until the 1980s and then when everything deregulated um about half a dozen uh floated but the other five um you know had various mishaps along the way um and and Aukett is the is the one remaining that that’s using this and therefore has a a a business model That’s Unique in the UK which I think presents uh quite a lot of um opportunity and interest um one of the one of the challenges in the architecture world is um grappling with a business model that I think is is kind of broken really in the traditionally as a partnership um if you’re a retiring partner um you you are looking to be bought out of your position um and take a lump sum away when you go as an owner of the partnership but and and when you bought in maybe 20 years before you would have borrowed a big part of cash and stuck it in to to into the business um for your share of you know buying in and um I think the the the the partners retiring now are looking around and and the younger generation are thinking are you kidding like why am I going to take I can barely get a mortgage um for a house you know why am I going to take on a massive load of six figure sum and pay interest on that and try and clear it as extra pressure on on my personal finances to it you know just to give you a pile of cash to go um and so uh the interesting thing about a PLC model is that um it’s a bit more like a regular business um as you might expect a um uh I say a management consultancy or any Commercial Business to be where there’s um there’s an ownership structure and you don’t have to um pay to progress in your career um but equally through the the PLC model you can if you want to invest in the business um to share in it as it performs yeah um but I think one of the challenges there is making sure that it’s a business that’s going to perform and perhaps the link is that both companies are inherently project-based businesses so you know if you build if you design a building it’s done you don’t need to design another one you know that has a finish similarly with an AV system if you install it or if you build a theater um it’s not a business that has um I know like a SaaS model where someone pays you so much a month for a continuing service and the challenge of any project-based business is that as you grow it you are um from a business perspective you’re kind of growing the machine that needs feeding there’s this size to it and at some point that way you’re continually grappling with a mismatch between the the resources you’ve got and the demand on those resources and get the two extremes you either run the business with um a sort of skeleton staff um and have to rely on Freelancers and you lose control of the the quality of what you’re doing or you have so many full-time staff that you can’t keep them occupied enough and you can’t make a profit and and so you’re stuck in you know balancing balancing this but ultimately if you get bigger there’s no reason inherently why the business is going to be more valuable you just have that added risk of of more to more to balance.

James: No it’s very interesting description I think of those types of businesses and I guess perhaps there’s also historically that’s the way that it’s been done right in our in the architectural space and there it’s carried on without perhaps people thinking about different Alternatives and again yes I mean it brings us back to the acquisition right that there are different ways of you know of doing this of growing an architectural business or growing a systems integration business but I mean I mean how did it come about in the first place how did um how did they approach you about it?

Nick: I reached out if you’re on the on the uh aim Market of the stock exchange you have a a nomad which is the nominated advisor which is essentially a financial services firm that makes sure you’re following the rules as a public company and and I approached by them and um they set up a meeting with the the then chief executive of Aukett Swanke who um and he and I remember coffee had a chat and uh he was coming to retirement and they were considering how best to handle the succession and uh they they’d interviewed a few um potential potential successes and I think it was felt that actually the the challenges that they’ve got to do something different um that I think from talking to some of the people who run the the architecture businesses uh in the group um you know there’s a feeling that that the PLC is is I mean at the moment frankly at best irrelevant the PLC structure that they don’t see it as as an advantage um that I think it can be and that it it needs to be because running a PLC is expensive you have to have a a board of non-executive directors you have to follow a load of corporate governance you have to pay various fees to all these City people to stay listed and so that people know things are done properly and be accountable to the outside shareholders and all that costs money so you’ve got to have a reason why you’re listed um and uh it offers tremendous potential as I say I think it offers a fix to to this problem um but the missing piece is that if you stay just with architecture um you continue to have a business that is just growing for the sake of it that you’ve if you double the size of the business you’ve got twice as many people um and and you haven’t got any more profit that adds the stability that you need to understand business it just becomes bigger bigger for no good reason and you spread the PLC costs over over more more bodies but it’s still like there’s no nothing compelling about that as an investment case so really they were looking for ways to leverage their um you know the unparalleled property contacts that they’ve got um to to find a solution to that as to you know and how to unlock the advantage of the unique advantage that Aukett Swanke has as a listed architecture practice Yeah and then meanwhile um you know TFG had um was similarly having challenges of thinking well what what do we do because um you know we have been essentially you know moving from being purely an AV company uh to uh to more of a master systems integrator um and you know there’s a uh you know really there and kind of following in in in the way that a a small number have done I think most AV systems integrators are just sticking to what they know busy running again a project-based business um you’re focusing on paying the bills and making it all work and there are a few um you know people like Mike Brooman at Vanti who I think you’ve interviewed in the past yeah um you know who for years have been you know just trying to do things differently and you know that that Master system’s integration role um that I think AV systems integrators are really well placed to um to occupy but um the the kind of when we looked at it the the missing piece um is just that it’s also siled and and difficult there’s um uh you know it doesn’t all of the the technology and the way it all in you know all AV is all points on a network but and so is every other building system but the systems don’t really talk to each other and the way the industry is structured there’s not really any budget um to change that there’s there’s a um you know a main contractor has appointed um you know a bunch of subcontractors almost exclusively on price at that point um and not giving them any money to play with and by the way the main contractor also has no money to play with you know their margins are terrible um and the system has has evolved where the property developer is wanting something for the lowest cost um to generate the highest Financial return and and just missing the piece that that just doesn’t really work anymore um you know as the property markets changed and that that that’s not what it’s about even for the property owner.

James: yeah a great description of something that I think we’ve talked a fair amount about right like this um siled approach to technology but also the whole life cycle of design operate maintain and how there isn’t a thread between them so I mean do you see this now as an opportunity to be able to kind of bridge that design operate Gap in the industry um how will you approach that?

Nick: Yeah absolutely so so I think the um you know the industry kind of started with the the kind of the soft Landings approach um uh and and I I think one of the interesting developments was the um thing Judith hackett’s um grenfell report and the the golden thread concept that came out of that um you know where essentially the architect’s Vision needs to be preserved through um not just through construction but into the operation um and I think one of the examples was that if you have a um your residential Tower block and um with lots and lots of lots of units and someone decides to knock through their kitchen dining room to make an enlarged living space that might be fine as one flat but if that becomes a design Trend and everyone does it before you know it you’ve got a building with a radically different profile in terms of preventing fire um the the fire brakes are missing compared to when the tests were run originally um and so this this golden thread is kind of essentially it’s a um quite an elegant term for what is really like a digital logbook of the building and the record of everything that happens to it and it just seems obvious when um the architect designs everything and creates a model of the building to maintain that all the way through and and suddenly um really we see that as well as having the um the master systems integrator role um that I think TFG can fulfill you can also envisage a master systems designer role and down stream of the smart building integrator a master systems operator and potentially I think there’s a case for saying that you need to it’s all much we’ve got to be much more joined up than it used to be and that actually while there’s certainly scoped to just try using Open Standards and persuade everyone you could just create one business that will do all of those things and just see you through the entire process um and thereby capture um just make sure that the vision goes through to reality and that you have um an ongoing record of the building in use and and um you know all of the the risks that come from a building being on a network can be properly addressed um and and you don’t miss any of anything from this sort of you know the various gaps the design operate Gap also the the design build Gap and the build operate Gap.

James: So you think with sort of the architectural practice sitting on the design team at the design phase of that project they’ll be able then you will also then be able to advocate for technology from the smart building integrator perspective as well to bring that through?

Nick: Yes exactly yeah um yeah I I think that if we um if we can get that done at a much earlier stage just get to get the technology considered right at the beginning um then we’ll be in a much better place that just that’s a more holistic approach just feels more more natural and sensible um and and you know I don’t think we’ll be able to persuade every client but we don’t have to persuade every client we just have to persuade a handful and my hope is that we’ll then be able to demonstrate that that creates a better building that maybe costs a fraction more to build but is so much cheaper to run and so much more pleasant for the people in it um you know as an AV company as an AV integrator we you know we’ve sold um you know obviously meeting room booking systems and those people make desk booking systems and um it’s astonishing how mostly the desk booking systems don’t talk to the HVAC so the desk you know the AV system knows that actually your building’s only got 20 of people in it but the HVAC system blindly heats the whole the whole building up anyway um when actually you you could uh not only just say well it’s there’s only 20 people in so put them all on one floor and heat that you could actually have the information going two ways and say well you know actually like being in a 24 degree environment or you know my eight-year-old is still in it’s been in shorts all winter and you know he he would sooner be in an 18 degree office and uh you know you you provide scope to have the information going both ways and not just the the desk booking system telling the HVAC system stuff but the HVAC system could say well I’m going to heat this part of the building to this temperature and if someone wants that they can be there right um and you can just provide that much better um much more enjoyable um experience are going to be in the building approach to automation as opposed to this siled approach which you’ve already talked about of course yeah exactly yeah do you I mean just.

James: Obviously we’ve talked about the integration which is what you’re used to and you can do but you also see an opportunity for you guys to not just install the technology but also provide it and perhaps because I mean obviously we all know that there are very good margins in software as well is that something as a public company as well you think will be you know useful uh to let’s say solve some of the challenges you mentioned around the old way of doing an architectural practice.

Nick: Yes absolutely one of the um one of the things investors look for is um Revenue that is recurring kind of automatically um because in a project-based business you have to kind of um keep selling in order to refresh the the in order to refresh the order book here when you when you carry out work you destroy your order book whereas with a software business where there’s some monthly fees for the service selling is just growing the business because as long as you’re providing a good service the client sticks around and continues to order the service and we had some experience with that at TFG where we invested in a small media software company and helped them to to sort of change the profile of what they were doing from from one-off software license sales to just to a SaaS model and the valuation rocketed and and we sold it in three years for seven times revenue and no one is paying seven times revenue for um for for a smart building integrator or an architecture firm um it’s quite interesting uh listening to your talk with um uh Geoffrey Moore from um the the Go I mean I read crossing the chasm when I started the business in the in the 90s yeah um iconic book from that era yeah and uh yeah fascinating to see that that’s I think that’s where smart building integrator were at in a lot of a lot of places um and uh and yeah that that that’s a a gap to be that’s a gap to be crossed so so you’re in listening to your talk one of the points that he that he mentioned was um the challenges of an established company looking to buy other businesses and that uh you know that the one of the difficulties is the as the established company you might be valued at one times revenue and this Tech startup thing wants 20 times revenue and actually it’s even more extreme for us you know we’re currently valued at like a third of Revenue um so we have to one of the challenges will be finding finding the right opportunities and actually the recent um difficulties that Tech have had I think presents an opportunity that that the valuations are way lower than they were and raising capital is way harder than it was particularly for relatively small businesses so one of my main objectives is to find some small Tech businesses with recurring revenues with interesting with interesting smart building integrator Tech be that um iot devices or software sold on on a SAS model and seeing if we can help them because they have um a sort of a funding Gap where they might be struggling to to get their next round away um all the valuation slower than they wanted and you know we’re able to offer um you know public company equity and uh I’m hoping that they’ll be scoped to find quite a few opportunities like that in the in the next year or two.

James: Yeah I mean I think it’s a not a bad time at all to think about acquiring or at least helping right proptech companies that um that might have a funding Gap um given something going on this year.

Nick: Yeah especially those that you know that have a product and just need some help taking it to Market given that as an established player we have such good connections to and to be able to take them something different um and interesting I think

James: Should be good yeah what other ways are you thinking about growing the business as well?

Nick: So really there’s uh although the the the there are certain rules being on stock market which I’m getting to grips with about what you can do and you can do pretty much anything but it it can get quite expensive in terms of the the fees can be disproportionate in terms of the rules about what you acquire when um but if we uh certainly we need more smart building integrator Consultants um and they’re relatively easy because that’s essentially just hiring people so there are no real rules around that um for the first 12 months um we’re kind of relatively constrained in in terms of buying reasonably small businesses um but I think there’s a lot of scope to show the market the kind of thing we want to do just in in smaller scale um and that will it will include um you know some tech firms but I’m not averse to acquiring architecture firms where that makes sense I think that um architecture um like so many other Industries is being changed by technology and yeah there are some advantages to scale and I think that the PLC as I say if you can give um shareholders confidence that the share price is going to be a good store of value then you can go to um you know architects who want to want to retire and have a business and and want to take some value off the table as a public company we’re able to use public Equity as a way of doing that um and we don’t have to make their start you know their middle management their next you know their second tier of management to take on some massive debt and sort of Saddle the business or themselves with debt we’re able to use equity instead um and then of course the you know the businesses have uh you have the scope for organic growth it is organic growth is really hard in a project-based business but um veritech is one of the two architecture practices in the UK that asgo and that’s an exec Architecture Firm so it works with creative Architects and then delivers their Vision um and that’s growing quite growing really quite nicely and doing very well um so yeah so it’s kind of a mix really of some acquisition of tech firms possibly acquisition of Architects organic growth particularly in architecture and um and and just hiring some more people to start to deliver the new smart building integrator services.

James: Yeah well look I thanks for spending the time with us today I you know I think genuinely this is a really interesting um acquisition and um it’s great to see companies trying new ideas and new ways of doing business and you know disrupting um sort of older ways of that have been more traditionally the way that we’ve delivered buildings so I wish you I wish you luck.

Nick: Thank you it’s um yeah I’m really excited it feels like feels a bit like being a startup in the 90s again uh only this time with all the tech and the people at my disposal to really make it happen exactly an interesting time.

James: Good stuff if they want to find out more about Aukett Swanke or yourself um how could people find out about that?

Nick: Yeah if you look at the London Stock Exchange website uh AUK is the ticket you type into the search box and you see all the news um Aukett Swanke if you put us in Google um or TFG is tfg.com um but uh uh yeah and I’m on LinkedIn hey happy to happy to talk to anyone who’s interested in getting involved.

James: Brilliant thanks again Nick bye for now thank you.

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