For the first time since emerging from the Great Recession, both the broader economy and the A/E & environmental consulting industry feel poised to break out from a multi-year malaise. And while A/E firms are still prone to headwinds of market sector unevenness and relentless competition, executives are back to looking at the glass as “half full” which is a most welcome sign. Industry revenues and profits are up, pent-up demand in the public and private sectors is fueling growing backlogs, and the war for talent at all levels of experience is back with a vengeance. Maybe not 2005 exactly, but a sense of normalcy is returning. Happy holidays indeed!
So you can’t blame CEOs in this heady climate for their exuberance and feeling, well, pretty darn confident again. And nothing fuels the M&A markets like executive optimism in addition to cash-laden balance sheets and an itch to start building and buying toward multi-year growth objectives.
And while by our tally the overall number of North American A/E & environmental transactions will likely end the year generally even with 2013, there are a number of intriguing observations and subplots we want to highlight as we wrap-up the year.
1. 2014 was the year of the mega-deal – There were a number of dramatic transactions that will truly change the competitive landscape for A/E firms, and frankly will take years to determine if they were sensible or not. AECOM joining forces with URS, WSP buying Parsons Brinckerhoff, and AMEC combining with Foster Wheeler really illustrate the bold and aggressive mindset of the M&A landscape this year. In addition, there were a number of other deals, albeit smaller, that consolidated major players along service specializations such as GHD-Conestoga Rovers (environmental), POWER Engineers-Burns & Roe (energy) and Hughes Associates-Rolf Jensen & Associates (fire protection/life safety). In fact, many of these combinations have ushered in a wave of trickle down discussions at other smaller and mid-size board rooms, wondering if they too should seek out partners as realignment comes to global A/E participants.
However, the reality is that these mega mergers, in addition to several prominent restructurings of other publicly-traded and large privately held firms, will force a necessary breather. Certain acquisitive participants may be out of the market in the short-term as they turn inward, digesting operations and divesting underperforming divisions. As such, heading into next year, we believe the most active and interesting A/E deals will be led by smaller acquirers, generally with $50-$500MM in revenue.
2. Prominent architecture firms got in the mix – Not to be ignored, there were a number of well-known architecture firms across the country that sold, highlighting both the acquirers’ desire for convergence of disciplines under one roof and eager sellers ready to deal after years of rebuilding from 2009 levels. Arcadis buying Callison, Stantec picking up SHW Group and ADD, Inc., ECADI acquiring Wilson Associates, EYP purchasing WHR Associates, and FreemanWhite joining Haskell were just a few examples of interesting strategic and synergistic intent on both sides. We predict more consolidation for architects in 2015.
3. The future for oil & gas deals today looks much murkier – We’ve noted with both awe and interest the impact of the shale oil energy revolution the last 5 years on engineering and environmental firms’ strategies. While some conventional civil engineering firms in well-positioned locations like Pennsylvania, Texas, Ohio, West Virginia, Colorado, and Western Canada completely revamped their business models to serve the booming energy sector, others simply bought their way into these markets. However, as we’ve all witnessed the last month with plunging oil prices, the booms often lead to busts. Many of the valuations and pro-forma assumptions of these M&A deals were based on energy client needs and forecasts predicated on much higher oil levels to justify activity (not $58/barrel!). So just how these firms perform if and when clients pull back their operations will be a major test the next 12-24 months. In the short-run, we feel engineering firms serving both the midstream and upstream client sectors could prove resilient as cheaper pump prices encourage additional consumption and manufacturers witness lower costs on raw materials.
4. Valuation gaps scuttling deals a reality given economic cycle upturn – Unfortunately, there have been a number of promising deals in 2014 that failed to materialize due to larger-than-expected gaps in buyer and seller expectations. This is all too common in deal-making as the economy and A/E industry moves from recession to recovery cycles. For a good number of sellers, the reality is that their financial performance from 2010-2013 was either lackluster or bumpy, but results and/or forecasts in 2014 have been much rosier. As such, sellers are unwillingly to part with their organizations based on valuations at a lower historical trend line, and buyers are reluctant to offer robust valuations on just a couple of quarters (or promises) of better top-and bottom-lines.
We’ve also seen more sellers who have gone out to market, but either did not find eager suitors or experienced lower-than-expected valuations given the aforementioned cyclical timing. As a result, they are now going back to “Plan B” and considering other transition options (internal sale, ESOP, etc).
5. Aging industry demographics is destiny – Looking ahead, 2015 will mark the year those individuals born in the 1950s will be hitting 55 to 65, the prime years for ownership transition and monetization of equity stakes heading into retirement. For owners and leaders who survived the last few years of recessionary headaches and drama, many feel now is the time to step aside and pass the baton either internally or externally. As we’ve noted in prior issues, we have begun to see more net sellers of stock at A/E and environmental firms (of all shapes and sizes) than net buyer demand, a phenomenon with wide ramifications for future industry competitiveness, strategic planning, capitalization, and leadership succession.
At Rusk O’Brien Gido + Partners, we possess strong relationships and years of experience navigating A/E and environmental buyers and sellers through the M&A process and towards winning combinations. Whether you are seeking to grow through acquisitions or by evaluating your firm’s strategic and ownership alternatives, please contact us as to how we can help your organization.
On a final note, Season’s Greetings and a Happy, Healthy and Prosperous New Year from all of us here at ROG+ Partners!