Summer of 2010 M&A Activity – Just Getting Warmed Up

As we look back at the summer of 2010, its clear many CEOs, CFOs and other A/E dealmakers probably took little time for beach vacations, fishing trips or golf outings, but instead found themselves negotiating and closing transactions at the most active pace since the first half of 2008. More notably, this summer’s M&A climate has been distinguished by heightened activity from publicly traded multi-disciplined firms as well as some very intriguing cross-border transactions among global organizations (see Table). In addition, a range of factors have driven the motivations of sellers in today’s climate.

This summer’s M&A highlights include:

  • AECOM’s acquisitions of Davis Langdon, McNeil Technologies, Tishman Construction, RSW, and INOCSA Ingenieria, which combined added over 6,200 employees worldwide
  • Stantec adding blue chip architecture firms Burt Hill and Anshen & Allen to its organization as well as purchasing Florida’s WilsonMiller and water/wastewater specialist Eco:Logic
  • PBS&J, confronted with looming ownership transition and capitalization challenges, joining forces with W.S. Atkins
  • URS, outlasting CH2M HILL in a highly visible back and forth bidding contest, for U.K. transportation and infrastructure specialist Scott Wilson Group
  • Dozens of small and mid-size mergers, acquisitions, and divestitures across a range of architecture, engineering, planning, and environmental consulting disciplines

So what are we to make of this sudden, accelerated activity? Is this just more consolidation in an already consolidating and fragmented industry with the large getting larger? To a certain degree, that remains true. But could this activity be foreshadowing a degree of much needed incremental risk taking, heightened confidence, and overall improved future financial performance? Unfortunately, the 2010 performance of the publicly traded E&C stocks is not indicating that, with many down 5-15% since the start of the year. However, with an improved liquidity picture and global ambitions, have these larger firms become — dare we say — a bit bolder?

Many leaders and industry M&A participants we talk to indicate that yes, much of the retrenching, downsizing, and efficiency exercises of 2009 are complete and, with backlogs generally stable, that the pendulum has begun to swing back to more growth-oriented initiatives like M&A. Now certainly it should be noted that a good number of the summer’s completed transactions were ones that were sidelined, resuscitated, or just took much longer to close from last year’s frozen climate because of uncertain valuations, cloudy forecasts, and buyers’ increasingly influential demands (i.e., – increased allocations to earnouts, enhanced due diligence, stricter employment agreements, tighter working capital “true-up” and A/R adjustments, higher holdback escrows and other post-closing adjustments, etc.).

The summer also witnessed a divergence between two distinct types of transactions. The first are deals that were completed with A/E targets in relatively good financial standing, (albeit down from their lofty 2007-2008 levels) and generally in resilient areas like water and transportation infrastructure, power/energy, and environmental. The second has been with targets that have struggled, and while perhaps these organizations were not in a formal bankruptcy or 363 sale process, their recoveries have not materialized to a large degree and their outlook and survivability has become increasingly unclear. Architects, contractors, land development consultants, and targets in building bust states are several types that come to mind.

The reasons why sellers have been running to the exits are numerous, from lack of effective succession plans, to the conventional better terms/quicker exit in the external vs. internal sale, to an increasingly murky economic recovery and glum outlook on taxes and regulation for small to mid-sized businesses in general. Many owners who have had a great 10 year run and delayed a merger/sale or irrationally tried to time the market have been burned, so a good number have finally gone through with the process for better organizational clarity and direction as well.

Given the demographic shifts impacting the A/E workforce, it’s becoming evident that effective ownership transition planning, from monetizing assets and unlocking wealth to perpetuating the organization and creating opportunities for a new generation will be critical to the overall health of the design industry. We are seeing in too many cases that ownership planning needs to go beyond a one shot mechanistic formula or a static “passing the baton” moment to a continuous firm-wide evaluation that takes a holistic approach to incorporating activities such as leadership development, financial transparency, accountability, incentive compensation, and ultimately, enhancing shareholder value.

Since Rusk O’Brien Gido + Partners’ formation, our team has been in discussions with many leaders of A/E and environmental consulting firms of all shapes and sizes, covering conversations from their general business and design outlook, areas of client and market opportunity, acquisition goals/criteria, and how they’ve survived the last 18 months and what are they doing to position themselves for the inevitable recovery. We’ve certainly learned a lot from listening to others and look forward to sharing these observations and sentiments in future ROG + Perspectives. As always, please contact us if we can ever assist your organization.

Table: Representative Transactions: May – September 2010

Acquirer Target Employees Price Key Markets
URS Scott Wilson Group 5,500 $333MM Transportation and Infrastructure
WS Atkins (U.K.) PBS&J 3,500 $280MM Buildings, Transportation and Infrastructure
AECOM Davis Langdon 2,800 $324MM Cost and Project Management
Cardno (Aus) ENTRIX 615 N/A Enviro/Natural Resources
Stantec (Can) Burt Hill 600 N/A Education and Health Care
Tetra Tech EBA Engineering (Can) 600 N/A Mining and Infrastructure
CDI Engineering L. Robert Kimball 550 N/A Buildings and Infrastructure
Jacobs TechTeam Govt Solutions 500 $59MM Government IT
Trow Global (Can) Teng & Associates 500 N/A Telecommunications/Mission Critical, Transportation, Buildings, IT/Energy Solutions
Michael Baker LPA Group 475 $59MM Transportation