Five Takeaways on 2019 A/E M&A Activity

Fueled by a national economic expansion that appears to have no limits, the A/E industry is undoubtedly finishing this decade exhibiting some of the highest levels of confidence, optimism, and growth that we can recall. The ENR 500, a good a barometer as any for the health and vibrancy of design firms, delivered record U.S. revenue in 2018, up an astounding 8.9%, and all indications are 2019 will exceed those heady levels. Many leaders we speak with express sentiments of “record years” powered by “strong backlogs” despite “challenging hiring and retention conditions” for almost every level and discipline. If ten years ago the industry’s mantra during its recessionary depths was “we have the people, but not the work,” then today’s landscape is a complete 180 degrees.

But can overconfidence be a bad thing? We’ve heard A/E teams tout market sector ebullience before – only to be whipsawed by the cruel lessons of client cyclicality (recall this decade’s instability in oil & gas, mining, housing, manufacturing, and federal spending). Yes, low-interest rates, a healthy consumer, and state governments taking the lead in infrastructure spending, along with favorable tax reform kicking in for A/E owners, offer heightened assurances going into 2020. However, we also enter this new decade with a contentious election on the horizon, uncertainty over trade wars, an architectural billing index displaying mixed signals, debt bubbles quietly percolating, and a lingering sense a slowdown just has to be around the corner.

This crescendo of executive enthusiasm, along with strong balance sheets, has resulted in yet another stellar year for A/E mergers and acquisitions. When the dust settles, we’ll see the number of 2019 North American transactions up 3% over 2018 levels, which itself was a record year. And while there was a noticeable absence of transformational “mega-mergers,” niche “tuck-in” deals to add geographic reach and discipline extension are ruling the day. But not everyone is going along in this buying frenzy. Interestingly, several serial acquirers chose to sit 2019 out, believing they can achieve annual growth targets organically and a wariness of potentially overpaying for targets at a market cycle top.

Key A/E M&A takeaways include the following:

1. It’s been a huge decade of industry consolidation – While 2019 has indeed been a robust year for deal-making, in aggregate, the 2010s have produced over 2,500 transactions, fundamentally reshaping the A/E competitive landscape for decades. This extraordinary wave has joined together some of the industry’s largest and iconic brands, created new global entities, witnessed dozens of ENR 500 firms sell to strategic or financial buyers, and fulfilled the exit strategy needs for thousands of small firm owners across the country. Has all this rampant amalgamation been healthy? Obviously, some deals work out, and some don’t, but growth through M&A will continue to be a tool for how organizations adapt and expand in the 2020s.

2. The private equity march continues – Ten years ago, the notion of A/E organizations partnering with private equity firms was rare and even scoffed at. Today, that couldn’t be further from the truth. With financial sponsors increasingly pursuing professional service firms and the desire to put cash to work for investors seeking higher yields, a new form of industry marriage has unfolded. This year other venerable A/E names have recapitalized with the help of financial buyers, including STV, Pond & Company, Prime AE Group, BCC Engineering, and many more. These “platform” investments are often aggressive purchasers of other boutique A/E and environmental companies (not to mention active hirers of executive and operational talent). We expect to see other prominent names go the private equity route in 2020.

3. Sellers are taking chips off the table vs. rolling the dice – Despite delivering recent strong financial performance and cash flows, which can serve as great foundations for customary internal transitions or ESOP options, more A/E Baby Boomer owners are deciding to sell externally. Many have generated solid growth rates and EBITDA levels in the last three years, have elevated levels of backlog, and feel they can attract the right valuation multiples and buyer universe. Owners also remember the flush times during the mid-2000s before the recession hit and have vowed not to make that mistake again. Better to sell today rather than risk an economic downturn tomorrow.

4. Some companies have audacious growth goals, which only M&A can achieve – Realistic or not, robust times like these can often be extrapolated into sizable strategic growth goals for leadership teams. Whether it’s engineering or environmental, buildings or infrastructure, we’ve seen several eye-popping revenue targets being offered by executives. Through bravery or bravado, they wish to double their firm’s size in 3, 5, or 7 years! With workforce retirements accelerating and the unemployment rate for design professionals under 2%, adding talent organically becomes increasingly difficult. The only way for these groups to realistically get there is through synergistic acquisitions.

5. Buyers are getting much better at integration – A frenetic decade of acquisitions goes a long way to applying the learning curve of integrating organizations of disparate cultures, processes, policies, and clients. In our view, buyers have dramatically improved their post-merger integration planning and execution by confronting thorny operational and personnel challenges together. This includes a critical understanding of key staff employment agreement needs, openly articulating benefit plan differences, proactively rolling out client communication and branding changes, and immediately finding shared projects to work on to build collaboration and comradery.

At ROG + 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.

We are pleased to have assisted our clients with the following recent M&A transactions: https://rog-partners.com/transactions-2/

On a final note, Season’s Greetings and a happy, healthy, and prosperous New Year from all of us here at ROG + Partners!