December 11, 2024

As 2024 concludes, many A/E leaders are basking in another year of strong growth and profitability. Record performance continues to be driven by escalating backlogs of traditional infrastructure, building and environmental projects as well as in the burgeoning “innovation revolution” consisting of new data centers, renewable energy, decarbonization and climate adaptation, and high-tech manufacturing facilities, among others. Despite persistent headwinds of acute talent shortages, a two-year lackluster Architectural Billings Index and elevated inflation anxiety, one can argue our industry has never been more prosperous, or promising. And nowhere has this heightened optimism manifested itself than in the enormous level of M&A activity.

This year will mark the first time ever that the number of North American A/E transactions will exceed 500, marking an 11% jump over 2023 results. The reasons behind this surge remain consistent but bear repeating: a huge number of “peak” Baby Boomer owners eschewing conventional internal transitions to sell externally, the pronounced impacts of private equity interest and investment, and a post-pandemic mindset focusing on organizational scale and transformation into new geographies and markets.

Although the A/E industry is always consolidating and renewing, it's worth reflecting on this remarkable, extended period of realignment and strategic positioning. So many blue-chip companies and venerable brands have been absorbed by larger buyers or financial sponsors. Aggressive deal making has allowed some firms to experience exponential growth in just four years. Sellers have realized billions in aggregate transaction value. We have chosen to dub this age as an M&A “Supercycle Era”, one where a series of correlated elements compound on one another until a new paradigm or event slows the wheel.

As the exhibit shows, the five characteristics of this current M&A Supercycle are the following:

1. Confidence & capital – Historically, M&A activity in any sector comes in waves. It ebbs and flows based on both macroeconomic and specific industry conditions as well as other unique, disruptive factors. Making deals happen relies on confident participants and the belief that favorable trends will continue. No shortage of that here. In fact. the American Council of Engineering Companies (ACEC) Research Institute's Engineering Business Sentiment Study shows that the engineering industry is very optimistic about the future. Their recent third quarter study found that executives across all market sectors are optimistic about future growth, an outlook that has generally been in place since 2020. In addition, deal volumes expand when buyers have the capital to allocate. Collectively, A/E balance sheets are the strongest they have ever been, giving strategic acquirers the funding firepower they need. Plus, over the last five years more than a billion dollars has poured into A/E organizations from private equity firms. These investments have spurred over 125 A/E recapitalizations and countless bolt-on additions.
   
   
2. New entrants & serial buyers – Confidence subsequently lays the foundation for new entrants. Sellers emerge, driven by their strong financial performance and potential market receptivity. First time and infrequent strategic buyers also display an interest and appetite to expand externally. Private equity groups, observing the successful entrances and exits of other competitor financial sponsors, advance their pursuits and conversations with A/E leaders. And each M&A cycle has a select number of diverse serial acquirers that vigorously drive deal levels. Buying 3, 4 or more companies a year, these 15-20 “super buyers” bring determined approaches, formal in-house corporate development talent, and seasoned integration teams and experiences.
   
   
3. Signature deals – A trademark of the M&A Supercycle is notable transactions that shake up the landscape or denote a new direction or model. Excessive deal making can encourage a framework where executives and boards embrace “going bold” to maintain or advance their competitive positions. Think URS-AECOM or CH2M Hill-Jacobs during the 2010s. This year we’ve witnessed WSP acquiring Power Engineers for nearly $1.8 billion, placing a big bet on the power and energy sector. In addition, the summer merger of two private equity backed titans in Gannett Fleming and TranSystems created a national entity with $1.3 billion in revenue and more than 5,000 employees.
   
   
4. Higher valuations – Buoyant activity inevitably leads to buyers willing to pay a premium for attractive and synergistic targets. Multiple expansion is a common characteristic during this stage. Hesitant sellers become more open minded upon learning of prices being paid for comparable companies. Owners, sometimes inundated with inquiries, may solicit the use of bankers and consultants to engage in formal sales processes. These advisors will engage with a wide range of buyers and the active solicitations typically drive the bidding higher.
   
   
5. Volume of deals – These dynamics converge as the number of buyers and sellers across the A/E universe broadens and an emboldened view of risk and reward sets in. The ramp up of private equity backed A/E firms adds more deal flow due to their desire to scale quickly through acquisitions. Comfort in successfully integrating cultures, operations, clients and staff creates a willingness to pursue additional targets. The cycle comes full circle.

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At ROG+ Partners, we possess broad relationships and years of experience navigating A/E and environmental buyers and sellers through the M&A process and toward winning combinations. Whether you are seeking to grow through acquisitions or are evaluating your firm's strategic and ownership alternatives, please get in touch with us about how we can help your organization.

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

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