Shopping spree


Industry merger and acquisition activity off to a strong start in 2005

As the economic expansion picks up steam, an increasing number of engineering firms are focusing their efforts on stimulating top-line growth with a renewed emphasis on growing through mergers and acquisitions (M&A). After several years of implementing cost controls to boost productivity and profits, presidents and principals are now more confident about the near-term outlook, and many are indicating a willingness to buy, rather than build, as a means of strategic growth.

In fact, the first half of 2005 has witnessed more than 60 transactions, with buyers and sellers of all sizes and disciplines joining forces. For buyers, the underlying motivation is to use an acquisition to expand geographically, add leadership and technical talent, enter new markets and services, or gain access to new clients. For owners who sell, the common rationale is to transition ownership, access the resources of a larger parent, and increase opportunities for the staff.

Hot regions and markets

It should be no surprise that there is strong demand for engineering firms in fast growing regions across the country, particularly in the southeast and southwest. Above-average growth rates, fueled by demographic and population shifts, have created a demand for housing, educational and commercial facilities, and public infrastructure. Engineering firms are responding by either opening branch offices or acquiring firms in these regions. Valuations for these opportunities could be higher simply because of supply and demand factors.

For example, Canadian-based Stantecs recent acquisition of California-based The Keith Companies, Inc., was fueled largely by managements desire to expand into the western United States. In announcing the transaction, Stantec President Tony Franceschini said, Stantec will gain a strong presence in California, a key market in North America, and an opportunity to lever this local base to cross sell our public sector services in transportation and environment. Alaska-based ASCGs recent acquisition of BPLW Architects & Engineers of New Mexico was driven in part because it expands the companys geographic and client base in the southwest, according to John McClellan, ASCGs president and CEO.

Similarly, management teams are interested in M&A as a means of building on their core expertise or as a way to diversify quickly. Specific markets currently on buyers radar screens are health care, federal, higher education, transportation, water resources, and land development.


Interest from private equity firms

Although rare in the engineering world, acquisitions and investments by private equity firms have been on the rise during the past year, and financial buyers continue to express an interest in the industry. While professional investors acknowledge the challenges of investing in professional service firms, where the greatest assets are the talents and capabilities of the employees and their client relationships, these buyers desire the same type of criteria they seek in technology, telecommunications, or health care opportunities. Financial buyers look for outstanding management teams, a track record of growth and profitability, a devotion to client retention and satisfaction, strong brand identity and market presence, project management discipline, and most importantly, a way to exit their investment profitably over a given time horizon.

For example, the past year witnessed Trivest Partners equity investment in Schoor DePalma, Inc.; Tonka Bay Equity Partners controlling stake in McCombs Frank Roos Associates; and Arlington Capital Partners acquisition of SECOR International, Inc., just to name a few. In many cases, financial buyers will look to make follow-on acquisitions to their initial investment as a means of growth and of adding capabilities for a potential future sale opportunity.


International activity continuing

Driven by the decline in value of the U.S. dollar and limited growth opportunities at home, European firms recently have stepped up their acquisitions of American engineering and design firms. M&A activity from international firms, such as U.K.-based AMEC and Halcrow, Netherlands- based ARCADIS, and France-based Bureau Veritas, comprised a sizable portion of industry activity during the last decade, and all signs point to that trend to continue. As international communications, trade, and travel continue to increase, multinational companies and government institutions will demand clients with the capabilities of managing projects across borders and time zones.

The critical success factors for international buyers are managing the cultural differences that exist between organizations and integrating management, project teams, and client relationships across borders. Too often, the deal economics and structure can overtake careful integration planning, which can lead to operational surprises and unrealized expectations.


Creating value through divestitures

A recent trend is that presidents and principals are willing to sell or separate non-core or underperforming units or assets for capital management purposes. By monetizing these assets, engineering and design firms can redeploy this capital to faster growing divisions, service lines, or branch offices, or make acquisitions that fit their long-term strategy. Also, they can better position balance sheets by paying down debt or shoring up capital positions.

Management teams always spend more time evaluating acquisitions or creating new businesses than formulating and refining divestiture strategies. Its unfortunate because studies show that companies can generate significant economic benefits from a proactive divestiture program. Unfortunately, some leaders may hold off selling a business unit or branch office long after the divestiture is appropriate to avoid painting an image of failure or questionable strategy. However, the costs of holding on to an office or unit, even one producing reliable cash flow, can be high.

Divestitures as a source for raising capital and redeploying resources often are complex and include numerous structures — taxable, nontaxable, asset, office, and subsidiary sales. The goal of the divestiture should be to make additional capital, debt capacity, or cash flow available to the firm. As with planning for a merger or acquisition, the process should begin with a thorough firm strategic assessment, transaction planning, and execution.

Looking forward

Although the dynamics and rationale of the engineering and design industry are quite different than the Fortune 500, M&A as a means of strategic growth and transition is a similar tactic for firms of all sizes and disciplines. Evidence suggests that structural elements for sustained deal making are in place and that well-planned and executed transactions will contribute to the long-term success of the industry.

Steve Gido is director of mergers & acquisitions with ZweigWhite Consulting. He can be reached at 202-965-3390 or via e-mail at

Posted in Uncategorized | January 29th, 2014 by

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