Consolidation’s impact on the AE business

Trends for firms from around the world and for U.S. firms that have overseas operations.

By Morrissey Goodale August 22, 2022
Courtesy: CFE Media & Technology

Last week, ENR released its 2022 Top 225 International Design Firms list (WSP is once again in the #1 slot). Perennially, the list is the benchmark for the global design industry and always includes insightful and thoughtful analysis by the ENR team.

I was particularly interested in seeing this year’s list ahead of my presentation over this past weekend to 200-plus shareholders of one of the largest and most successful Asia-Pacific engineering and environmental firms. The theme of my address was “Global AE Trends and Issues.” Here are just some of the trends that we’re seeing and hearing in our strategy and M&A advisory work for firms from around the world and for U.S. firms that have overseas operations.

La grande pression est mondiale: Think it’s hard to recruit a designer or scientist or graduate surveyor in Salt Lake City? Well, try doing it in Sligo, Selkirk, Stockholm, Seoul, or Sydney. The acute talent shortage is worldwide. Similar to the U.S., unemployment rates across the OECD are at or close to record levels. In Australia, the engineering job vacancy rate has increased by 97% in 12 months, something the main industry body, Engineers Australia, fears could have a “catastrophic” impact, including by delaying major infrastructure projects relied upon for the nation’s economic recovery. In the first quarter of this year, the shortage of skilled workers in Germany reached record levels with particularly large shortages “in the construction, architecture, engineering, surveying, and building services.” Meanwhile, 69% of the Top 225 are seeing an increase in backlogs. So, the big squeeze that firms are seeing in the U.S. from too much work and too few staff is playing out around the world.

More a kaleidoscope than a hybrid: AE and environmental firms around the world are grappling with their post-pandemic workplaces. In The Questions Raised by the Gloriously Heterogeneous AE Industry of 2022, I wrote about the splintering by region of the U.S. industry’s workplace model post-pandemic. Well, that’s playing out worldwide. And on a global scale, it’s further complicated by differing national labor laws, cultural preferences, and housing stock. (Working from your apartment with no air conditioning in Amsterdam during a heatwave sure makes bicycling to and from your air-conditioned office five days a week a lot more appealing—even if Gunter, that super annoying CAD manager, is also going to be there.)

Rapid global industry consolidation: Last year saw extraordinary levels of consolidation in the global AE and environmental industry. In all, we tracked close to 790 transactions in 2022—33% more than the prior record set in 2020. We fully expect this year to set another record with year-to-date transactions already exceeding 470 globally. (Of note—the U.S. accounts for approximately two-thirds of global transactions.) And while the share of overseas deals involving private equity is not as high as in the U.S.—it still accounts for a whopping 25% in certain regions.

Global buyer diversity: The most prolific global (non-U.S.-based) acquirers this year are RSK Group, U.K. (17 announced transactions); Egis Group, France (7) (just this month Egis through their architecture company 10Design merged with SB Architects out of San Francisco); WSP, Canada (7); and SOCOTEC, France (4). (We note that 13 different U.S. firms have already made more than four acquisitions this year.) The top four countries where buyers of design and environmental firms are headquartered (excluding the U.S.) are the U.K. (U.K. firms have made 56 acquisitions—domestic and overseas), Canada (31), France (16), and Australia (6). (If you’re keeping score at home, U.S. firms have made 302 acquisitions already this year.) Glaring omissions from the list of nations yielding prolific buyers are G8 members China, Japan, Germany, India, and Italy.

Hot zones: Excluding the U.S., the countries seeing the most consolidation this year are the U.K. (57 announced transactions), Canada (21), Australia (11), Ireland (10) (really punching above its weight), and Norway, the Netherlands, and France (each with 6). Again, it’s notable there is virtually no consolidation in the G8 economies of China, Japan, Germany, India, and Italy. While all five are giant economies, they each have specific socio-economic, tax, and regulatory factors that make consolidation—either by domestic players or global buyers—unattractive.

Increased interest in the U.S.: Domestic firms are benefitting from the booming global industry with an increasing number of them featuring in the expansion plans of well-capitalized, global players. Year-to-date we’ve seen 16 transactions involving a U.S. firm selling to an overseas acquirer—accounting for 5.6% of all U.S. deals. There’s been a 25% jump in domestic sales to global buyers since the pandemic. Overseas buyers are keenly aware of the infrastructure opportunities that will flow from the IIJA and looking to put “boots on the ground” in the U.S. in advance of those funds flowing into the economy. This is a similar pattern to what we saw after the Great Recession when overseas buyers snapped up a record number of ENR 500 brands. But it’s more than just getting a presence in the U.S. that is driving demand. Overseas buyers are also looking to access unmatched U.S. innovation, IP, know-how, and expertise.

A casbah of capital and ownership models: The Top 225 list provides a great insight into the diversity of capital models at play in the global industry. Among just the Top 50, the models include publicly traded (on a variety of national exchanges), state ownership, foundation ownership, employee, closely held private, and (my favorite) blended ownership (every conceivable combination of foundation, private equity—both minority and majority, state, and employee.)


Morrissey Goodale is a CFE Media content partner.

Original content can be found at Morrissey Goodale.