Increased mergers in the architectural engineering industry

By the time you’ve read this, another architectural engineering (AE) and environmental consulting industry firm will have been acquired. One-plus merger a day. That’s the pace that consolidation of the design and environmental consulting industry has been running at for the past few years. And there’s no sign of a slowdown. Recently, Jon Escobar and Nick Belitz of our advisory business shared their consensus forecast for over 450 transactions this calendar year. The hits keep coming.

This ongoing wave of consolidation is affecting national, regional, and local competitive environments. It’s changing in real time how firms approach sales, marketing, and recruiting. In some states, the primary competitive change comes from intra-state mergers and acquisitions (M&A), where one firm headquartered in the state acquires another, effectively reducing competition. In others, out-of-state acquirers are entering the market, upending the status quo. When it comes to the 13 Western U.S. states, both of these dynamics can be seen in action. Here are some highlights.

California

The Golden State has traditionally seen the most M&A activity on an annual basis of any of the 13 Western U.S. states. (Indeed, it annually rivals Texas for the most deals nationally in any given year.) Since 2021, the state has seen close to 170 transactions, with a record 62 of those being consummated in 2021. Statewide M&A-driven competitive changes: The most frequently observed deals in California are intra-state, accounting for one of every three acquisitions. This is a result of the state essentially being two distinct regional markets—Northern and Southern. To operate statewide, a firm needs a presence in both markets, thus the healthy intra-state deal flow. Deals completed by Florida-based firms and firms headquartered in New York yield the second- and third-most frequently observed transactions in California—accounting for 8% and 7%, respectively, since 2021. These are typically larger (ENR 500) East Coast AE and environmental consulting firms expanding to the West Coast as part of a “national firm” strategy.

Colorado

Colorado is perennially a distant second to California when it comes to deal volume in the 13 Western states. Since 2021, the industry in the Centennial State has experienced 55 acquisitions. The last two calendar years have been particularly frothy with 20 deals in each of 2022 and 2023. Statewide M&A-driven competitive changes: Unlike California, it’s out-of-state players that are primarily driving changes in the Colorado competitive landscape. Firms headquartered in California and Illinois accounted for one quarter of the transactions in the state over the past three-plus years. Acquisitions in the first cohort represent elements of an aggressive Western U.S. regional growth strategy by California-based firms, while acquisitions in the second cohort are examples of Illinois-based firms seeking out higher-growth markets.

Washington

There have been 42 transactions of AEC firms in the Evergreen State since 2021—encompassing all service types and end markets. Last year saw a record 13 firms change hands. Statewide M&A-driven competitive changes: Intra-state deals accounted for 20% of transactions in Washington. Acquirers from California and Texas accounted for 16% and 10%, respectively, of transactions in the state since 2021. It’s not unexpected to see California firms use acquisitions to extend their businesses northwards. It is somewhat surprising to see this number of transactions by Texas-based firms.

Arizona

The Grand Canyon State continues to rank highly as a target market for East Coast and Midwest firms seeking to follow population-driven development and infrastructure opportunities. Since 2021, there have been 30 transactions in the state with a record 13 of those taking place in 2022. Statewide M&A-driven competitive changes: A deeper dive shows that firms from three states—Florida, Texas, and Iowa—have been the primary drivers of consolidation in Arizona since 2021, accounting for 37% of all acquisitions. This Southwest state is seeing its competitive environment upended by growth-minded players from the Southeast, South, and Midwest.

Hawai’i, Montana and New Mexico

The Aloha and Treasure States and the Land of Enchantment have all experienced consolidation through M&A since 2021. And in each of the three states, 100% of the deals were a result of out-of-state acquirers buying a presence in the state. In Hawaii, all acquisitions since 2021 have been made by just one firm outside of Washington State. Montana has seen its competitive environment disrupted by a smorgasbord of acquirers from Wyoming, Minnesota, Illinois, Louisiana, and California, while in New Mexico new entrants to the state have come from Massachusetts and Virginia. States with relatively few major metro areas and relatively smaller populations are notoriously hard for out-of-state firms to grow in organically, so this pattern is not all that surprising. What will be interesting to see is how many in-state firms remain independent over the next decade in these three states as they face leadership and capitalization challenges.

Original content can be found at Morrissey Goodale.

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