MEP Giants smash M&A records in 2021
Publicly traded, privately held and private-equity-backed firms all vied for deals, combining for the hottest year ever
Driven by the energy of economic expansion following the first pandemic year of 2020, Consulting-Specifying Engineer’s MEP Giants stepped up deal-making to never before seen levels in 2021. As a group, the largest mechanical, electrical, plumbing and fire protection engineering firms recorded 70 transactions, a tally amounting to more than double the 33 transactions made in all of 2020 and up more than one-third (35%) from pre-pandemic 2019, during which 52 deals were consummated.
The past year also saw the highest number of MEP Giants getting, well, gianter. In 2021, those 70 transactions were made by 29 of the MEP Giants or nearly one-third of all firms ranked, which qualifies as an all-time high. By comparison, only 21 of the MEP Giants reported a transaction in 2020, down from 28 in 2019 and 25 in 2018. Without a doubt, more MEP Giants closing more deals was the theme of 2021.
Activity by MEP Giants mirrors rise in deals globally
Looking around the wider world, we see the rising acquisition activity of the MEP Giants reflected in the broader consolidation of the industry at large. Globally, the engineering and architecture industry closed 637 deals in 2021, a stunning 47% increase over the 434 deals notched in 2020 and a 37% increase from the previous record set in 2019.
Critically, two-thirds of the transactions last year occurred with sellers based in the U.S. as acquirers sought to expand domestic market positions and take advantage of the post-pandemic economic boom. With flush balance sheets and record backlogs, buyers in the overall engineering industry announced 426 U.S. transactions over the course of the year. The number of announced transactions exceeded prior year activity by more than 100 deals and also smashed 2019’s pre-pandemic record levels by a whopping 34%.
What drove all the wheeling and dealing? In a word: great expectations. Anticipating public spending on infrastructure and the private sector investment that traditionally follows it, industry acquirers, including the MEP Giants, aggressively used mergers and acquisitions as a means of getting in front of spending on design services.
Bucking the private equity trend, publicly traded buyers lead the pack
With all the deals being made, even a casual observer of industry M&A may quickly assume private equity firms drove most of the transactions. Private equity firms and private equity backed engineering firms have made significant inroads in the industry in recent years on the strength of ready access to capital and the ability to swiftly evaluate, aggressively price and quickly close deals.
But a closer look at the 2021 data reveals something different. In fact, the most prolific acquirers of the MEP Giants in 2021 were publicly traded NV5 (Hollywood, Florida, eight deals), Bowman Consulting Group (Reston, Virginia, seven deals) and Stantec (Edmonton, Canada, six deals), with an honorable mention for WSP (Montreal, Canada, five deals). Rounding out the top five most active MEP Giants, only Salas O’Brien (Santa Ana, California, six deals) counts as private equity-backed.
In a historical context, this makes sense because big, publicly traded firms have traditionally constituted the most reliable group of buyers for the past 20-plus years, accounting for between one-quarter and one-fifth of all transactions in a given year. But in view of the total engineering M&A market in the past one to two years, which has seen private equity firms account for 40% of all transactions (and climbing!), it comes as a bit of a surprise.
Overall, publicly traded MEP Giants accounted for 27 transactions in 2021, while their private equity-backed peers accounted for “only” 14 deals. Why did this happen? First, publicly traded firms in general have even easier access to growth capital than private equity firms — that’s why a firm goes public. Second, public buyers often self-finance transactions, with no need to borrow money or solicit lender or anybody else’s approval beyond the board of directors. Third, Morrissey Goodale data indicates that publicly traded firms, all else equal, pay slightly more for deals than even the PE firms, thus making offers more attractive to potential sellers.
With interest in the MEP sector high in 2021, no doubt the publicly traded buyers used their capital to jump on the deals most critical to achieving their strategic plans and reporting growth to Wall Street analysts.
In 2022, we fully expect the acquisitive dynamic to remain in play as MEP Giants of all capital structures seek growth, but we also expect the rise of private equity to continue unabated. For that reason, we anticipate next year’s results to show private equity firms take the top spot for number of transactions among the MEP Giants.
Visit www.csemag.com/giants for the full MEP Giants report in a downloadable format.