Mergers and acquisitions are back among MEP Giants
If mergers and acquisitions are an indicator of economic health—and they are—then a sense of optimism appears to have returned to the Consulting-Specifying Engineer MEP Giants. Over the past year, 17 of the MEP Giants were involved in a merger or acquisition (M&A), up from 12 the prior year. The MEP Giants took a look around, made a judgment call that the worst of the storm had passed, and stepped back into the M&A game.
Domestic deals outpacing international deals
The uptick in M&A activity among the MEP Giants reflected a resurgence in overall U.S. domestic M&A activity for architecture, engineering, and construction (AEC) firms in all sectors. The total number of domestic M&A deals (deals involving a U.S.-based seller) grew 3% to a record 180 last year (see Figure 1)—its highest level since before the Great Recession. A growing stock market, increased housing starts, and lower unemployment figures all contributed to the positive economic picture in the United States. Firms that struggled to survive during the recession began to hit their stride and thrive over the most recent years. Many firms that were considering M&A prior to the recession placed those plans on hold until economic conditions and company performance improved. Conditions have now changed, with many firms seeing more project opportunities and positive indicators from clients—particularly in the private sector.
As more project opportunities and private sector dollars flowed into the market, the MEP Giants were among the firms that were ready to take advantage of the new normal. The MEP Giants deepened their mechanical, electrical, plumbing (MEP), or fire protection engineering competencies through acquisitions of specialized services firms and also expanded their services portfolio and geographic reach with some smart mergers.
Some MEP Giants that made deals in the past year included:
- Henderson Engineers (No. 13; Kansas City, Mo.) acquired acoustic and audio visual design firm Acoustical Design Group (Kansas City, Mo.)
- Greenman-Pedersen (No. 68; Babylon, N.Y.) acquired multi-discipline engineering, surveying, and environmental service firm Abate Associates Engineers and Surveyors (Buffalo, N.Y.).
Uptick in interstate deals
If the increase in M&A activity is clue that the MEP Giants are feeling more bullish on the economy, then the uptick in deals taking place across state lines confirms it. Through the first 6 months of 2013, almost two-thirds of all deals have been interstate—that is, firms from two different states merging (see Figure 2). This is an important indicator of economic health. Deals that take place across state lines tend to be a result of a firm’s expansion strategy and an indicator of confidence in the future. During the recession and through the recovery, we tracked interstate M&A activity at record lows in the 54% to 57% range. But the first half of 2013 has seen an end to that.
The prevailing sense of optimism has created a shift to an offensive M&A approach as buyers seek firms that will allow them to grow (not just defend or maintain) revenue and market share.
MEP Giant EYP (No. 31; Albany, N.Y.) has been notable for its expansion through M&A recently, completing two deals beyond its home state in 2012 and early 2013. One deal saw the merger of its energy and sustainability services division, EYP Energy, with The Weidt Group (Minnetonka, Minn.), a leading building energy and software consultancy. In another expansion—this time into the resurgent Southeast—EYP also acquired certain assets of 20-person architectural design, programming, master planning, health care planning, and interior design firm BJAC (Raleigh, N.C.).
International deal-making slows
While domestic activity is rebounding, overseas M&A is more sluggish. This reflects the global economic picture where the U.S. economy—while not exactly booming—is stronger than that in most of rest of the world. It appears that much of the uncertainty that clouded the United States’ economic forecast in 2011 has begun to be resolved, while the European debt crisis continued to cause grief among international buyers and sellers. European bailouts of Greece (twice), Ireland, Portugal, and Cyprus, and a bailout of Spain’s banks appear to have caused buyers and sellers, especially those with significant exposure to European debt and equity markets, to let things cool off before jumping back into the M&A game. Finally, in June 2013, French President Francois Hollande declared an end to the eurozone debt crisis, which stymied growth for nearly 4 years in the European Union.
Interestingly, U.S. firms may have capitalized on the uncertainty, snapping up more international firms than at any point since 2007 (see Figures 3 and 4). We may have seen a tipping point in 2011, as there was an equal amount of cross-border deals in and out of the U.S. In 2012, U.S. firms bought 23 international firms, whereas only 18 non-U.S. firms ventured inside our borders. Much of this activity is driven by U.S.-based publicly traded design firms that are seeking to grow beyond the U.S. market. We expect that publicly traded firms will continue to make acquisitions to support the growth required to drive the value of their stock.
One of the public companies that made a cross-border deal in 2012 was the largest MEP Giant, Jacobs Engineering Group (No. 1; Pasadena, Calif.), which acquired acquire Team Maroc (Rabat, Morocco), a 171-person full-service engineering and management consultancy with services that include engineering design, studies, work monitoring, and supervision related to road infrastructure, highways, water supply, and a variety of building types.
Continued consolidation among firms
Among the 17 MEP Giants that reported being involved in a merger or acquisition this year, there were several notable deals that further consolidated the MEP space. Perhaps most significant was leading Canadian engineering services firm Genivar’s (Montreal, Quebec) acquisition of MEP Giant WSP Group (No. 12; London), the global design, engineering, environmental, and energy consultancy. The transaction created a firm with 14,500 employees in more than 30 countries and further consolidated MEP services in Canada, Northern Europe, the U.K., and the United States.
Among the 16 MEP Giants that reported acquiring firms in 2012, there were a number of deals where firms sought to bolster their existing mechanical, electrical, or plumbing services. Affiliated Engineers Inc. (No. 9; Madison, Wis.) acquired Ross Infrastructure (Baltimore), a consulting engineering firm specializing in the analysis, planning, design, and operation of complex infrastructure systems, including the generation and distribution of chilled water, steam, and electrical systems, including peak shaving and cogeneration. AEI cited the acquisition as a response to the growing nationwide need for highly efficient central plant systems, alternative and renewable fuel options, cogeneration systems, and integrated energy plans.
SSOE Group (No. 22; Toledo) acquired CRS Engineering & Design Consultants (Birmingham, Ala.), a 50-person multidiscipline engineering firm specializing in health care, government, higher education, and other institutional facilities and offering services that include electrical engineering, plumbing engineering, fire protection engineering, mechanical and HVAC engineering, lighting design, telecommunications design, and security system design. KJWW Engineering Consultants (No. 29; Rock Island, Ill.) acquired 25-person MEP engineering consulting firm Moore Engineers (Carmel, Ind.). This interstate deal allowed KJJW to expand territory beyond existing markets while bolstering MEP expertise. Energy planning and design firm Salas O’Brien (No. 65; San Jose, Calif.) acquired architectural, mechanical and electrical engineering, and interior design firm KDW (Seattle). Consolidation within the MEP industry has continued into 2013 as Stantec (No. 7; Edmonton, Alberta) acquired the assets of IBE (Sherman Oaks, Calif.) a 50-person building engineering firm that specializes in high-performance, sustainable design of mechanical, electrical, and plumbing systems.
It appears that Consulting-Specifying Engineer’s MEP Giants seek to continue to improve, enhance, and grow their MEP offerings through acquisitions. As energy efficiency and green design continues to expand, more engineering firms are seeking to offer clients high-performance services in HVAC and plumbing, as well as electrical efficiency, to meet that demand. In many cases, MEP firms may look outside of their traditional space for acquisition opportunities that complement current services.
Is M&A full speed ahead again? The pace of consolidation appears to be ramping back up within the U.S. Our research suggests that the buyers are back to growth-oriented deal making, and sellers, many with a few years of strong financial results since the recession, may be looking for an exit. As globalization continues, mega-projects and alternative delivery make competition fiercer. When coupled with small firms’ need for leadership and ownership transition as the baby boomers prepare to retire, we anticipate seeing continued consolidation within the AEC industry carry through the end of 2013 and beyond.
Mick Morrissey is managing principal of Morrissey Goodale LLC, a management consulting and research firm that serves the AEC industry exclusively. An engineer by training, Morrissey has assisted numerous MEP firms in the areas of strategy development and implementation, leadership development and transition, technical and professional talent recruitment, ownership transition, and mergers and acquisitions. Neil Churman is a principal consultant at Morrissey Goodale and leads the firm’s Houston office. He works with AEC firms to deliver strategic business solutions.