The state of industry consolidation

Patterns of industry consolidation on display in 2022 can offer keen observers insight into the changing shape of the A&E industry.

By Morrissey Goodale February 6, 2023
Courtesy: Morrissey Goodale.

Hot off the presses this week is our 2022 AE Industry M&A: Year-in-Review and Infographic. There’s a lot to be learned about how the industry is consolidating and some clues about where we’re headed. Let’s take a look at some of the highlights:

Record-breaker: No, not the classic 1970s BBC children’s TV show. But it’s precisely what last year was for domestic deal-making. We counted 463 transactions of design and environmental firms in calendar 2022. More than one transaction a day. Open your laptop in the morning, and you see another competitor (or client!) sold or recapped (if it’s an ENR 500 firm).

Just the facts, ma’am: The median acquirer had revenues of about $70 million and 350 employees. The median seller was about $3 million with 20 employees. (That median seller stat has been consistent for two decades and is always a bit of a jaw-dropper. It shouldn’t be, though. The industry is comprised of mostly sub $5 million firms that are being snapped up by buyers at a ferocious rate—in large part these days to on-board the talent that they can’t find otherwise.)

In like a lion: Deal-making didn’t run out of battery power in 2022, but there was certainly some range anxiety. Transactions fell by 22% in the second half of the year. Indeed, reported deals dropped 18% in the final quarter of last year compared with the same period in 2021 to finish at the lowest level of activity since Q4 2020. Our rolling 12-month average that tracks the pace of consolidation while smoothing out seasonality (Q1 of any year typically sees a spike in announced deals that were actually closed in the prior year), shows that for now, the pace of consolidation has plateaued.

Hall of fame: Leading employee-owned engineering design firm IMEG (ENR #71) took the crown as the industry’s most prolific buyer in 2022 with nine transactions. Silver medals went to fast-growing (and recently recapped) Ardurra (ENR #114), publicly-traded Bowman (ENR #118), and relative newcomer Trilon, each of which completed eight transactions.

More buyers, doing more deals: The year saw 317 unique buyers—another record. Some 44 different AE and environmental firms completed more than one acquisition. Twenty-nine completed three or more deals. (If your strategic plan called for an acquisition last year and you didn’t get one done—while your competitors were growing through acquisition all around you—it might be time for the Spanish Inquisition and ask why. Related—nobody expects the Spanish Inquisition.)

Consolidators do what they do: The industry’s 10 most prolific buyers accounted for 67 acquisitions, or nearly 15% of all U.S. M&A activity in 2022. It’s like a poker game—winner takes either all or most.

Capital models: Interest from financial sponsors (private equity, family offices) remained strong and was a factor in one-third of all deals. Last year, employee-owned and publicly traded buyers accounted for 58% and 9% of transactions, respectively.

Bigger ≠ Buyer: A record 45.6% of industry transactions involved ENR 500 ranked firms in 2022. However, the industry’s biggest firms weren’t all buyers. Twenty-one ENR-ranked designers joined the list of firms that—driven by the trifecta of (a) leadership and ownership transition failure; (b) asymmetry between internal and external valuations; and (c) a changed competitive environment—either sold or recapitalized.

The big three: The industry in Texas, Florida, and California saw the most consolidation with 34% of all transactions taking place in the Lone Star, Sunshine, and Golden States. Texas was (as everyone in Texas knows) #1, seeing 54 transactions. Florida, which had never seen more than 26 firms sold in a calendar year prior to 2021, experienced a massive 53 firm sales. California saw 52 firms sell, merge, or recapitalize.

Unbounded optimism? Almost three-quarters (72%) of transactions took place across state lines, as buyers pursued growth beyond their home states.

Morrissey Goodale is a CFE Media and Technology content partner.

Original content can be found at Morrissey Goodale.

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