Down But Not Out - An Overview of M&A Activity in the AEC Industry


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While mega deals such as Balfour Beatty acquiring Parsons Brinckerhoff and Arcadis buying Malcolm Pirnie made the headlines in 2009, many smaller and medium-sized transactions continue to take place under the radar screen. In fact, the recession may end up accelerating the industry’s consolidation trend, and many A/E/C firms are looking to explore their strategic growth or ownership transition alternatives in 2010. Where does your firm stand?

Find out when you listen to “Down But Not Out - An Overview of M&A Activity in the AEC Industry”. In this 90-minute webinar, Steve Gido, CFA and Principal of ZweigWhite's Merger & Acquisition Advisory Services, assesses the current M&A environment, highlight recent notable transactions, analyze “hot” and “cold” markets, and discuss economic, valuation, tax, and demographic factors that are driving the M&A market heading in 2010.
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Down But Not Out - An Overview of M&A Activity in the AEC Industry

  1. 1. managing the business of design & construction Down But Not Out An Overview of AEC M&A Activity for 2010 February 18, 2010 Presented by: Steve Gido, CFA Principal ZweigWhite Financial Advisory Services Boston 321 Commonwealth Road Suite 101 Wayland, MA 01778 1-800-466-6275 Washington, DC 1001 N. 19 th Street Suite 1200 Arlington, VA 22209 1-202-965-3390 Chicago 221 West Wacker 18 th Floor Chicago, IL 60606 1-239-280-2300
  2. 2. Speaker Background <ul><li>Steve Gido, CFA </li></ul><ul><li>Principal </li></ul><ul><li>ZweigWhite Financial Advisory Services </li></ul>Visit us at
  3. 3. ZweigWhite Financial Advisory Services <ul><li>ZweigWhite’s Financial Advisory Services Group provides a diverse range of corporate finance, valuation, ownership transition planning, incentive compensation, and merger & acquisition services for engineering, architecture, and environmental consulting firms, from niche organizations to ENR 500 and publicly-traded firms.  </li></ul><ul><li>Merger & Acquisition Advisory Services </li></ul><ul><ul><li>-       Firm acquisition searches, outsourced corporate development, and buyside representation </li></ul></ul><ul><ul><li>-       Firm merger/sale services and sellside representation </li></ul></ul><ul><ul><li>-       Asset divestitures and spin-offs </li></ul></ul><ul><ul><li>-       Negotiation, deal structure, and due diligence assistance </li></ul></ul><ul><ul><li>-       Strategic integration planning, support, and consulting </li></ul></ul><ul><ul><li>-       Market and industry research </li></ul></ul><ul><li>Valuation & Ownership Planning Services </li></ul><ul><ul><li>-      Business valuations and appraisals – for internal transfer purposes, M&A transactions, ESOPs, stock incentive programs, formula design, buy/sell agreements, litigation support, estate planning, etc. </li></ul></ul><ul><ul><li>-       Comprehensive internal ownership and exit strategy planning, alternatives and analysis </li></ul></ul><ul><ul><li>-       Fairness and solvency opinions </li></ul></ul><ul><ul><li>-       ESOP consulting and assessment </li></ul></ul><ul><ul><li>-       Cash flow management </li></ul></ul><ul><ul><li>-       Incentive compensation implementation, assessment, and benchmarking </li></ul></ul>Visit us at
  4. 4. Learning Objectives <ul><li>The current industry backdrop and state of M&A activity in the AEC industry </li></ul><ul><li>The perspectives of buyers vs. sellers </li></ul><ul><li>Hot markets </li></ul><ul><li>Valuations </li></ul><ul><li>Is this activity sustainable and what are the biggest risk factors going forward? </li></ul><ul><li>What to expect for 2010 and beyond </li></ul>Visit us at
  5. 5. Where We’ve Been <ul><li>2009 M&A activity was down 25% compared to 2008 levels </li></ul><ul><li>M&A activity comes in waves, coinciding with economic cycles and confidence/outlook </li></ul><ul><li>2009 saw pendulum swing to operational efficiencies and retrenching exercises vs. growth-oriented initiatives </li></ul><ul><li>40% of AEC industry in depression </li></ul>Visit us at
  6. 6. Industry Backdrop <ul><li>U.S. construction activity still looking for an upturn - overall construction spending fell 12.4% to $939 billion in 2009, the steepest drop on records dating back to 1964. Architecture Billing Index remains weak. </li></ul><ul><li>Commercial, office, retail, residential sectors still suffering from overcapacity and credit restrictions </li></ul><ul><li>Federal construction spending rose by 2% to an all-time high of $30.5 billion in December. However, cash-strapped state and local governments cut their spending by even more </li></ul><ul><li>Overall, public construction spending grew by 3.7% in 2009 to $317 billion. Highway construction spending increased by the same % to $85 billion </li></ul>Visit us at
  7. 7. Industry Backdrop <ul><li>More management teams indicating 2010 will be just as challenging as 2009; warnings on 2010 outlook from publicly traded firms </li></ul><ul><li>Growing divergence between larger, diverse, publicly traded firms vs. the small-to-mid size ENR 500 private companies in terms of access to credit, M&A intent and growth goals, and relative performance </li></ul><ul><li>“ Everything’s on the table”…..boards and leaders willing to consider range of strategic alternatives, from acquiring, selling, to remaining independent. </li></ul>Visit us at
  8. 8. Industry Backdrop Visit us at ZW Indices vs. S&P 500 – January 2009 to Present
  9. 9. Industry Backdrop Visit us at Enterprise Value/EBITDA Multiples – Select AEC Firms 6.2x 6.2x URS 10.6x 11.6x Tetra Tech 9.0x 9.3x Stantec 7.9x 5.6x Shaw Group 3.4x 7.6x Jacobs 8.5x 9.7x Hill 5.0x 5.6x Fluor 6.8x 4.7x Baker 8.0x 11.2x AECOM Dec 2009 6.2x URS Tetra Tech Stantec Shaw Group Jacobs Hill Fluor Baker AECOM Dec 2008
  10. 10. Today’s M&A Market – Buyers <ul><li>Buyers are stirring again…lower valuations enticing buyers </li></ul><ul><li>With organic growth avenues slowing (key hires, opening branch offices), more AEC firms playing “offense” and looking to “buy growth” with “manageable bets” </li></ul><ul><li>While a few mega-deals could transpire in 2010, niche and specialized targets and add-on deals will continue to be the rule </li></ul><ul><li>Buyers continue be selective in terms of criteria, valuations, and strategic intent; “Square Peg in the Square Hole” </li></ul><ul><li>International buyers on the prowl both in U.S. and in emerging economies </li></ul><ul><li>Backlog quality and resiliency remains #1 due diligence concern </li></ul><ul><li>Buyers remain cognizant of industry deals that have gone poorly </li></ul>Visit us at
  11. 11. Today’s M&A Market - Sellers <ul><li>Many small and mid-sized owners acknowledge great run this decade but concerned about industry and economic outlook </li></ul><ul><li>Internal ownership transition challenges loom large: combination of indifferent younger generation and difficult funding challenges </li></ul><ul><li>Sellers valuation gap remains – lofty expectations from 2006-2008 vs. reality today </li></ul><ul><li>Yes, lower valuations…..but higher taxes (capital gains, ordinary incomes, state/local, etc.) coming in 2011 for S-Corps, LLCs, and Partnerships – after-tax proceeds might be higher today </li></ul><ul><li>Mid-sized ENR 500 firms – eat or be eaten? </li></ul><ul><li>Some firms will spin-off/sell offices or divisions to monetize assets and realign core business </li></ul><ul><li>Regional “merger of equals” for scale and/or survivability </li></ul>Visit us at
  12. 12. Today’s M&A Market – Distressed M&A <ul><li>Increasing number of AEC firms will face severe restructuring, insolvency, or bankruptcy circumstances in 2010 </li></ul><ul><li>Particularly acute with architecture, general contractors, and civil/site/commercial firms in “building bust” states– recovery hasn’t come yet </li></ul><ul><li>Despite slashing staff, many face stretched payables, declining demand, and onerous debt or lease scenarios </li></ul><ul><li>Different M&A skill set in acquiring Section 363 target or one that is slowly bleeding – opportunity or quicksand? </li></ul><ul><li>Can operational issues be fixed? Synergy potential? Negotiating with other stakeholders? </li></ul>Visit us at
  13. 13. Today’s M&A Market FORECAST Visit us at
  14. 14. Today’s M&A Market Percentage of firms with M&A in their Strategic Plan within the next five years Visit us at
  15. 15. Today’s M&A Market <ul><li>2009 ENR 500 “Top Design Firms” Sale Transactions </li></ul><ul><li>#11 – Parsons Brinckerhoff ( Balfour Beatty ) </li></ul><ul><li>#42 – Malcolm Pirnie ( Arcadis ) </li></ul><ul><li>#83 – CHA ( Long Point Capital ) </li></ul><ul><li>#113 – R.W. Beck ( SAIC ) </li></ul><ul><li>#135 – Ellerbe Becket ( AECOM ) </li></ul><ul><li>#137 – Wink Cos., LLC ( Willbros Group ) </li></ul><ul><li>#151 – Jordan, Jones & Goulding ( Jacobs Engineering ) </li></ul><ul><li>#196 – X-NTH ( Trow Global ) </li></ul><ul><li>#249 – OWP/P ( Merger with Cannon Design ) </li></ul><ul><li>#330 – Stearns & Wheler ( GHD ) </li></ul><ul><li>#370 – S E A Consultants ( Kleinfelder ) </li></ul><ul><li>#386 – EN Engineering ( Clearview Capital Fund ) </li></ul><ul><li>#409 – Bryan A. Stirrat & Associates ( Tetra Tech ) </li></ul><ul><li>#472 – Maguire Group ( Metric Engineering ) </li></ul>Visit us at
  16. 16. Today’s M&A Market Visit us at <ul><li>Private Equity “Platform” Transactions </li></ul><ul><li>P.E. firms find infrastructure and environmental opportunities still very appealing given landscape </li></ul><ul><li>However, funding and credit issues remain high in tight credit environment </li></ul><ul><li>Valuations down from prior lofty levels </li></ul>
  17. 17. What does a typical deal look like? <ul><li>Most involve an ENR 500 firm buying a smaller firm </li></ul><ul><ul><li>Median size of selling firms was 26 employees </li></ul></ul><ul><ul><li>Median size of buying firms was 400 employees </li></ul></ul><ul><ul><li>Bulk of deals occur at less than $5M in enterprise value </li></ul></ul><ul><li>Vast majority of deals in our space are niche deals; “manageable” bets either for scale (“do more of what we’re good at”) or diversification (“we need to be there/doing that”) </li></ul>Visit us at
  18. 18. What does a typical deal look like? <ul><li>Most are asset purchases rather than stock deals </li></ul><ul><li>Transactions often mix of cash, stock, & notes – holistic, “sum of the parts” approach on buyer capitalization vs. goals/ages of sellers </li></ul><ul><li>Earnouts, or pay-for performance mechanisms, remain popular for buyers to bridge price gaps and shift risk to seller given cloudy outlook and uncertain backlog, but can be barrier to cultural integration </li></ul><ul><li>Employment agreements and compatible salary/incentive compensation structures are key </li></ul>Visit us at
  19. 19. Hot Markets <ul><li>Water Resources, Water/Wastewater Infrastructure, Storm water/Sewer, Desalination </li></ul><ul><li>Power/Utilities </li></ul><ul><li>Alternative Energy (Nuclear, Wind, Solar, Hydropower) and Green Building </li></ul><ul><li>Federal </li></ul><ul><li>Healthcare </li></ul><ul><li>International and developing country infrastructure </li></ul>Visit us at
  20. 20. Desired Buyer Criteria <ul><ul><li>Mandate - “Good to Great” model or diversity into new markets and services? </li></ul></ul><ul><ul><li>Size: 25-250 employees, $3-$300 million net revenue </li></ul></ul><ul><ul><li>Developed and stable repeat client base </li></ul></ul><ul><ul><li>Technical staff with broad project management and marketing expertise </li></ul></ul><ul><ul><li>2 nd tier of capable leaders and managers </li></ul></ul><ul><ul><li>Backlog, backlog, backlog!! </li></ul></ul><ul><ul><li>Firm history - have they survived a recession before?? </li></ul></ul>Visit us at
  21. 21. Valuations <ul><ul><li>Generally witnessing 3.5x-5.0x EBITDA for firms less than $15M in revenue; 4.5x-6.5x for firms larger </li></ul></ul><ul><ul><li>Net revenue multiple 45-80%; 1.5x – 4.0x Book Value </li></ul></ul><ul><ul><li>May be higher or lower based on “hot market” or distressed situation </li></ul></ul><ul><ul><li>Overall trend has been downward last 12-24 months </li></ul></ul><ul><ul><li>How deal is structured and after-tax proceeds just as critical as valuation </li></ul></ul>Visit us at
  22. 22. Valuations <ul><li>Why aren’t A/E multiples higher? </li></ul><ul><li>Nature of industry </li></ul><ul><li>Low barriers to entry = thousands of firms offering “commodity” like service </li></ul><ul><li>Lumpy, project-to-project, uneven cash flow stream </li></ul><ul><li>Incremental growth – i.e. purely function of staffing </li></ul><ul><li>Intangible assets and people-based businesses </li></ul><ul><li>In many cases firms reliant on 1-5 key individuals for business development and growth </li></ul><ul><li>Function of what owners can extract as dividends / returns from business – this isn’t Google! </li></ul>Visit us at
  23. 23. <ul><ul><li>Highly fragmented industry </li></ul></ul>Is This Activity Sustainable? <ul><li>Approximately 70,000 firms in the industry </li></ul><ul><li>Low barriers to entry </li></ul><ul><li>Vast majority are privately held </li></ul><ul><li>Vast majority are under $5 million in revenue </li></ul>Visit us at
  24. 24. <ul><ul><li>Aging baby-boomer demographics </li></ul></ul>Is This Activity Sustainable? <ul><li>Leading edge of boomer generation (born ’46-’64) who founded AEC firms in 70’s, 80’s and 90’s nearing retirement </li></ul><ul><li>Many lament lack of internal transition options for redeeming equity and monetizing business </li></ul><ul><li>Internal ownership transition becoming increasingly difficult due to recession, firm valuations, and “entitlement” generation of potential new shareholders </li></ul><ul><li>Three choices - Sell down? Sell out? Wind down? </li></ul>Visit us at
  25. 25. <ul><ul><li>Continued capital spending </li></ul></ul>Is This Activity Sustainable? <ul><li>Impact for infrastructure projects with federal stimulus package? Will more come? Budget trade-offs loom. </li></ul><ul><li>Environmental consciousness is here to stay </li></ul><ul><li>Domestic needs in healthcare, green building, alternative energy, water supply and wastewater, power & energy, aviation, ports, transportation, highways, and bridges </li></ul>Visit us at
  26. 26. <ul><ul><li>International demand for U.S. firms </li></ul></ul>Is This Activity Sustainable? <ul><li>Long-term demand for 21st century will come in developing regions with greater building and construction needs: China, India, Eastern Europe, Latin America, and Middle East </li></ul><ul><li>U.S. and European firms facing recession, deficits, and slower growth prospects at home vs. other global regions </li></ul><ul><li>Clients are multi-national organizations and governments </li></ul><ul><li>“ Smaller world” enhancing deal communication and integration across borders </li></ul>Visit us at
  27. 27. <ul><ul><li>Economic Recession </li></ul></ul>M&A Risk Factors <ul><li>Reality of lingering economic recession and lost decade, jobs disappearing for many architects, engineers, planners </li></ul><ul><li>Lower risk appetite when visibility is unclear </li></ul><ul><li>Understanding that heady valuations might not be back soon </li></ul><ul><li>How will valuations impact M&A and internal ownership transition plans? </li></ul><ul><li>However, recession may accelerate already consolidating industry </li></ul>Visit us at
  28. 28. <ul><ul><li>Integration indigestion? </li></ul></ul>M&A Risk Factors <ul><li>More AEC firms are digesting deals from 2008 to 2009 and evaluating budgets under different economic assumptions </li></ul><ul><li>Has due diligence improved? </li></ul><ul><li>Risk vs. reward </li></ul><ul><li>Were these deals wise? At the time, yes. Now, time will tell… </li></ul>Visit us at
  29. 29. <ul><ul><li>Retaining clients and motivating key staff </li></ul></ul>M&A Risk Factors <ul><li>Resentment among the minority-interest or non-owners may linger </li></ul><ul><li>Deal value will be significantly diminished if key talent exits post closing </li></ul><ul><li>Competitors will come after target’s clients and staff </li></ul><ul><li>Cultural fit and firm integration is key and most difficult part of M&A process! </li></ul><ul><li>What synergy?? </li></ul>Visit us at
  30. 30. 2010 M&A Outlook <ul><li>Given market uncertainty, buyers will be more selective in terms of criteria, valuation, and strategic intent – see more niche, “tuck-in” deals than mega combinations </li></ul><ul><li>Sellers will continue to head for the exits ahead of 2010 capital gains expiration; big difference in after-tax proceeds </li></ul><ul><li>Distressed opportunities – bargains or quicksand? </li></ul><ul><li>Firms in hot markets will be in demand </li></ul><ul><li>M&A comes in waves but when well planned and executed is still an effective tool for AEC ownership transition and strategic growth </li></ul>Visit us at
  31. 31. Questions ? Visit us at
  32. 32. Contact Information <ul><li>Steve Gido, CFA </li></ul><ul><li>(202) 965-4809 </li></ul><ul><li>[email_address] </li></ul><ul><li>Click here to purchase the webinar: </li></ul><ul><li> </li></ul>Visit us at