The board of engineering firm Michael Baker Corp. has begun 2013 facing new pressure from stockholders who have sought for months to boost the publicly held firm's share value. The Pittsburgh company's board announced Jan. 7 that its "independent" members will now seek new "strategic alternatives," including an unsolicited buyout offer it received last month from a financial-firm investor. The tumult, which includes the ouster of CEO Bradley L. Mallory, may signal new challenges for the industry's public firms—particularly smaller ones—at a time of changing market conditions. 

The Michael Baker board and long-time Chairman Richard L. Shaw, 85, have to make a "compelling case" for the firm to stay public and independent before a proxy meeting set for the spring, possibly as early as February, "or they could have a fight on their hands," says Tahira Afzal, analyst for KeyBanc Capital Markets Inc. Baker said it has hired industry M&A consultant Houlihan Lokey as advisor.

The tumult began last month when Baker announced that, at the board's request, Mallory had left the posts he had held since 2008. The announcement gave no reason for the change, but in a statement, spokesman David Higie said the board "determined that, from a leadership standpoint, the company needed to take on a different direction." Mallory is set to receive a $1.1-million severance package, says a Jan. 7 filing by the firm. Neither Mallory nor Shaw could be reached.

On Dec. 19, shareholder DC Capital Partners notified Baker of its all-cash, $24.25-per-share offer, or about $233 million.

Firm President Thomas J. Campbell says that Baker has spent $100 million on acquisitions since 2010, but that its share price has fallen 40% in that same time. The investor proposes to link Baker with a unit, KS International LLC, which it describes as "a provider of mission-critical operational support to government agencies." And, in a Dec. 26 letter to the board, investor Crescendo Partners urged Baker to consider the DC Capital offer or "explore the sale of the company." Crescendo acknowledged the offer "is low," but said a sale price could be as high as $34 per share, based on Baker's value and cash balance. The firm's shares closed at $25.04 at ENR press time on Jan. 8.

Michael Baker ranks at No. 26 on ENR's list of the Top 500 Design Firms, with $528.4 million in 2011 revenue, about 54% in transportation markets and 85% from public owners. In a push to broaden its national reach and boost revenue toward $1 billion, Baker acquired firms in Columbia, S.C., Irvine, Calif., and Las Vegas since 2010. Higie says the board "will respond in due course" to DC Capital and Crescendo. He would not say when a new CEO would be chosen. Two executive vice presidents are interim chiefs.

Mallory told analysts in November that Baker had "achieved national scope" and completed an "organizational realignment." But he said anticipated growth and profit were hampered by public sector slowdowns, and Baker's further progress into private sector markets such as health care and oil-and-gas was "not where we would like." Mallory also noted Baker's plan" to reduce costs by $18 million to $20 million in 2013, including 130 staff cuts completed last month.

The firm is halting acquisitions to focus on organic growth, but company sources not authorized to speak publicly say integration problems still remain. Mallory told analysts cost-cutting and "dramatically" improved performance could boost 2013 results, but failing that, "a lot of fair questions will need to be asked."

Paul Zofnass, president of M&A and financial consultant EFCG Inc., says Michael Baker has "underperformed" in several financial measures compared to 22 other public engineer-consultants the firm tracks. Its stock price declined 51% in the last five years, ending Sept. 30, compared to a 14% slippage for the peer group. Industry analysts note Baker's challenges. "They have to compete with the URSs and AECOMs that are 10 to 15 times their size as well as private firms that don't have some of the burdens of being publicly traded, so going private is a sensible alternative if shareholders get the right price," says Steven Gido, a principal at Boston management firm Rusk O'Brien Gido & Partners. He speculates that an international buyer could be among potential buyers. But, says one former Baker executive who declined to be identified, "the board is fiercely against going private." Some observers point to the strong influence of Shaw, Baker chairman since 1991 and former CEO for a decade.

Other smaller-cap public firm chiefs empathize. "It's tougher to get a lot of attention from Wall Street," says David Richter, Hill International CEO. But he says the firm's 40% insider ownership would preclude an investor's "stalking horse" offer. Even so, "a lot more aggressive play from hedge-fund investors is a new dynamic [the industry] isn't accustomed to," says TRC Cos. CEO Chris Vincze. But adds Patrick McCann, CEO of Weston Solutions, which left public ownership in 2001, "we're extremely happy to be employee-owned. With the kind of work we do, our earnings can be lumpy. We're not going to make decisions just to achieve results in a quarter."