“Once there is risk-sharing, it’s hard to go back,” said Koffel. “That worries me going forward.” He said he asked Wall Street experts for advice in creating “rigorous” risk management systems at URS. “You have to say no to some projects,” he said.
Koffel retired from his 25-year CEO role in 2014 after completing the firm’s attention-getting sale to AECOM for $6 billion, including debt.
Koffel said other types of professional service firms have outperfomed those in E&C, noting the “opaqueness” to investors of how sector backlog converts to results. He added that sector revenue is often tied to “unique externalities,” such as politics vs. free market dynamics.
He said industry executives also have “under-engaged” in policy dialogue. “They have been unoriginal and tepid,” Koffel told investors. He pointed to more high-level and game-changing influence in broadcasting and health care, and by “disruptive industries” such as that spawned by app-based ride service firm Uber.
According to Koffel, industry consolidation will accelerate, with “access to cheap debt and a fluid equity market.” He said he had anticipated the buyer of URS to be a large German or French firm, but such a deal was thwarted by “the woes of Europe.”
The executive pointed to Asian firms “with geopolitical interests to expand.” Koffel foresees Korean forays into the U.S., but predicted “resistance” to M&As by other Asian buyers.
Contractors “will lead the consolidation,” said Koffel, adding there wil be “some surprising combinations of firms.” But the former CEO cautioned that M&A strategy should focus on “scaling up in specific markets,” not “in general bulking up. That just creates size, not value.” Industry firms will be challenged “to generate value as a priority,” said Koffel. “It’s no accident the AECOM-URS combination outperformed the market by 20%.”
Koffel urged investors to better understand M&As in construction, saying that vetting “by bankers, lawyers and regulators doesn’t define deal success.” While changes at URS were spurred by an activist hedge fund investor, Koffel said such activist investors “dont understand the [E&C] sector. They like things simpler.”
But he foresees more boardroom push from pension and mutual funds and other institutional investors. “A steady dialogue may be healthy,” said Koffel.