A year ago, signs of the construction market’s collapse were as clear as a crisp autumn day – backlogs were drying up, revenues were swept away, sputtering projects went dormant, and new work was nowhere on the bare landscape. And in the midst of that chill in November 2009, Structure Tone, a New York contractor with a $3 billion book, jumped on an acquisition of L.F. Driscoll, a Philadelphia market leader with $650 million in work.Structure Tone has kept active during the downturn with its staple - interiors work construction management. One of its recent projects, completed earlier this year, is the new two-story, 40,000-sq-ft broadcast studio for WTIC Fox 61, the Tribune Company, and Hartford Courant, where Structure Tone fit the new studio and data center into the newspaper company’s Hartford facility in an effort that required extensive mechanical and electrical upgrades.
Most market observers say the construction sector’s swoon actually opened a prime season of mergers and acquisitions, a time for strong firms to not only bolster their prospects in a down market but also catapult ahead when the market finally thaws. It’s also a time when struggling firms might seek an edge through a deal, or when a dearth of work forces contractors to seek a savior in order to stay afloat.
“It’s a very opportunistic time for buyers,” says Will Hill, managing director in Denver of the investment banking practice at FMI, a management consultant based in Raleigh, N.C.
But it turns out that those market pressures had very little impact on Structure Tone’s acquisition of Driscoll, leaders at both firms say. Instead, they say each firm was searching for strategic growth opportunities, for ways to expand business in their counterpart’s geographies and specialties, and for like-minded partners with similar ownership, culture, and values – and fortuitously were in the market at the same time.
Expanding market access by geography or construction specialty are classic drivers for deals, and both apply to Structure Tone’s acquisition, says Hill, whose firm represented Driscoll. And the approach is familiar to Structure Tone, which has grown from its roots in the New York interiors market nearly 40 years ago in part by acquiring contractors with other specialties in other regions, such as Connecticut’s Pavarini McGovern in 2002.
“Structure Tone has a desire to continue to achieve sustainable growth, and one of the ways we seek to pursue that is through diversification,” says Robert Mullen, the company’s CEO. “So for a number of years, we’ve been on the lookout for firm with a strong résumé in healthcare in the Northeast, a market where we had not been active in any significant way.”
Enter Driscoll, a firm based in Bala Cynwyd, Pa., with solid credentials in the healthcare, life sciences research, and sports facility construction market, and with a primary shareholder – Jack Donnelly – looking for the next place to take the business. A four-month courtship last year soon culminated in the deal.
Mullen says the first payoff oddly is well beyond the Philly market but does draw on Driscoll’s expertise – a new project breaking ground in October – to partner with Albert C. Kobayashi and two other firms to build a $100 million cancer research center for the University of Hawaii. Construction of the six-story, 158,500-sq-ft facility would finish in December 2010.
Donnelly, who remains CEO of the fully owned Driscoll subsidiary, says he had options other than Structure Tone. “If we had been in it just for the highest price, we may have gone another direction,” he says. “But we wanted a move that not only was financially sound but also had the best long-term benefit for our employees.”
Donnelly says the poor economy was neither an impetus nor a deterrent to the deal. “We all knew going into it we were in for a rough one or two years,” he says. “But we see ourselves coming out of it stronger.”
The acquisition also ties into Structure Tone’s long-term view of the business, says James Donaghy, the company’s chairman. “Since our founding, our goal has never been to be the biggest or highest ranked,” he says. “Our focus has always been to the best at what we do and to be a sustainable, healthy business Bringing L.F. Driscoll into the Structure Tone organization was a strategic strengthening of that position.”
Prime Time The slow market has left contractors with a lot more time on their hands and a lot less money in their coffers. Despite the national economy showing signs of a rebound, the construction market could be in for another year or two of paralysis, says Ronald Eagar, partner at Grassi & Co., an accounting firm serving contractors and developers that now represents Structure Tone thanks to its own acquisition of another accountant.
“The bad conditions create pressure for mergers, and opportunities for the better-positioned firms,” he adds.
Hill says activity at FMI bears out that prognosis. The first six months of last year, when project backlogs were still strong but the storm clouds had gathered, there were virtually no deals at all. But then the phones started to ring with buyers looking for options and sellers – many of them coming off good runs – realizing they faced hard decisions ahead, especially those whose owners wanted to hand off their stakes in the near future.
Hill says deals both small and large have followed, with Structure Tone’s acquisition as one of the signature examples, but a bigger deal closing even more recently when Los Angeles-based AECOM Technology, a $6 billion program management company, announced a $245 million deal in July to buy New York’s Tishman Construction, a $1 billion construction manager. The deal came even as Tishman continues work on high-profile projects such as the 2.6-million-sq-ft 1 World Trade Center, better known as the Freedom Tower.
“You see a lot of companies trying to buy up a piece of the market,” Grassi’s Eagar says. “You’re going to see a couple more big acquisitions in the New York market in the coming year or two.”