There are a few people in the powerplant construction business who would love to see James M. Bernhard Jr., the smooth-talking multimillionaire chairman of what is probably the world's most sophisticated pipe fabricator, The Shaw Group, fall flat on his face.
Bernhard, through a series of contracting acquisitions, has gone into competition against some of his customers, including powerful Bechtel Group Inc. He began easing his way into the turnkey powerplant construction business from 1997 to 1999, adding value, he would say, to the pipe fabrication work at which Shaw Group excels. Eighteen months ago, he upset the power pecking order by buying former design and construction giant Stone & Webster Inc. out of bankruptcy.
As a subcontractor, Baton Rouge-based Shaw Group had always been one step removed from control of projects. Now it could start dealing directly with a handful of owners as a turnkey prime contractor.
Last year, Shaw Group booked about 7,500 Mw as an engineer, procure and construct firm in the power market (see chart below). And it again upset the established order by booking this work under targeted-price, cost-plus contracts where return is more modest but potentially disastrous liquidated damages are absent.
|MILESTONES New powerplant contract in Nevada limits Shaw's downside. (Photo by Tony Illia for ENR)|
More recently, Shaw Group continued its bargain-hunting approach to acquisitions, surprising quite a few people by bidding for The IT Group Inc., Monroeville, Pa. The purchase of that financially strapped firm would expand Shaw's and Stone & Webster's foothold in environmental cleanups and in long-term government cost-plus services. In Shaw Group's offer for IT–the fourth company it has bought through a bankruptcy–the buyer is proposing to pay $104 million for a company with $700 million in debt. The deal is far from done, but if Bernhard succeeds, the king of power and industrial pipe will be closer to his goal of becoming one of the biggest and most profitable engineer-contractors in the country.
Such ambition has brought out all kinds of detractors. Bernhard "thinks quite a lot of himself," says a contracting executive who has met him several times. A competitor claims "his customers are uneasy" over the amount of control he would have on projects where he does pipe and EPC work. Adds another: "I hope it blows up on him."
A deep-chested man with an endless reserve of funny stories and quips, Bernhard tends to use dramatic statements when describing his rise. One minute he is exceedingly humble, the next he is practically swaggering with delight–even while still sitting down. "You've got to understand, in this day and time, to build a company that starts with literally three people and $50,000, that in 15 years has never lost money and always made more, it's really unheard of in this business," Bernhard says. "We approach things a little differently. I remember everybody laughed at us and told us we would never get a cost-reimbursable project built in powerplants. And I wondered about it."
|HIS OWN WAY After building a fortune in pipe fabrication, Bernhard has ruffled feathers by working as a prime contractor. (Photo by David Wood for ENR)|
Bernhard's shrewd opportunistic instincts, demanding management style and nonstop salesmanship have kept Wall Street's skittish sell-side brokers behind him. They consider Shaw (SGR-NYSE) a value-creator on a level with Jacobs Engineering Group Inc., Pasadena, Calif., and Granite Construction Inc., Watsonville, Calif., among the few promising publicly traded U.S. construction firms. "Looking at some of the other engineering power construction companies, [Shaw] looks undervalued next to Jacobs or Fluor," says Peggy Preston, a stock analyst with Carrett & Co., a New York-based investment manager. "I'm impressed with Jim Bernhard's way of bidding work on a cost-plus-fee basis. You don't have the huge potential profit margin, but you also don't have the negative hit."
Some say that Shaw is an example of what engineering and construction companies must become in order to regain credibility among investors. A new business ethic based on profitability and value for investors must replace the outworn idea from the 1960s and 1970s that engineering is held in high esteem, and big construction projects entitle their builders to respect whether the job makes money or not, according to some critics. But others familiar with the powerplant market dislike Jim Bernhard Jr., because he's seen as a pipe salesman who isn't part of the engineering and construction profession and whose only interest is making money.
Even so, one of the most skeptical experts on E&C companies, Merrill Lynch analyst Fritz Von Carp, has been recommending Shaw to investors. "Bernhard's approach is about defining his competitive advantage and changing the revenue model to sell a package of goods and services by wrapping them around his pipe fabrication component into a bundle," says Von Carp. "Only time will tell if it's the right strategy."
The underlying economics of Shaw Group's approach may be the company's greatest selling point. It is changing the status quo of running E&C businesses by conceding that engineering is a commodity and that engineering services must be sold with a value-added component, sources say. Bernhard's style isn't that of an engineer, either. "He's a salesman by profession and temperament and he's part of a trend of businessmen from outside coming in to run engineering companies," says Von Carp.
INDEPENDENT Born into a Baton Rouge-area family with a mechanical contracting company now run by his brother, Bernhard, who is known as Jim, graduated with a degree in construction from Louisiana State University in the early 1970s. "It was either going to be civil engineering or construction, and the construction guys drank a little bit more beer, so I hung around with them," he says, exploding with laughter. So Bernhard went off on his own and worked his way up through the ranks of local pipe fabricator and contracting companies before starting his own business in 1985.
Bernhard's timing was fortunate. In the mid-1980s, much of the existing pipe fabrication capacity in the U.S. was being abandoned at low prices with powerplant construction in the dumps and the oil and gas business uncertain. At the same time, pipe fabrication needed an overdue transformation from a handicraft made by skilled welders in the field to a factory-made product produced at lower costs. Richard F. Gill, Shaw's chief operating officer and a more subdued counterpart to the boisterous Bernhard, credits his boss with lifting pipe fabrication into the modern age. "Jim brought the business out of the 19th Century before the 20th Century was over," he says. Using technology devised by others, Bernhard installed fabrication and tracking systems that helped manage the huge inventory.
Shaw's position in pipe fabrication, where gross margins average about 20% but occasionally can run as high as 30% on a project, is enviable, say industry sources. With one acquisition after another, Bernhard has added capacity, services (such as erection and installation), products (hangars and fittings), market niches and technology. Perhaps his best move was the 1997 acquisition of Cojafex, a Dutch company whose huge pipe-bending machines eliminate much of the cost of welding. Bernhard considers the machines his technological ace and has stopped selling them to some competitors. Shaw also has proprietary inventory software that tracks the whereabouts of thousands of pipe spools. The firm doesn't disclose the exact amount of annual pipe fabrication revenue, but describes it as somewhere between $500 and $600 million, a big part of fiscal 2001 total sales of $1.54 billion.
|BENT ON COST SAVING Pipe technology has kept Shaw in demand. (Photo by David Wood for ENR)|
GOLDEN TOUCH On one level, the Stone & Webster deal may go down as one of the best ever and serve as proof of Bernhard's golden touch. Jacobs Engineering was close to having an asset purchase agreement for Stone & Webster, which got into trouble with powerplant construction losses. But Shaw swept in and outbid Jacobs.
Along with the acquisition came two valuable assets. One was a cold storage business with warehouse freezers that, for some reason, Stone & Webster owned. Shaw sold the unit for between $70 million and $75 million. "We're not chicken freezers," says Chief Financial Officer Robert Belk. The other asset was some process plant equipment stranded at Stone & Webster after a contract was canceled. When a new joint-venture owner wanted to build an ethylene plant in China, Stone & Webster was able to use the equipment to win a hard-money contract whose greatest benefit to Shaw is the profit on the equipment. The potential windfall was another $70 million or so. Added to these were the proceeds of the sale of a Houston building. "Once you net out these, we have recouped our transaction in short order," says Belk.
On another level, the Stone & Webster deal is part of the bigger gamble to enter the engineering and construction services market for powerplants. Shaw already had been buying contracting companies and two to three years ago took its first turnkey powerplant jobs on smaller projects and a joint venture. About that time, Shaw Group began talking to Entergy Corp., New Orleans, and ended up beating several longtime EPC prime contractors to win a partnering agreement with the big utility and powerplant developer, which had ordered or taken delivery of more than 30 General Electric turbines.
|CLEANUP IT Group's environmental work fits in at Shaw Group. (Photo courtesy of the IT Group)|
After having had problems on two Raytheon Corp. projects in England that resulted in heavy damages for the contractor, Entergy decided to take a more hands-on approach, says Robert Malone, vice president of engineering and construction for Entergy Wholesale Operations. The utility sought a joint venture partner, although, at the time, Shaw Group probably wasn't as high on the experience list, says Malone. But the firm was expanding aggressively and it was buying Stone & Webster. "Things kind of clicked," Malone says. Under the joint venture, the profit is split down the middle, and Shaw takes some risk in the form of its fee and some overrun liability, he says. "It's a better risk profile than under the old setup with big liquidated damages," Malone says.
When Bernhard describes the reasons for the Stone & Webster acquisition, his face darkens with wounded feelings. Shaw Group had to buy the designer because powerplant engineers did not want to do design work on the projects where Shaw would serve as prime contractor, he claims. "We had a difficult time being received by the engineering community, to subcontract our work. I don't want to mention names," Bernhard says. "So I bought Stone & Webster." Bernhard's assessment of much of the existing powerplant prime contracting business goes this way: "We have a way of describing that business. We call it EPCL–engineer, procure, construct, litigate," he says. "We don't want to be in that business."
The strategy isn't without its drawbacks, however. Shaw Group's gross profit margin is down from 19% in fiscal 1999, to 16% in 2001. Engineering and construction is a lower margin business, as Shaw's recent experience proves.
There is another hazard as well. San Francisco-based Bechtel had used Shaw as the sole source for all its fabricated pipe following a 1992 partnering agreement. But when Shaw bought Stone & Webster and became a prime contractor and competitor that started winning jobs that Bechtel had chased, the contracting giant got upset and stopped hiring Shaw, say sources at both companies.
Bechtel spent a couple of years looking for other pipe suppliers, but eventually gave its business to two former Shaw employees. With financial backing from Bechtel, they started PipeWorks Inc., St. Amant, La., which has 70,000-sq-ft shops in Reserve, La., and Venezuela. Bechtel officials wouldn't comment in detail about pulling its business from Shaw.
|COMPETING Gill has no beef with Bechtel. (Photo by David Wood for ENR)|
Shaw's worldwide pipe fabrication capacity is 9,150 tons per month, far ahead of its closest U.S. competitor, Louisiana-based IPS, whose worldwide capacity is 1,750 tons per month. COO Gill, who is also president of Stone & Webster, is diplomatic about the split with Bechtel. "We have no problem with Bechtel," he says. Gill says that by making Shaw its sole source and then having it go into prime contracting, "Bechtel may feel that they have created a monster."
Exactly how big the monster may grow isn't clear yet, although the $1 billion a year in revenue from IT Group would add considerably to Shaw's size. IPS President David Chapman says he believes Bernhard wants Shaw to become the biggest E&C firm in the U.S.
For Bernhard, it isn't about personal wealth anymore. His nearly $941,000 salary and $2-million bonus last year were supplemented by a $40-million stock sale. But don't bring him any money-losing project proposals to build something just for the sake of putting it in Shaw's resume. He hates that. For all of Bernhard's exuberance, Shaw Group has so far observed a discipline in its business practices that has paid off big.
As a result, all of those competitors and critics waiting for Jim Bernhard Jr. to trip and fall may be waiting in vain.
Behind the Hype, Close Attention to Basics
James M. Bernhard Jr. is known for nonstop superlatives about the Shaw Group and his mercurial temperament. "I've been described in two words, exciting and excitable," he says with a laugh. But as he has dramatically increased the size of his company, Bernhard has surrounded himself with experienced–if not more subdued–executives. Together, they have stuck to conservative business fundamentals, a philosophy built around singles and doubles rather than home runs.
Many of the top managers of the Shaw Group joined the firm within the last few years. The most important is Chief Operating Officer Richard F. Gill, a Louisiana construction veteran who knew Bernhard for years before selling his company, Merit Industrial Constructors, to Shaw Group in 1997.
Back in the 1980s, when Gill and Bernhard had recently started their companies, Gill bought pipe from Bernhard. "Everybody buys pipe from me," says Bernhard, who claims that Shaw is the lowest-cost fabricator in the world.
Back in the early 1990s, Bernhard and Gill joined up to recruit hundreds of pipe welders to work on a huge industrial project on St. Croix, U.S. Virgin Islands. In addition to sharing a "go-for-it" approach, Gill, 58, is a valuable counterpoint to the talkative, 47-year-old Bernhard.
Another important addition was made in 1998 with the hiring of Chief Financial Officer Robert L. Belk, who brought publicly traded company experience and who serves as a contact with investors. The core of the management braintrust is rounded out with construction and maintenance Senior Vice President Donald G. Stokes, who arrived in 2000 with the Stone & Webster purchase, and fabrication and manufacturing Senior Vice President Mitchell A. Rayner, who joined in 1997.
If Shaw completes the acquisition of The IT Group, Monroeville, Pa., it will add a company with $1 billion in annual revenue to smooth out some of the ups and downs in Shaw's volatile stock price by serving as a low-risk cash generator. IT Group's federal cleanup jobs and military housing contracts also will serve as a hedge in case Shaw can't book as many engineer-procure-construct powerplant contracts in fiscal 2002 as it did the year before.
"We consider it cost-reimbursable work with very little risk of loss because of the federal government credit risk," says Belk. "The upside is not as exciting, but it will provide cash to reinvest in higher margin businesses while giving us more diversity in customer and revenue base."
Exactly how Bernhard will work the superlatives into that assessment isn't clear yet, but no one doubts he will.