In recent years, we've witnessed a fundamental shift in how architecture, engineering and construction (AEC) firms implement growth strategies. As once-explosive organic growth has generally ground to a halt, companies have shifted away from using acquisitions to add resources and size to keep up with the market. They now have become highly strategic formarket access and expansion of capabilities. This follows the well-established trend of project owners seeking single-contract solutions with AEC firms that "can do it all."

 

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These strategic acquisitions often have involved smaller specialty firms that can expand the purchaser's capabilities and increase the potential for work. But recent examples show that small firms aren't the only acquisition targets, a point made recently by Texas-based engineer CB&I's announced intent in July to buy design-build firm The Shaw Group Inc., Baton Rouge, for $3 billion.

Looking at Layers

With such a wide range of firms being purchased, what is the sweet spot for buyers or for firms that want to be acquired?

I'm a firm believer that our industry is on track to one day resemble the accounting business with its three distinct layers of companies. There ultimately will be a group of megafirms, much like accounting's "Big Five" that will dominate the global marketplace. Next, there will be a growing set of mid-market firms with a strong presence in a smaller set of geographies, yet as diversified as the megafirms in services offered.

Below the top two layers will be regional, local and even niche firms that offer a smaller selection of related services to a very specific client base or industry sector. These smaller companies likely will continue to make up the vast majority of all AEC firms, but the large organizations will continue to grow in size and global footprint, taking an even greater share of the construction market.

Aiding the stratification of the marketplace is the growing presence of private-equity capital as well as access to growth financing in public markets. With privately held firms that have strong balance sheets able to borrow cash at historically low interest rates, acquisitions and consolidation will continue.

Magic Number

With regard to the sweet spot for acquisitions, I contend that no one is immune to the pressure to consolidate. At a recent forum of top AEC industry executives, one of my peers surmised that 1,200 employees is the magic number beyond which point a firm likely has outgrown someone else's acquisition sweet spot.

The pool of buyers capable of purchasing a firm of this size is small, but amassing the amount of cash needed for such an acquisition is not that difficult for a venture capitalist with deep pockets or for a large, publicly held company.

Further, beyond domestic buyers, there are still plenty of mid-market and larger firms globally that still do not have a U.S. presence. Recent examples of cross-border purchases show the U.S. is still viewed as a must-enter market for any company that aspires to be a worldwide giant.

In Demand

Ultimately, what truly makes a firm desirable in today's market is its client base, especially in sectors that are in higher demand, such as energy and natural resources. Similarly, firms that have positioned themselves well even in softer sectors are on acquisition target lists.

For example, in the face of government in-sourcing and shrinking budgets, transportation has been a flat market for several years. However, there are pockets of the sector that are doing quite well when involved with projects that have dedicated revenue streams or stable, user-fee-based funding mechanisms. The same could be argued for other seemingly flat sectors in the AEC marketplace.

The bottom line is that it is difficult to define the sweet spot in generalities. Ultimately, if your firm has strong client relationships with dedicated revenue streams, if it's reasonably diversified, and is not already a global giant, it's safe to say that while you are likely to be a buyer, you are also more likely to be on somebody's radar screen for a potential acquisition.

William C. "Bill" Siegel has been president and CEO of San Diego-based engineering firm Kleinfelder since April 2009. He has been with the company for more than 25 years. Siegel can be contacted at bsiegel@kleinfelder.com.