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Firms Should Think About Expanding

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Merger and acquisition activity has halted recently as many firms have been scared off by the current economic volatility, but there is a strong possibility this situation may change in the second half of 2009. Due to bonding requirements relative to the size of their backlogs, many engineering and construction firms are sitting on cash that exceeds the amount needed to execute the work. Backed by strong balance sheets, E&Cs have split into two schools of thought: ride out the storm with current cash, or use this economic trough as an opportunity to buy smaller firms to provide new growth avenues.

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When the construction markets eventually normalize and capital spending returns, the best-positioned companies will be those that made strategic moves to enhance their business models.

Today, the American Recovery and Reinvestment Act has earmarked $130 billion for the nation’s infrastructure. Government spending could prove a boon to the top E&C companies. Those that want to solidify their competitive advantage should look at expanding their geographic reach, broadening services to reach more markets and adding new specialty areas. The fastest way to do all these things is through acquisitions.

Last year, some of the most significant merger activity included AECOM’s acquisitions of Earth Tech and Boyle Engineering, and URS Corp.’s purchase of LopezGarcia Group and Tryck Nyman Hayes Inc. Other acquisitions proved lucrative, with Balfour Beatty PLC reporting a 30% increase in full-year net profit.

Beare
BEARE

This profit trend should be continued by Balfour Beatty and others such as McDermott International, KBR, Shaw Group, Fluor Corp., Jacobs Engineering, Foster Wheeler, General Cable and Chicago Bridge & Iron. So far in 2009, McDermott acquired Nuclear Fuel Services, AECOM bought Lockerbie & Hole Inc., and Parsons Corp. acquired McMunn Associates.

Acquisitions will intensify competition for future infrastructure projects. Many large E&C firms that traditionally serve specific markets like oil and gas may expand market reach by acquiring engineering companies and electrical contractors specializing in environmental retrofitting, a hot market.

A turnkey approach holds tremendous appeal to government agencies as they begin awarding large contracts. Many E&C companies are looking to acquire specialists so they can offer cradle-to- grave solutions to clients.

Strategic E&Cs also will be on the lookout for engineering companies that have patented technology, design prototypes and techniques. Proprietary technology is not a commodity and priced accordingly.

E&C companies need to position themselves today for what is expected to be a very profitable infrastructure build-out in the years ahead.

Nicholas V. Beare is a managing director at Stephens Inc., Dallas. He can be reached at 214-258-2747 or nick.beare@stephens.com.

 

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