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My Verdict On Merger Mania

The Consolidation Wave

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Bill Siegel
SIEGEL

The recent news that CDM acquired Wilbur Smith is another example of how the A/E industry is changing. Every deal is different, but I believe that clients’ evolving demands are behind the current merger mania. Clients are reacting to challenges to staffing and oversight by bundling more projects together, and they are looking to have single contracts that encompass a wide variety of services.

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For example, it is becoming much harder to find clients with separate contracts for civil, structural and geotechnical engineering.Further, many clients are using alternative delivery techniques that put the A/E industry in a different contracting and delivery position.

We are being asked to team with other industries, assume overall project leadership roles and take on more risk without a commensurate opportunity for reward.

Clients also are increasingly using their contracts to meet—or to force A/Es to help meet—political or social goals. While fine in concept, many requirements for using small or disadvantaged businesses actually skew the market. Although certain disciplines seem to always end up being used just to meet contract goals for small or disadvantaged businesses, in many cases there is pressure to do a greater variety of services in-house to simplify subcontracting activities.

The mergers and acquisitions have to do with adaptation. In the business world, when your market changes, you had better be able to react. History is littered with firms that did not recognize or adapt to change. At one time, Kodak ruled photography, Atari was king of video games, and General Motors had a dominant market share.

Given the changing landscape, A/E firms have reacted with unprecedented consolidation. The market leaders are bigger than ever, have a wider range of service offerings and are willing to take on more financial and project risk. Although there are still nearly 100,000 small firms in the U.S., the share of work going to the ENR Top 500 firms has doubled. It is estimated that they represent two-thirds of all architect and engineer billings.

Sources of Finance

More than ever, A/E firms are financed by publicly issued shares, private-equity infusions or investment by overseas-based companies. We are seeing the industry separate into very large and very small companies, with fewer firms in between. With ample capital available, firms are gobbling up each other. Every day more deals are announced, and speculation grows as to which firm will fall next.

Is this good for our industry? My gut reaction says no. It is hard to see how the industry and our clients will be better served by fewer choices. And I am sorry to see many old and established firms selling out, even if I must admit my firm has bought some of them. On the employee side, consolidation is certainly disruptive, and some mergers have led to layoffs or changes in job responsibilities.

Taking a closer look, I have a different take. Recessions, especially deep ones, are transformative. Things seem tough, but there are still opportunities for those willing to adapt. There are nice projects to be had, and our productivity is going up as we learn to do more with less. Clients want us to take more risk, but good clients recognize we need some reward and incentive, which might help us to do better in the long term.

While larger firms seem to be dominating, ours is still an easy-entry profession in which anyone with a computer and the proper registrations can start a business. I am confident some sort of equilibrium between large and small firms will be reached in the long run.

Finally, I would like to think engineers can and should take leading roles on projects for our clients. Why shouldn’t we take the lead role on a design-build team? To solve our client’s challenge, why can’t we put together a team with a contractor, arrange for financing and even take charge of operations after construction? If that means we need larger, more complete firms so that engineers can take a leadership role in the building industry, so be it.

The markets will respond and reward those firms that figure out the best way to serve their clients. The merger mania is just a logical response to market pressures, and while it may be uncomfortable, it also may turn out to be a chance for A/E firms to lead the industry to greater heights.

 

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