M&A activity in the engineering and construction services space reached an all-time high with well over 300 U.S. target companies acquired in 2018. This trend does not appear to be slowing as approximately 90 deals have already closed in the first quarter of 2019.
While there have been a handful of large transformative transactions in the space over the last few years, like McDermott International’s acquisition of Chicago Bridge & Iron Company for $4.2 billion in 2018, and Jacobs Engineering’s acquisition of CH2M Hill for $3.4 billion in 2017, a majority of the transactions have involved the acquisition of middle-market and lower middle-market firms.
SC&H Capital’s Mike Alessi and Matt Roberson share insights in the following article as to what has been driving the increase in M&A in the engineering services industry, and what executives need to consider based on this record activity.
What has been driving the increase in M&A activity in the Engineering Services space?
Favorable Economic Conditions: A major driver of the record M&A activity over the last 15 months is the currently favorable economic conditions and the vast amounts of capital in the market looking to be put to work. Building and capital expansion has been prevalent as firms have worked through the backlog of on-hold projects from the 2008-2009 recession. With the U.S. economy experiencing the longest expansion in history (almost 10 years) and interest rates projected to rise, engineering services firms are feeling the pressure to act now. Firms are currently able to leverage low cost financing, consistent financial performance, and strong balance sheets to aggressively execute on acquisition strategies.
Tight Labor Market: With the U.S. unemployment rate near 50 year lows, and a scarcity of qualified engineers in the market, it has become very difficult for engineering services firms to attract and hire new talent. This greatly limits firms’ ability to grow organically, and those firms that are able to attract and hire new talent are seeing a contraction of profit margins due to wage inflation. As a result, many firms have turned to inorganic growth, looking to acquire a large number of skilled employees in one or two transactions rather than hire them individually.
Increased Competitiveness: Smaller firms are seeing an increase in competition from larger firms who have moved into their geographies and are increasingly competing for smaller projects. These larger competitors have more developed infrastructures and economies of scale allowing them to outbid smaller firms on projects, making it difficult for those smaller firms to compete for business and stay profitable. As a result of these challenges, many small firms are reevaluating their strategic options including partnering with larger players through an acquisition.
Succession Planning: Many engineering services firms lack a well thought out succession plan causing uncertainty related to future leadership and strategic direction. In many cases, ownership is concentrated within one or two founders who will want to diversify their wealth upon retirement. In other cases, founders have sold shares and transferred ownership to a diverse group of junior employees over time without clearly defining future leadership roles and responsibilities. Given the current M&A environment and high valuation multiples, many middle-market firms are looking to solve their succession planning and liquidity challenges through being acquired.
Bringing it all together: What does all of this mean for middle market engineering services firms?
Engineering firms are seeing M&A as a way to grow. M&A activity in the engineering services space will remain strong as long as the current economic expansion persists, and capital remains easily accessible. Competitiveness and talent gaps are going to continue to drive larger firms to acquire smaller firms. This increase in consolidation creates more one-stop-shop service providers as these larger firms strive to enter new geographies and bolster their portfolio of offerings
A recent example of activity in the engineering space is the sale of Leach Wallace Associates – a ~125 employee healthcare focused 
engineering services firm who was acquired by WSP Global with the help of SC&H Capital.
In this increasingly competitive environment where many companies are being acquired at high valuations, middle-market engineering services firms should seriously consider evaluating their strategic options.
SC&H Capital has completed numerous transactions in the engineering industry and continues to see an increase in prospective deals in this space. If you are considering a sale, or have been approached by a buyer, we encourage you to Contact Us in order to guide you through this process.