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Global M&A activity holds steady as domestic M&A falls

More mechanical, electrical, plumbing (MEP), and fire protection engineering firms are acquiring while other engineering sectors slow deal-making activities.

Nick Belitz, Morrissey Goodale, Denver
08/10/2017

Figure 1: The number of global deals dipped slightly in 2016, as compared with 2015. Courtesy: Morrissey GoodaleFollowing back-to-back years of record-setting levels of mergers and acquisitions (M&A) in the architecture and engineering (A/E) industry, the number of transactions in the industry declined modestly in 2016. Morrissey Goodale tracked 347 A/E deals globally in 2016, down slightly from 352 deals in 2015, but still up from 341 deals in 2014 (see Figure 1).

Consulting-Specifying Engineer's 2017 MEP Giants somewhat defied the trend and increased deal making in 2016, with 23% of the largest mechanical, electrical, plumbing (MEP), and fire protection firms reporting at least one acquisition. This represents an increase in the number of Giants involved in acquiring another firm over prior years. In 2015 and 2014, 21% of the Giants made at least one deal, while in 2013, only 16% of the Giants completed an acquisition.

Domestic M&A down

While global M&A activity in 2016 was approximately in line with the number of deals done in 2015, domestic A/E industry mergers and acquisitions fell from 241 deals in 2015 to 215 deals last year (see Figure 2). This represents a bit of a conundrum because M&A activity typically is tied to overall economic activity. When the economy grows, so does deal making; when the economy contracts, mergers and acquisitions pause.

Figure 2: The domestic merger-and-acquisition market dipped a bit in 2016, likely due to a very busy deal-making year in 2015. Courtesy: Morrissey GoodaleHowever, 2016 saw the opposite in the United States: rising GDP and a decrease in the number of deals. This is likely due to the relative flurry of transactions seen over the prior 2 years; pent-up demand was released as the effects of the Great Recession faded, transactions peaked in 2014 and 2015 after buyers and sellers gained confidence in the market, and then the domestic A/E M&A market took a bit of a breather in 2016 after two torrid years of activity. 

Interstate activity on the rise

Interstate deal activity (defined as firms headquartered in two different states consummating a deal) jumped in 2016 to its highest level in the past 10 years, at nearly 61% of overall domestic M&A (see Figure 3). Even as the overall number of U.S. deals fell in 2016 relative to 2015, this indicates a high degree of confidence in the general market as buyers risked investment capital to expand to new geographies and diversify client bases across state lines. Interstate activity in 2016 represents a notable increase over 2015, in which 57% of deals were between firms not headquartered in the same state, and also exceeds the previous high-water mark of interstate deals set in 2008. 

Technology, health care, specialized knowledge drive M&A

With general economic growth driving broad expansions in the U.S. commercial, industrial, residential, health care, education, and other markets, MEP firms have widespread opportunities in the marketplace. Growth through acquisition is a proven means of expanding market share for MEP Giants and interest in the sector remained robust in 2016, as evidenced by the acquisitive nature of nearly one-quarter of the MEP Giants.

While interest in the MEP sector was broad-based, numerous acquisitions by MEP Giants focused on sellers with expertise in technology applications, health care, or other specialized market knowledge. Notably:

Figure 3: Interstate deal activity jumped to a very high level. Deals haven’t been this high since before the Great Recession. Courtesy: Morrissey GoodaleRepeat buyers active in the market

Notable in 2016 was the activity of No. 4 Stantec and No. 6 JENSEN HUGHES, which made five deals and four deals, respectively, to advance strategic goals. Stantec's acquisitions indicated a general desire to round out the firm's vertical design capabilities, with deals in building design and multidisciplinary engineering firms both in the U.S. and Canada. JENSEN HUGHES' acquisitions sought to expand expertise in specific disciplines including fire protection, risk management, and forensic science and engineering consulting.

Also, frequent acquirer No. 44 NV5 (Hollywood, Fla.) made a splash by acquiring fellow MEP Giant No. 60 JBA Consulting Engineers (Las Vegas). The deal, when added to NV5's June 2017 acquisition of RDK Engineers (Boston), is expected to vault NV5 to the top echelons of Consulting-Specifying Engineer's MEP Giants list. 

The road ahead for A/E M&A

While 2016 and early 2017 represents a bit of a cooling-off period for the A/E M&A market, buyer interest in engineering firms remains strong, with acquirers looking to expand geographic reach and service offerings through targeted, disciplined acquisitions. Sellers, enjoying consecutive years of strong financial performance, are looking to capitalize on the value created, but also want to select the best partner to provide an orderly transition and more opportunities for staff.

With both buyers and sellers in the mindset of carefully evaluating prospective deals, M&A activity in 2017 is expected to continue at a steady, though somewhat subdued pace relative to the deal making of the last several years. 

Nick Belitz is a principal with Morrissey Goodale LLC, a management consulting and research firm that exclusively serves the architecture, engineering, and construction (AEC) industry. Based in the firm's Denver office, Belitz works with AEC firms to deliver M&A, consulting, and financial advisory solutions. Morrissey Goodale is a CFE Media content partner.

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