Executive Corner: Five Takeaways on 2020 A/E M&A Activity
The 2020 global pandemic will forever be remembered as when the simplest of norms and patterns across everyday family and office life were turned upside down. A/E leaders, whose patience and determination were tested just as they were 10 years ago during the depths of the Great Recession, once again rose to the occasion. Through care and compassion, instinct and intellect, they led our resilient design and construction industries, the steady and steely backbones of the country, to even greater heights. And as we head into a new year swirled with insecurity and headwinds, we hold the collective confidence and spirit, knowing we can endure, adapt and grow.
That same indomitable attitude could be found among industry dealmakers wrapping up a whipsaw year. Coming off 2019, a year that produced record M&A activity and exhibiting no signs of easing, buyers and sellers were dramatically forced into a “pencils down” mindset by early spring. Mergers took a backseat to the health and safety of staff and even the survivability of organizations. The real world became digital, companies hunkered down and deals would resume if, and when, the fog cleared.
As workforces steadily returned and much of the A/E industry was deemed “essential,” deal participants also came back to the table. Second-half transaction volume soared as parties skillfully worked through the pandemic disruptions and grew accustomed to leveraging remote technology and virtual meetings through a sale and closing process.
Better Than Feared
Amid the ups and downs, we’ll see the number of 2020 North American transactions down around 14 percent from 2019 levels. However, keep in mind 2018 and 2019 were among the strongest years of industry consolidation this decade. When comparing 2020 to similar, normalized levels of 2014-2017, the number of deals is actually up 18 percent on average from those periods. If 2021 is all about “uncertainty,” then elevated M&A activity is serving as an intriguing counterbalance in the risk equation.
Key A/E M&A takeaways include the following:
1. 2020 brought unique challenges in getting deals done. There were no shortages of thorny complications for buyers and sellers to navigate through 2020. For example, how should the parties resolve the target firm’s outstanding PPP liability? Are sellers’ EBITDA levels this year genuinely reflective of the company’s performance, or are they artificially elevated due to extraordinary cost savings? In due diligence, which projects are delayed and which ones will come back (or not), and when? Are 2021 forecasts still realistic, given stressed client budgets and shifting priorities?
2. Some strategic buyers were very active; others stayed on the sidelines. A number of A/E firms continued aggressive pushes into acquisition programs in 2020, dramatically enhancing their capabilities across the country. Growth-oriented design and consulting firms such as IMEG, Kleinfelder, Labella, Salas O’Brien, Terracon, Rimkus Consulting Group, KCI and J.S. Held all absorbed multiple companies last year. WSP’s quest to acquire AECOM fizzled, so they instead announced the recent $1.1 billion acquisition of Golder. Other familiar suitors decided to sit 2020 out and instead focused on internal growth prospects and organizational changes. CEOs at these firms have shared that their M&A plans will reemerge with better visibility.
3. Huge numbers of A/E owners don’t have a viable exit strategy. Surveys show that most Baby Boomer owners across a wide swath of industries don’t have feasible exit and succession plans. The latest Deltek Clarity A&E Industry Study indicated that only 43 percent of firms had succession planning processes in place. In many instances, the retirement horizon, goals and lifestyles are different for this generation. However, leaders seeking long-term organizational sustainability and the eventual monetization of their ownership stakes—commonly achieved through an internal transition, ESOP recapitalization or external sale—should consider the events of 2020 as a wake-up call to action.
4. Integration challenges in a virtual world. We’ve heard our share of laments from leaders who acquired firms during the last year and their frustrations with blending organizations during a pandemic. Great professional-service combinations are all about enhancing the synergies among staff and the consistent face-to-face interactions that build toward a common culture. That has obviously been difficult given travel restrictions, office closings and limitations on group gatherings.
5. After a wild 2020, what comes next? A/E leaders should be prepared for anything this year. The economy will largely be influenced by vaccine distribution timing and overall public acceptance, the impacts of a second federal stimulus package, and how quickly states can dig out of their sizable budget deficits. We feel the recovery will largely be an uneven one depending on sector variabilities (e.g., higher education, oil & gas, aviation, hospitality, mining, land development, data centers, etc.) as well as the condition of each state (compare Nebraska’s 3 percent unemployment rate to Nevada’s 12 percent). Look to see A/E firms pursuing both horizontal mergers (acquiring targets across various disciplines and markets) for diversity and vertical ones (buying firms to amplify concentrated strengths in services and regions). Industry evolution and repositioning also will produce several strategic divestitures.