Consolidation in the A/E industry continued its frenetic pace into 2008 with 8 deals announced within the first 11 days of the year. The early indicators are that deal volume will be on pace with or exceed that of 2007. But will this actually be the case? And how did M&A activity shape the industry last year? The answer to these and other questions below.

2007 In Review

Deal volume at all time high: As we predicted at the beginning of the year, the number of transactions in the industry reached a record 214 in 2007— an increase of in excess of 26% over the prior year. In 2007, it seemed as if every president or principal you knew in the industry was in the middle of due diligence, or reviewing the financials of a target firm, or considering an “unbelievably rich” offer from a buyer. 2007 was the year where everyone was either a “deal maker” or wanted to be one. “Deal envy” was rampant. The pressure to “do a deal” was everywhere.

Globalization is here to stay: If you sold your firm in 2007, the chances are higher than ever that you now work for a non-US headquartered firm. Close to 17% of the 151 firms sold in the United States last year were purchased by an overseas buyer. Who bought into the U.S. market in 2007? Canadian firms led the way with 15 deals; British firms were next with 5 acquisitions; and other international buyers included the Netherlands, Denmark, Australia, and India. Last year, international firms bought into the U.S. at twice the pace that US firms bought overseas. A full 20% of transactions in 2007 occurred outside of the United States involving both an overseas buyer and seller.

Public markets: More than a quarter of all transactions last year included a publicly traded company— typically as the buying entity. This represents the highest number and percentage of deals ever involving publicly raised capital in the industry.

Hottest domestic markets: In 2007, the following states saw the greatest volume of inbound deal activity: California (18); New York (13); Texas (9); Florida (9); Pennsylvania (7); Ohio (7) New Jersey (6); Colorado (6); Indiana (5) and Louisiana (5). Not surprisingly the states seeing the greatest increases in population— California, Texas, and Florida— all saw a significant number of firms sold in 2007. Of interest is the strong M&A activity in the Rust Belt and Northeast (Pennsylvania, Ohio, Indiana New York and New Jersey) that are seeing relatively weak population growth.

The Year Ahead

We expect deal activity to be flat this year and closely match the 200-plus deals of 2007. The slowing economy in 2008 will impact the plans of many buyers who are seeing a slowdown in their business for the first time since 2003. A number of acquirers will choose to pass on potential deals or defer strategic investments until the outlook becomes clearer and their backlogs improve. Also, given the challenges in the credit markets, public buyers, who in 2007 accounted for over a quarter of all deals, may scale back on their activities. All of these factors will have a dampening effect on M&A activity in the industry. However, the fundamental drivers behind the consolidation of the past five years (firm owners and principals reaching retirement without internal ownership transition plans, the highly fragmented nature of the industry, the inability of firms to hire talent fast enough to meet strategic growth goals, and the attractiveness of U.S. firms to overseas buyers given the weakness of the dollar) will remain and will continue to support deal activity at or close to last year’s levels.

Winning in 2008
- MARK GOODALE

On the bright side, it is believed that infrastructure sectors such as transportation and water/wastewater will remain strong while institutional sectors like healthcare and education will, at the very least, tread water.

All of these factors have one thing in common: principals of A/E and environmental consulting firms don’t have an ounce of control over any of them. Go ahead. Stand on your head. Curl up in the fetal position. Get on your knees and pray. 2008 will run its course no matter what you do.

So here’s my advice. Understand the macro-trends that are relevant to your business and then focus on improving the aspects of your firm that actually ARE in your control. Here’s how:

Establish stretch goals for Marketing & Business Development. Light a fire under your marketing and business development team. Get them engaged and accountable by directing them to outline 30, 60, and 90-day action plans with aggressive goals that are designed to generate short-term revenue and position the firm for longer-term opportunities. Have them develop and deliver a weekly opportunities report that summarizes their activities and their results.

Collect. A/E and environmental consulting firms make poor lending institutions. Get on the phone and collect. The importance of cash flow will be magnified if this year pans out the way many experts are predicting. If you are the top person in your firm, make sure you are leading by example.

Eliminate waste. Costs are an obvious place to start (excessive car allowances, extravagant office furniture, boondoggles, etc.), but also look to eliminate waste in your firm’s operations. Start by thinking about the deliverables your clients get versus what they could get. Is your organization structure optimal for producing quality or is it creating barriers to collaboration? Are roles and responsibilities clear? Does your firm have a unique “way” of doing work that balances constant improvement with well- designed standards, policies, and procedures that are regularly put into play?

Over-communicate with staff. Whether you are riding high in 2008 or coming off of a down 2007, make sure you keep the staff informed of what is going on. When employees don’t know what is happening inside the company, they fill in the blanks themselves. If things are going well, employees tend to think they are going better than they really are. If things are not going well, employees tend to believe the sky is falling. If you communicate firm-wide performance on a monthly basis and regularly pump up the troops, morale and retention will be stronger.

Build trust with your partners. Now is the time to strengthen the bonds with your partners. Commit to getting beyond any nagging issues— the tougher they are to talk about, the more you’ll get accomplished. Reassure your partners that you are on their side and you are committed to helping them succeed— by sharing your knowledge, your network, or even your compassion. In 2008, you’ll need your leadership team and your leadership team will need you, so invest the time and energy it takes in building a stronger one.

We can have a positive impact on many more aspects of our business than we realize— or want to realize. So take control of what you can and make 2008 a winner for your firm.