Domestic M&A Activity Slowly but Steadily Rebounding: Through the first six months of 2011, 84 M&A domestic deals were announced (i.e., transactions involving a U.S. based selling firm), representing a 12% increase over levels seen domestically through the first six months of 2010, but still way down from the frenetic deal-making activity prior to the financial crisis.

Domestic M&A Activity
First 6 Months

Domestic M&A Activity 2007 through 2011
Annual

Of the 84 domestic firm sales, two-thirds (56) of the deals involved sellers in just 11 states. California saw 8 firm sales, followed by Virginia (7), Texas and Florida (6 each), North Carolina (5), and Arizona, Colorado, Massachusetts, Ohio, South Carolina, and Wisconsin (4 each).

Top States for Firm Sales
First 6 Months, 2011

Surging International M&A Activity: Through the first six months of 2011, 86 international M&A deals were announced (i.e., transactions involving a Non U.S. based selling firm), representing a five-year high and a 72% increase over levels seen internationally through the first six months of 2010.

International M&A Activity
First 6 Months

International M&A Activity: 2007 through 2011
Annual

Of the 86 international firm sales, just under 70% (60) of the deals occurred in 7 countries. Canada is leading the way with 17 firms announcing sales, followed by the United Kingdom (16), Australia and India (7 each), the Netherlands (5), and Sweden and South Africa (4 each).

Top International Countries for Firm Sales
First 6 Months, 2011

Global M&A Activity Remains Heightened: On a global basis (i.e., international sales plus U.S. sales), 170 M&A deals were announced through the first six months of 2011, representing a 36% increase over global levels seen through the first six months of 2010.

Global (Including U.S.) M&A Activity
First 6 Months

Global M&A Activity: 2000 through 2011
Annual

Interstate Transactions on the Rise: Through the first half of the year, 58% of domestic deals occurred across state lines, representing a 6% increase over 2010, but well below pre-recession annual levels.  Following a first quarter flurry of interstate deal activity of 63%, the percentage of interstate deal-making fell 10% in the second quarter to 53%, hinting at an economic recovery that continues to disappoint.

Interstate M&A Activity
First 6 Months

Interstate M&A Activity: 2000 through 2011
Annual

A Continued Slowdown of International Firms Advancing into U.S.: In another interesting development over the first half of 2011, just over 8% of all domestic sales involved a non-U.S. buyer, down from 16% for the same period in 2010. Additionally, in a reversal of a trend seen since 2007, through the first half of 2011, there have actually been more transactions involving a U.S. firm buying an international firm (11) than an international firm buying into the U.S (7).

Of the 7 transactions involving a U.S. seller and international buyer, 4 of the buyers are headquartered in the UK and the remaining 3 are headquartered in Canada, Ireland, and South Korea. Of the 11 transactions involving a U.S. buyer and an international seller, 5 of the sellers were headquartered in Canada, 3 in India, and the remaining 3 were headquartered in the Netherlands, the UK, and France.

International Buyer as a % of U.S. Sales
First 6 months

Deal Flow In and Out of the U.S.
First 6 Months

Private Firms Driving More Domestic M&A Activity than the Publics in 2011: Just one-fifth of total domestic sales involved a publicly-traded buyer through the first six months of 2011, down from 25% for the same period in 2010. However, on a global basis, through the first six months of 2011, publicly-traded firms continue to consolidate the AEC industry, with 40% of total global deals involving a publicly-traded buyer, representing a five-year high.

% of Domestic Transactions Involving a Public
First 6 Months

% of Global Transactions Involving a Public
First 6 Months

Interpretations of the Statistics: With the U.S. economy mired in a sluggish recovery, domestic M&A activity has yet to return to pre-recession levels. However, it appears to have bottomed out in 2010 and to be on the rebound so far in 2011. We expect the domestic M&A market to continue in its recovery.

The international M&A market is experiencing a heightened state of activity, unparalleled over the past five years. Additionally, as the macro economy becomes more global, so too does the AE industry, as evidenced by the number of U.S. firms expanding internationally via M&A. The increased ease of doing business on a global basis combined with the slow state of recovery domestically and increased opportunities abroad have made international expansion increasingly attractive to U.S. firms.

Despite being up over 2010 and possibly on the rise, growth-oriented interstate deals (as a percentage of total deal making) is still down relative to pre-recession levels, indicating that defensive deal making remains at increased levels. Industry-wide, firms still appear hesitant to pursue geographic expansion (at least compared to pre-recession levels).

The volume of U.S. transactions might be becoming less reliant on public buyers, indicating perhaps that private buyers are adopting similar strategies as their publicly-traded counterparts and/or that there remains uncertainty in the public capital marketplace.

Observations from the Frontlines: While it is difficult to pinpoint the specific motivations of acquiring firms from a service and market sector perspective (as many acquiring firms offer multiple services to multiple market sectors), it appears (at least anecdotally) that a heightened number of deals are being driven by the following services and/or market sectors:
•Energy, power, natural resources, and mining services
•Environmental services
•Water and wastewater services
•Healthcare market sector
•Private industry (e.g., oil and gas, utilities, other industry, etc.)

While the Sun Belt states (e.g., AZ, AL, CA, FL, GA, LA, MS, NV, NM, NC, SC, TN, TX) were some of the hardest hit states during the recession, they also appear to be some of the more desired states for M&A advancement so far in 2011. Through the first 6 months of 2011, 38 transactions involved a firm that was headquartered in a Sun Belt state, up 23% over 2010 (31) and up 15% over 2009 (33). Arizona and North Carolina have led the way with the largest year-over-year increases in firm sales through the first 6 months with 4 and 3, respectively.

Interesting, from a deal valuation perspective, premiums are still being paid in the industry for AE firms. That said (and this certainly might go without saying), these transactions are often those that involve a selling firm satisfying a strategic service, market sector, and/or geographic goal of the acquiring firm.

There appears to be an increased amount of cash being used in deal terms (as opposed to stock and/or notes and/or earn-outs), particularly on the part of the publicly-traded buyers. This is perhaps driven by publicly-traded firms’ balance sheets being flush with an increased amount of cash relative to past years (and these firms choosing to deploy it on M&A initiatives) and the pressures it is placing on privately-held firms to come to the table with comparable terms (relative to their public counterparts) for selling owners. Regardless, cash is definitely King these days.

Certain-sized AE firm owners are increasingly succumbing to a feeling of being “stuck in the middle.” Their firm is not small enough to qualify for certain set-asides, designations, or certifications but not large enough to be selected on certain jobs due to concerns on the part of the client that the firm lacks needed capacity. This is likely to continue (if not intensify) as consolidation of the ENR 500 continues. As a result, many firm owners are exploring the benefits of becoming part of a larger firm so that they can better compete for upcoming projects.

For a full listing of industry M&A activity, click here >