A. Executive summary – the year of recovery and international advancement

As we predicted at the start of the year, the pace of both domestic and global consolidation increased in 2011— reflecting greater overall confidence in the industry on the part of buyers and investors. In the U.S., deal activity recovered to 2007 levels, while off-shore deals reached an all-time high— driven primarily by energy, mining and natural resources and environmental end-markets in Canada, the United Kingdom and Australia. Additionally, in 2011 there were more transactions involving U.S. firms expanding internationally than in each of the four previous years. Domestically, inter-state deal activity has still not recovered to normal pre-recession levels and is a continued cause of concern.

B. Domestic activity – a healthy rebound in 2011

We tracked 171 domestic M&A deals, representing a 12.5% increase over 2010 and a return to levels not seen since 2007. We attribute this to continued confidence on the part of institutional investors and savvy buyers who see the industry fundamentals as stabilizing and the long-term trends as encouraging. Specifically, they anticipate greater clarity around connecting massive domestic infrastructure development and rehabilitation needs with a public-private financing model.

Outlook for 2012: Given the continuing needs of baby-boomer owners to free up their investments in their firms, combined with the outlook for a continuing ultra-competitive environment for smaller firms, we anticipate the pace of domestic M&A to continue to rebound, yielding between 190 and 210 deals in 2012, representing an increase of between 11% and 23% over 2011. Additionally, we anticipate that approximately 20 of the ENR Top 500 Design Firms will be acquired this year and/or merged with another firm— an increase from the 14 ENR Top 500 Design Firms that were acquired and/or merged with another firm in 2011.

Domestic M&A Activity

As expected, California and Texas saw the greatest number of firm sales in 2011 with 19 and 15 deals, respectively. This compares to 22 deals in California and 11 Texas last year. New York and Virginia saw 10 AEC firm sales each in 2011, as compared to 7 and 10 deals, respectively, in 2010. Eleven states then accounted for another 70 transactions in 2011, including WA (7 deals), AZ (7), CO (7), MA (7), NC (7), OH (7), PA (7), FL (6), WI (6), SC (5) and IL (4).

Arizona had the largest year-over-year increase in deals, experiencing 7 firm sales in 2011 as compared to just 1 deal in 2010. This was followed by Wisconsin with a year-over-year firm sale increase of 5 and Texas, North Carolina and Washington all with year-over-year firm sale increases of 4.

California, as the largest state economy in the U.S. traditionally yields the highest number of AEC firm sales in any year. However, deal activity in Texas has been growing as its economy has continued to remain relatively strong through the economic downtown. We anticipate that Texas could supplant California in 2012 as the state yielding the highest number of firm sales.

Top States for Firm Sales - 2011

C. International deal activity – overseas consolidation surges

We tracked 157 international M&A deals (i.e., transactions involving a non U.S.-based selling firm) in 2011, a robust 54% increase over 2010. While many anticipated deal activity in developing economies to be the story of 2011, it was the 80-plus deals in the developed industrial nations of Canada, the United Kingdom and Australia that was the headline.

Outlook for 2012: Concerns about the Eurozone will likely see a relative decline in M&A activity there. However, we anticipate overall international M&A activity to increase to between 180 and 200 deals next year, representing an increase between 14% and 28% over 2011. We anticipate greater deal flow in Asia in 2012 and view the recent AECOM acquisition in Taiwan as a leading indicator of interest.

International M&A Activity

Of the 157 international firm sales, 71% (112) of the deals occurred in 7 countries. Canada led the way with 36 firms announcing sales, followed by the United Kingdom (28), Australia (21), India (8), Sweden and South Africa (7 each), and the Netherlands.

Top International Countries for Firm Sales - 2011

D. Global deal activity – globalization continues to drive consolidation

On a global basis (i.e., international sales plus U.S. sales), we tracked 328 M&A deals in 2011, representing a 29% increase over the global levels seen in 2010 and an 11-year high. The industry’s globalization and in particular the increased ease of doing business and availability of information abroad has led to a robust global M&A environment.

Outlook for 2012: We anticipate global M&A activity to increase to between 370 and 410 deals next year, representing an increase between 12% and 25% over the already robust 2011.

Global M&A Activity: 2000 - 2011
Annual

E. Interstate activity – complete return to growth-focused M&A still a year or more away

In 2011, 56% of domestic deals occurred across state lines, consistent with 2010 and 2009 levels but still below pre-recession levels. Amidst the continued challenging economic environment domestically, a greater percentage of deals continue to involve firms merging with or acquiring a local peer or in some cases a competitor to add resources and/or achieve greater scale and efficiencies. Despite accounting for close to 6 out of every 10 transactions, growth-focused M&A across state lines still remains down relative to pre-recession levels.

Outlook for 2012: We remain unchanged from our outlook offered for 2011. While we anticipate levels of interstate M&A activity returning to prior recessionary levels, this will only happen once a pervasive sense of confidence and stability returns to the industry— and this is likely not to occur until 2013.

Interstate M&A Activity: 2000 - 2011
Annual

F. U.S. firms advance overseas while international interest cools domestically

Domestic firm sales to international buyers in 2011 dropped to 11.1% of total domestic activity, down from 19.7% for 2010 and fairly consistent with levels seen in 2008 and 2009. International firm sales to U.S. buyers in 2011 was 12.1% of total international activity, down from 13.7% for 2010.

Interestingly, there were an equal number of transactions involving a U.S. firm buying an international firm (19) in 2011 than there were transactions involving an international firm buying into the U.S. This concludes a four-year run in which there were more transactions on an annual basis that involved an international firm buying into the U.S. than there were a U.S. firm buying an international firm— attributable at least in part to a disappointing domestic economic recovery in 2011 and turbulent global capital markets. Of particular note, however, is that the 19 transactions involving a U.S. firm acquiring an international firm represents a five-year high, speaking to a heightened interest in expansion abroad by domestic firms.

Of the 19 transactions involving a U.S. seller and international buyer, 7 of the buyers were headquartered in the United Kingdom, 4 in Canada, 4 in Australia, 2 in the Netherlands and the remaining 2 in South Korea and Ireland. And while the number of deals involving a U.S. seller and international buyer was less than anticipated for the year, we note that the fourth quarter of 2011 featured a flurry of such transactions (8 out of the 19 total for the year)— perhaps a leading indicator of what’s to come in 2012. GHD (Perth, Australia) and RPS Group (Abingdon, United Kingdom) were particularly busy late in the year in the U.S. finalizing 3 and 2 domestic transactions, respectively, in the fourth quarter.

Of the 19 transactions involving a U.S. buyer and an international seller, 7 of the sellers were headquartered in Canada, 3 in Australia, 3 in India, 2 in the UK, and the remaining 4 were headquartered in Chile, Singapore, France and the Netherlands. The most active U.S. buyers of international firms in 2011 were Tetra Tech (Pasadena, CA) with 3 international transactions and Jacobs Engineering Group (Pasadena, CA) with 2 international transactions.

Outlook for 2012: We anticipate that the number of international firms buying into the U.S. will increase in 2012 as the economy stabilizes and non-U.S. firms look to capitalize on a pent up infrastructure market here locally and increased clarity into project financing alternatives. We also anticipate that the number of U.S. firms buying internationally will increase (driven by the industry’s continued globalization and increased attractiveness of emerging markets), but not quite at the same pace as international firms buying into the U.S.

International Buyer as a % of U.S. Sales

U.S. Buyer as a % of International Sales

Deal Flow In and Out of the U.S.

G. Public activity – publicly-traded firms take a step back domestically

Less than one-fifth (19.3%) of total domestic firms sales involved a publicly-traded buyer in 2011, down from 23.7% in 2012 and representing a five-year low. However, on a global basis, publicly-traded firms continued to consolidate the industry, with 36.9% of total global deals involving a publicly-traded buyer.

Outlook for 2012: We anticipate that in 2011 the publics will increase their acquisition participation domestically to pre-recession levels (i.e., 21%-24%) deploying the considerable cash they have accumulated on their balance sheets and that on a global basis the publics will maintain their historical levels of acquisition participation between 35% and 40% of all transactions.

% of Domestic Transactions Involving a Public

% of Global Transactions Involving a Public

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