The Big Picture: Domestically buyers are proceeding with caution
We witnessed a slight pullback in M&A activity in the third quarter, largely driven by a slowdown in the domestic M&A market (i.e., transactions involving a U.S.-based selling firm). Going into the third quarter of the year, domestic M&A transactions were up 12% on a year-over-year basis entering, but finished the third quarter up only 3%. Another contributing factor to the slow-down was the decline in the number of domestic firm sales to international buyers. Through the first nine months of 2011, international buyers represented only 9.2% of all U.S. sales, a five-year low and down considerably from 2010, where close to one in five domestic firm sales were to international buyers.

The trajectory of industry M&A has largely reflected that of the general domestic economy for the first nine months of 2011— as would be expected. M&A activity increases in growing economies and declines in recessionary or stagnant economic environments. With so much uncertainty in the domestic economy, it’s not surprising that M&A activity has also been relatively flat.

But while activity may be just ahead of last year, there are interesting lessons to be gleaned from what deals are actually happening as follows.

Flat domestic M&A activity: Through the first nine months of 2011, we tracked 120 M&A domestic deals, representing a marginal 3% increase over levels seen domestically through the first nine months of 2010. Essentially, M&A domestically is flat with last year through the end of Q3. Assuming this pace continues, 157 domestic deals are projected to occur through year-end 2011.

Domestic M&A Activity
First Nine Months

Domestic M&A Activity: 2007 through 2011
Annual

Of the 120 domestic firm sales, over one-quarter (32) of the deals were in 3 states. Texas saw 12 firm sales, followed by California (11), Virginia (9), and Florida, Massachusetts, North Carolina, and New York (6 each). While Texas and Virginia are not all that surprising, in perhaps a bullish sign of things to come, we continue to see interest on the part of buyers outside of California in the California market and even noticed heightened interest of late— this despite the lingering effects of the housing crisis and the state’s budgetary challenges. The industry is certainly still drawn to “The Golden State” and all it has to offer in terms of future opportunity for AEC services.

Top States for Firm Sales
First Nine Months, 2011

Additionally, while Texas, California and Virginia were home to the most firm sales through the first nine months of 2011, heightened activity in the states of Arizona, Wisconsin and North Carolina has caught our eye. Through the first nine months of 2011, Arizona and Wisconsin each have seen an increase of 4 sales relative to 2010 and North Carolina has seen an increase of 3 sales. While it is certainly premature to draw any definitive conclusions, M&A transactions in the states of Arizona, Wisconsin and North Carolina might provide some beginning signs of a strengthening economy, a bullish and confident outlook for AEC services and/or it being an opportune time for firms to put in place growth initiatives in each of these particular states.

AEC Firm Sales 2010 vs. 2011
Through First 9 Months

Heightened international M&A activity: Through the first nine months of 2011, 120 international M&A deals were announced (i.e., transactions involving a Non U.S. based selling firm), representing a five-year high and a 69% increase over levels seen internationally through the first nine months of 2010. Assuming this pace continues, 172 international deals are projected to occur through year-end 2011.

International M&A Activity
First 9 Months

International M&A Activity: 2007 through 2011
Annual

Of the 120 international firm sales, 71% (85) of the deals occurred in 7 countries. Canada and the United Kingdom are leading the way with 23 firms announcing sales, followed by Australia (13), India (8), Sweden (7), South Africa (6), and the Netherlands (5). While it is difficult to draw definitive rationales for such transactions, a common thread across deals in these particular countries appears to be that they are driven (at least in part) by a desire on the part of acquiring firms to penetrate the following markets and services lines:
• Canada – energy and power; mining and natural resources;
   and environmental services
• United Kingdom – energy and power; transportation
   infrastructure; and environmental services
• Australia – environmental services; mining and natural
   resources; transportation infrastructure; and energy and power
• India – general infrastructure; facilities; and energy and power
• Sweden – environmental services; energy and power
• South Africa – environmental services; energy and power;
   general infrastructure
• The Netherlands – environmental services; energy and
   power; and general infrastructure

Top International Countries for Firm Sales
First 9 months, 2011

Global M&A activity remains heightened: On a global basis (i.e., international sales plus U.S. sales), we tracked 240 M&A deals during the first nine months of 2011, representing a 28% increase over global levels seen through the first nine months of 2010. Assuming this pace continues, 325 global deals are projected to occur globally through year-end 2011, representing a 12-year high, and providing further evidence of the industry’s globalization and the growing attractiveness of emerging markets to both U.S.-based and international AEC firms.

Global (Including U.S.) M&A Activity
First 9 months, 2011

Global M&A Activity: 2000 through 2011
Annual

Interstate activity pulling back in 2011 Through the first nine months of the year, 56% of domestic deals occurred across state lines, in-line with 2010 and 2009 and well below pre-recession annual levels.  Following a first quarter flurry when interstate deal activity represented 62% of all activity, the percentage of interstate deal-making dropped to 54% and 50% in the second and third quarters, respectively— perhaps indicative of a sliding confidence in the domestic economy.

Interstate M&A Activity: 2000 through 2011
Annual

International interest in the domestic market has waned year-to-date Domestic firm sales to non-U.S. buyers through the first nine months of the year had fallen to just over 9% of total domestic activity, down from 19% for the same period in 2010. Additionally, in a continued reversal of a trend seen since 2007, through the first nine months of 2011, there have been more transactions involving a U.S. firm buying an international firm (15) than an international firm buying into the U.S (11).

Of the 11 transactions involving a U.S. seller and international buyer through the third quarter, 4 of the buyers were headquartered in Canada, 4 in the UK, and the remaining 3 were headquartered in Ireland, South Korea, and the Netherlands. Of the 15 transactions involving a U.S. buyer and an international seller, 5 of the sellers were headquartered in Canada, 3 in India, 2 in the UK, 2 in Australia, and the remaining 3 were headquartered in the Netherlands, the UK, and Chile.

International Buyer as a % of U.S. Sales
First 9 Months

Deal Flow In and Out of the U.S.
First 9 Months

Publicly-traded firms leaving their mark on global industry consolidation; less so domestically Just over one-fifth of total domestic firm sales involved a publicly traded buyer through the first nine months of 2011, down from 28% for the same period in 2010. However, on a global basis, through the first nine months of 2011, publicly traded firms continued to consolidate the AEC industry, with over 41% of total global deals involving a publicly traded buyer, representing a five-year high. Interestingly, almost as many acquisitions by publicly traded firms were made in Dow Jones classified emerging markets (21) through the first nine months of 2011 as there were in the U.S. (26). And with close to one-third of all international publicly traded acquisitions being made in emerging markets through the first nine months of 2011, this certainly speaks to the robust nature and attractiveness of emerging markets’ economies relative to the U.S.

% of Domestic Transactions Involving a Public
First 9 Months

% of Global Transactions Involving a Public
First 9 Months

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