AE Industry M&A: Q1 2020 in review and outlook for the year

Deal-making started the year at a record-breaking pace. January and February saw a 25% increase in deal announcements over the same period in 2019. Then COVID-19 hit. Deal announcements in March fell 50%. The first quarter of 2020 ended flat compared with 2019.

Some of the notable highlights and trends from Q1  include:

Record-setting Q1 deal activity: There were 93 A/E deals announced in the US in Q1 – matching the record set in 2019. However, we expect the pace to cool off in Q2 as buyers and sellers navigate the difficulties of completing a deal during these turbulent times.

Private equity continued to reshape the AE industry. Over one in five deals in Q1 were either an acquisition by a private equity-backed operating firm or a recapitalization by a private equity group. This is in keeping with the levels seen in 2019. A great example of this type of deal was the January acquisition of bridge engineering expert CME Associates (Mansfield, CT) by private-equity backed CHA Consulting (Albany, NY).

Publicly traded buyers remain strategic: The big publicly traded buyers accounted for just 7.5% of domestic deals in Q1 – in line with 7.1% for 2019. Most of these acquisitions involved technology and systems firms.

Robust inter-state deal making. Almost two-thirds of domestic deals took place across state lines, which is in line with the pattern seen in 2019 and indicative of an expanding industry. For examples of cross-border M&A activity in Q1, click here.

Destination Texas. Texas saw the most activity in Q1 with 10 firm sales, followed by California and New York (7 each), and Florida and Illinois (6 each).

ENR Top 500: The top 500 firms in the US continued to consolidate during Q1 – with almost half of all deals involving an ENR 500 buyer or seller.

Smaller firms: Reflecting the demographics of the A/E industry – 40% of all domestic deals in Q1 involved a seller with 10 or less employees.

Outlook for Q2 and 2020

The COVID-19 crisis will definitely slow deal making in Q2. The pandemic provides a very practical impediment in that social distancing makes physical due diligence hard, if not impossible – thus extending the deal-closing time line for mergers that are currently in the works.

Bigger picture, many would-be buyers tend to step back from acquisitions until they see the market return to “normal” conditions. We have heard this from many buyers over the past month and expect it to continue through April and May. There is precedent for this reaction. During the 2008/2009 recession, industry M&A declined 25% as buyers put deal-making on hold. Nevertheless, we expect to see less of decline in this recession for two reasons:

1. The 2008/2009 recession had “no end in sight” whereas this downturn is closely tied to the public health crisis. As the virus abates, we will see deal making return to normal course levels – very likely in Q3.
2. Headed into 2008/2009, better than one quarter of all deals were being done by publicly traded firms that were required to step back from M&A activity. Headed into this recession, 20% of deals were being driven by private equity firms that continue to demonstrate an appetite to acquire, even in a recession. Private equity firms continue to have significant amounts of cash that they want to deploy for longer-term growth – and a recessionary environment provides them with a great opportunity to “buy low, sell high”. Indeed we see private equity buyers continuing – and in some cases increasing – their outreach to potential acquisition targets.

In general, we see less appetite on the part of buyers for “nice to have” deals but a continued focus and commitment on the part of buyers to get “must have” deals done – sooner rather than later. However, for some buyers, the definition of “must have” has changed over the past 30 days.

Based on past experience, we do expect valuations overall to see some challenges in Q2 and throughout the year. However, except for certain sectors such as hospitality, entertainment, and workplace, our clients have not reported a significant slowdown (yet). In fact, many clients are reporting an increase in backlog and wins – particularly in certain Federal markets and the Healthcare sector. But at this early stage of the recession, the full implication of this public health crisis on the industry and sector-specific valuations remains unclear. We will have more information on the impacts in our future M&A updates and webinars.

As always, we are here to help.  If you are a seller or buyer in need of assistance during this challenging time, contact Mick Morrissey, Managing Principal
@ [email protected] or 508-380-1868.