AE Industry M&A: Q1 2021 in review and outlook for the year

U.S. M&A sets first quarter record as the promise of Federal stimulus spending, combined with the potential for tax increases next year, superchargers demand for deals.

Some of the notable highlights and trends from Q1 include:

Record-Setting Q1 Deal Activity. There were 108 AEC deals announced in the US in Q1 – surpassing the record set in the first quarter of last year. Unlike 2020, however, when deal-making froze over in late March as a result of the pandemic, we expect industry deal levels to continue to soar with plenty of appetite from buyers and sellers alike.

The Top Firms Are Selling or Recapitalizing. Typically, about ten firms in the ENR Top 500 sell or recapitalize in any given year. Already in the first quarter of 2021, seven ENR Top 500 firms have sold or recapitalized with Golder (ENR #18), UniversalPegasus (ENR #59), Aegion (ENR #70), Woolpert (ENR #72), Enercon (ENR #87), RATIO (ENR #347), and Murraysmith (ENR #258) announcing deals. We expect this number to more than double over the balance of the year with twenty of the industry’s top AE firms selling or recapitalizing.

California Gold Rush. Driven in part by a lofty budget, cushioned by a $15 billion surplus and pent-up demand for AE services, California saw the most activity of any state in Q1 with 21 firm sales, followed by Florida (12 deals), Texas (8 deals), North Carolina (5 deals), and Connecticut and Georgia (4 deals each).

Demand for Environmental. Environmental firms have been a mainstay on the market over the course of 2020 and through the first quarter of 2021. Environmental deals have accounted for roughly 30% of M&A in the first three months of the year as some of the industry’s largest players have begun to integrate and expand their service offerings. In addition to the deal announcements referenced above involving ENR’s #17 ranked environmental firm, Golder, and ENR’s #30 ranked environmental firm, Aegion, we also note WSP’s February acquisition of ENR’s #195 ranked environmental firm EarthCon.

Private Equity and Family Office Investment. Loaded with dry powder, private capital has continued to disrupt the AEC space en masse with 250+ U.S. deals completed since 2018. Over the prior 12 months alone, the number of private equity-backed industry deals grew an astonishing 22%. In Q1, nearly one in three deals were either an acquisition by a private equity-backed operating firm or a recapitalization by a private equity group. The great recapitalization of the industry will accelerate through the balance of the year with about 35% of all deals being completed using capital from private equity or family offices.

Outlook for Q2 and 2021

What is happening in the engineering industry is a reflection of the rest of the business world. Rosy economic projections have buoyed expectations for deal-making across all sectors with the AE and environmental industry being no exception.

According to Kiplingers and the Bureau of Economic Analysis, GDP grew by 4.3% in the fourth quarter of 2020, indicating momentum for the economy at the end of last year. Businesses increased spending on equipment and inventories, and housing construction rose to its highest level since 2007, providing a pop to the residential market. This momentum continued through the first quarter of 2021 as GDP increased at an annual rate of 6.4%, reflecting the economic recovery, reopening of businesses and institutions, and continued government response related to the pandemic. Focusing on just the AE and environmental industry, the possibility of a $2.25 trillion economic stimulus plan centered on infrastructure spending has infused even more optimism into the minds of deal-makers.

In addition to the superior outlook for the U.S. economy and public- and private-sector spending on engineering and design services, expect the explosion in deal-making to be further accelerated by one or more of the following:

1. Seller’s looking to close deals to lock in this year’s tax rates before potential changes in corporate tax rates and capital gains.
2. Leadership and ownership fatigue caused by the pandemic and transition challenges created by Baby Boomer principals seeking to retire and divest themselves of their ownership stakes.
3. An escalating competitive environment in which firms large and small are considering M&A as part of their strategic plans.

These factors, plus a monetary environment with interest rates that are still low but projected to rise over time, may encourage decision-makers to act on their M&A strategy sooner than expected.

Time will tell whether the presumed deal-making wave materializes as expected for the full-year, but with a prolific number of buyers and sellers in the market, we can expect the deal-making party to continue on in the near- to medium-term.

To learn more about what’s going on in the world of M&A, or if you need assistance with your merger or acquisition, contact Jon Escobar @ (224) 577-8595 or  [email protected]