Word on the Street: Issue 144

Miami Highlight Reel

– Mark Goodale

Sunny skies and 80 degrees served as last week’s backdrop for Morrissey Goodale’s Southeast M&A, Strategy, and Innovation Symposium at the sumptuous Mandarin Oriental hotel in Miami, Florida, where more than 200 AE industry executives and investors gathered to hear the latest on where the industry is heading, learn about emerging best practices, and create new business relationships. Below are just a few of the highlights:

Two women’s journeys to the top of the mountain: The charismatic Gen Oraa, partner at CohnReznick (New York, NY), moderated our “Advancing Women in the AE Industry” session with Morrissey Goodale consultant Sarah Thornhill kicking off the session. The panelists included Kim Burkert, CEO of Bala Consulting Engineers (King of Prussia, PA) (ENR #344), and Amy Corriveau, president of CDM Smith subsidiary Trinnex (Manchester, NH). Kim’s ascent to CEO was fueled more than 20 years ago when she was essentially told by her previous employer she wasn’t worth a higher salary. “I was told good luck finding more money somewhere else—so I found Bala,” Kim shared with the audience. “I was treated as an equal from day one.” She spent 20 years serving as CFO until Bala’s founder decided Kim was the right choice to lead the company into the future. “I took a day to let it sink in, and then I accepted the job.” For Amy, the challenge was fitting in, or so she thought. “It could be uncomfortable being the only young female engineer on a project site, so I tried not to stand out in the early stages,” confided Amy. “But eventually, I came to realize I didn’t need to hide.” Tim Wall, CEO of CDM Smith, didn’t have to look hard to find Amy. He asked her to lead and launch a digital firm for the company that became Trinnex. “I knew it would be a massive commitment and would change the dynamic at home,” said Amy. “But I took it on.”

In the AE industry, it’s optimism and more optimism—hope springs eternal: During the “State of the Industry” presentation, Morrissey Goodale shared the stage with Megan Miller, director of product marketing for Deltek. Between Deltek’s breadth and depth of data and Morrissey Goodale’s up-to-the-minute intel, the audience was treated to the most accurate snapshot of the AE industry that exists as well as a detailed look at where things are heading. While the larger economy was characterized by mixed signals resulting in a blend of concern and confusion, both the plethora of information Megan provided from Deltek’s Clarity Report and the myriad of examples from Morrissey Goodale’s proprietary research and client intelligence indicate that 2023 will be another strong year for much of the AE industry.

AE firm or HR company? Finding, developing, and keeping smart, hard-working people remains the number-one challenge for AE firms, according to the panel of ENR Top 500 firm CEOs that was assembled for the symposium. Morrissey Goodale principal Nick Belitz and Karen Erger, senior vice president and director of practice risk management for Lockton, co-facilitated the panel. “A paycheck every two weeks used to keep people here,” started Bala’s Kim Burkert. “But that’s not how it works now.” Kim emphasized how much attention is given to the firm’s employees. “We care a lot about them, and while they are our biggest challenge, they’re also the best part of what I do,” she added. Mike Carragher, president and CEO of VHB (Watertown, MA) (ENR #62), weighed in on the never-ending hybrid work saga, stating, “We expected to see drops in multipliers, but we saw the opposite. We expected quality to drop, but we didn’t see that, either. So, if you want your employees to come into the office, you can’t necessarily use productivity and quality as the reasons. You need something else to draw them in.” Susan Boyle, AIA, managing partner of HLW International (New York, NY) (ENR #304), followed up with some examples of how to do just that. “We have lots of new people, so we did a speed-dating event to help to get to know the organization. We’ve also noticed most people are in on Wednesdays, so we make sure there is free food in every office on those days.” Tyler Mathews, P.E., president of England-Thims & Miller (Jacksonville, FL) (ENR #322), opened eyes when he said, “Millennials and Gen Z actually want to be in the office. It’s the older folks who want to work from home.”

Origins of a digital firm—a conversation on innovation: Stafford Palmieri, Morrissey Goodale partner and CEO of Fabius Labs, had a one-on-one conversation with Amy Corriveau about how Trinnex got off the ground. “Early planning dates back to 2017,” said Amy. “Our CEO and executive leadership team were huge proponents of digital.” Amy shared how different the business model is for digital compared to traditional AE services. “When you are used to selling hours, you feel good about high utilization. But half of our people are building out products, so utilization doesn’t work the way it does on the AE side. We don’t fit the traditional metrics. It takes time to see revenue build up that will outpace the costs. It’s all just so drastically different.”

Pedal to the metal: The buyers’ panel, hosted by Morrissey Goodale vice president Brendon Cussio, featured a variety of experienced deal-makers, all of whom expect their firms to continue on the acquisition path through 2023 and beyond. “The economy is not changing our opinion on doing deals,” said Matt Bissett, president of Atwell (Southfield, MI) (ENR #81). “We continue to want to add good resources to our 1,500-person firm.” Anne-marie Lakusta, director of HR mergers and acquisitions at Stantec (Edmonton, Canada) (ENR #9), concurred. “A foundational pillar of our growth has been bringing in really great talent through acquisitions. It will continue to be very much part of our strategy this year.” Despite a flurry of recent activity, Cathy Cahill, chief financial officer of Ardurra (Tampa, FL) (ENR #114), says there’s no stopping now. “We just recapped this year and at the same time finished six significant transactions last year—and we’re going to continue our activity.” Finally, Sirish Samba, president and CEO of Sambatek (Minneapolis, MN), shared that his firm made its first acquisition last October. “I am humbled to be on this stage,” he started. “Back in 2008, we were down and out. But through grit and determination, we persevered. Now we’ve done our first acquisition, and we have our sights set on growing from $22 million to $120 million by 2032.”

Time to make the move: Led by Morrissey Goodale senior consultant Nate Wentworth, the sellers’ panel featured a number of compelling external transition stories. “Diversification was a goal, and an external sale helped me do that,” said Rob Matthews, president of Matthews | DCCM (St. Augustine, FL). “And while it also helped me take the chips off the table, I had to want to work there. In the end, culture was the number-one consideration, and it was a match.” John LaProcido, senior principal at Stantec (Edmonton, Canada) (ENR #9), was feeling increasingly boxed in and believed he needed a different strategy. “From the beginning, our plan was to be more nimble and surgical,” he said. “We wanted to be that boutique firm with big-firm experience. But we were locked in a bit geographically. I did not want to sell, but we had to deploy our subject matter expertise in a broader way. We settled our deal in November, and we are already seeing dividends.” Monty Irvin, former CEO of Ramey Kemp Associates (Raleigh, NC), was looking for an alignment of values. “To us, it wasn’t just stock and dollars. We wanted people who cared about taking care of our communities as much as we do,” he said. “We looked for suitors that fit that culture, and we found one in Trilon Group (Denver, CO). Now we have a good thing going.” 

The devil’s in the deal-tails: In another fascinating “500 Club Panel” led by Brendon Cussio, attendees got an insider’s look at the nitty-gritty of deal-making in the AE industry. George E. Christodoulo, a partner with Lawson & Weitzen, LLP (Boston, MA), expertly navigated the complexities of F-reorganizations, explaining how in certain situations, both the buyer and seller can benefit from significant tax advantages, while Dave Sullivan, a partner with DGC, a division of PKF O’Connor Davies (Boston, MA), shared his keen observations of the shifting trends associated with how buyers are paying for deals. Kent Collier, managing principal of Greyling Insurance Brokerage & Risk Consulting (Atlanta, GA), deftly tackled the thorny issue buyers face when taking on the various NDAs, non-competes, and non-solicitation agreements the seller often accrues from would-be buyers earlier in the process.

A final word on AE industry M&A: Nick Belitz and Morrissey Goodale vice president Jon Escobar brought home the M&A discussion with a deep dive into the main drivers of the market for both buyers and sellers as well as the latest and greatest data on valuations and where they are heading. The session started with a trip back to 2010 when annual deals were only a third of what they were in 2022, then delved into how private equity has driven the “great recapitalization” of the industry over the last several years. A number of trends were covered next, including the meteoric rise of valuations, the emergence of “acqui-hires” (when a company is acquired for the primary purpose of obtaining access to its key employees), the hottest of the hot markets/regions/services, and the rise of technology firm acquisitions.

Congratulations to IMEG, Morrissey Goodale’s first M&A Award recipient! To close out the symposium, Morrissey Goodale awarded The Most Prolific and Proficient Acquirer Award to IMEG Corp. (Rock Island, IL) (ENR #71). The award was the first of Morrissey Goodale’s Excellence in Acquisitive Growth Awards Series. Click here for more information on upcoming awards.

Finally, a special thanks to our fantastic sponsors, including Deltek, Lockton, BST Global, Greyling, CTA, Full Sail Partners, Ames & Gough, and CohnReznick!

Register here for Morrissey Goodale’s Western States M&A, Strategy, and Innovation Symposium June 7-9 at the Encore Las Vegas. 

M&A Valuations in 2023: Nuances Prevail in Very Interesting Times

– Nick Belitz

With the financial world absorbing the twin pressures of rising interest rates and large-scale bank failures, over 200 AE industry executives and investors gathered in Miami for this year’s Southeast M&A, Strategy, and Innovation Symposium to hear how the machinations of the wider world are affecting valuations in deals across the industry. With deal pricing over the past two years pushed ever higher by strong macro-level drivers that include continued investment by private equity in AE firms, the need for current AE firm owners to transition, and billions of dollars of work flowing from the Infrastructure Investment and Jobs Act, all eyes were on the data to see what nuances the latest and greatest information on valuation in deal-making revealed. 

Here is a summary of what attendees heard at last week’s symposium:

We see some softness in valuations in 2023, but that does not apply to all—or even most—firms. No doubt some would-be buyers in attendance hoped to hear the audible thud of deal prices falling like ripe coconuts all around them, making it easier to convince their respective boards and investors to close a deal, but that’s not quite what the data show. The early read this year is that valuations of AE M&A deals for the largest firms, or those valued at between $150 million and $200 million and higher, did decline by one or more turns of EBITDA. We can largely attribute this to the swift rise in the cost of debt over the past three fiscal quarters, making big deal pro formas based heavily on borrowed money less palatable for buyers, resulting in a reduction in prices acquirers were willing and able to pay. For smaller firms, however, it’s a different story…

Deal valuations remain high for lower middle market AE firms. For finance professionals and private equity firms, “lower middle market” means AE firms smaller than $100 million in revenue. For everybody else, “lower middle market” translates to “the vast majority of AE firms in existence.” Valuations climbed higher in 2021 as the industry emerged from the pandemic years busier than ever and then rose again in 2022 to record-setting levels for firms across a range of services, specialties, and geographies as buyers looked to diversify and grow through acquisition. Taking a step back, it’s critical to note that overall valuations are still very much above historical norms of just three years ago—often between 1x and 2x EBITDA higher than what we saw prior to 2020. That creates a strong incentive for potential sellers to test the market’s waters in 2023. And for firms looking to maximize transaction pricing…

All else equal, three traits make sellers more attractive and, therefore, more valuable. Buyers assign their most aggressive valuations for selling firms with one or more of the following characteristics: 1) those serving the critical infrastructure markets of transportation, water, and energy; 2) those located in the Sun Belt or along the densely populated U.S. coasts; and 3) those having investments in innovative or digital technologies that distinguish the firm from other AE peers. One of these factors is good, two are better, and firms having all three may expect to command distinct valuation premiums in the days ahead. And as for the overall market, AE firm executives and owners need to understand…

The industry is on pace for another highly active year. With the first quarter of 2023 nearly behind us, Morrissey Goodale has tracked nearly as many deals from January through mid-March of this year (111 transactions) as we tracked in the first quarter of 2022 (118), and that year turned out to be the most active on record. Turbulence in the financial markets notwithstanding, AE firms are flush with backlog, and the industry offers long-term opportunities for growth. Add to that a mix of buyers motivated to make their firms bigger and better via acquisition and sellers evaluating their strategic options in the context of a changing competitive landscape, and we have a table set for another exciting year in M&A. Considering that, we can’t wait for the next symposium in Las Vegas this June when we’ll review the latest pricing data and discuss and debate the implications for buyers and sellers of all types.

Market Snapshot: Airports (Part 2)

Weekly market intelligence data and insights for AE firm leaders.

Last week’s post featured overview, size, and outlook information about the airports market. If you missed it, you can check it out here. This week we will cover drivers, trends, and hot spots.

Drivers

• Passenger volume
• Air traffic
• Global economic activity
• Tourism industry activity
• Global health security
• Geopolitics
• Fuel prices 

Trends

• According to Airports Council International (ACI) – North America, large hub airports infrastructure needs account for over half of the total funding required system-wide between 2023 and 2027. Medium hub airport investment needs are estimated to be 65% higher than the 2021-2025 estimate, totaling $28 billion and making it the category with the highest percentage growth in estimated infrastructure needs.
• Many airports will be putting IIJA and leftover FAA funding to use for sizeable renovation and expansion projects. In some cases, improvements will focus on retail offerings and premium lounge spaces. Other plans aim to revamp terminal-concourse connectivity or construct brand new terminals. 
• According to ACI, terminal projects represent 43% of the funding needed. Airfield projects follow with 27% of the estimated infrastructure investment costs.
• The industry continues to be challenged by labor shortages, volatility in fuel prices, and supply chain constraints. The latter may impact aircraft manufacturers’ ability to deliver on time.
• Data-driven solutions and artificial intelligence will continue to be implemented and deployed to help the industry’s key players better manage resources amid unexpected demand surges and disruptions.
• Many aviation companies have set out targets for net-zero emissions in an attempt to reduce the industry’s greenhouse gas emissions. For that to happen, Sustainable Aviation Fuels (SAFs) need to be scaled for commercial production. 
• A positive and seamless travel experience starts before getting to the airport. Industry leaders are looking at ways to integrate multimodal transport for passengers to get to the airport, a concept known as fully connected travel.

Hot Spots

Top 10 airports by increase in enplanements (2021 vs. 2020):

• Small hubs: Will Rogers World (Oklahoma City, OK); Richmond International; Spokane International; Myrtle Beach International; Sarasota/Bradenton International; Louisville Muhammad Ali International; Gerald R. Ford International (Grand Rapids, MI); El Paso International; Buffalo Niagara International; Ellison Onizuka Kona International at Keahole
• Medium hubs: Kahului; Charleston AFB/International; John Wayne/Orange County; Luis Munoz Marin International (Carolina, PR); Bradley International (Windsor Locks, CT); Albuquerque International Sunport; San Antonio International; Ted Stevens Anchorage International; Norfolk International; Daniel K Inouye International
• Large hubs: Austin-Bergstrom International; Miami International; Nashville International; LaGuardia; Ronald Reagan Washington National; Orlando International; Washington Dulles International; George Bush Intercontinental/Houston; John F Kennedy International; Seattle-Tacoma International

To learn what’s ahead for other markets, check out Morrissey Goodale’s 2023 Market Outlook for the AE Industry. Click here to access recording and materials.

To learn more about market intelligence and research services offered by Morrissey Goodale, schedule an intro call with Rafael Barbosa. Connect with him on LinkedIn.

Weekly M&A Round Up

Congratulations to Atwell (Southfield, MI) (ENR #81): The fast-growing consulting, engineering, and construction services firm acquired Blueline (Kirkland, WA), a 75-person civil engineering, land planning, and landscape architecture firm. The acquisition significantly expands Atwell’s capabilities in the Pacific Northwest region and will strengthen Atwell’s ability to support its national residential, commercial, industrial, and energy clients in the region. We’re thankful that the Atwell team trusted us to advise them on this transaction.

Five domestic and three international deals: Last week saw five new domestic deals announced in WA, MO, UT, NV, and FL, as well as three global deals in Ireland, Oman, and Australia. Deal activity over the latest 12 months is down 8%, while global deal activity is down 2%. You can check all of last week’s M&A news here.

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