Word on the Street: Issue 156

In observance of Independence Day, there will be no Word on the Street next Monday. Our next issue will be published on Monday, July 10.

Seven Acquirers to Watch (and Learn from) in 2023

Consolidation in our industry continues at a transformational pace. Year-to-date we’ve recorded 218 transactions of U.S. design and environmental firms. The industry is well on its way to experiencing a third consecutive year of over 450 transactions. 

It’s in the interests of all industry stakeholders—project owners, firm shareholders, managers, and employees—that consolidation at this scale happens in a professional and continually improving manner thereby creating value, reinforcing reliability, enhancing client service, and improving resource allocation industry-wide. 

It’s for these reasons that we created the Excellence in Acquisitive Growth Awards series—to recognize those firms that are improving industry performance through acquisitions and to share best practices. As part of our research for the awards series, we keep a close eye on consolidation trends and activity—including the most active acquirers globally and here in the U.S. 

As of the mid-point of 2023, these are the seven most active industry acquirers in the U.S. Collectively, they account for 14% of all acquisitions made this year. They are actively consolidating the buildings, geospatial, civil infrastructure, and geotechnical/environmental services/construction materials testing sectors.

Bowman Consulting Group (Reston, VA) (ENR #87) (NASDAQ: BWMN): Year-to-date Bowman has announced five acquisitions, including most recently this month’s addition of 80-person Infrastructure Engineers (Brea, CA). Since going public in 2021, Bowman has been on an impressive growth trajectory, jumping 31 places in this year’s ENR Top 500 Design Firms list. Acquisitions continue to be a core part of the firm’s growth plans as Gary Bowman, the firm’s chairman & CEO, stated in this year’s Q1 earnings call, “We continue to have a strong pipeline of acquisition opportunities.” The firm has added over 220 employees in Maryland, Georgia, Florida, Texas, and California this year through acquisitions. 

SAM, LLC (Austin, TX) (ENR #88): The nation’s largest geospatial and inspections firm has also announced five acquisitions in calendar year 2023. Recapitalized by Peak Rock Capital in 2021, SAM most recently acquired 40-person Axis Geospatial (Easton, MD) earlier this month. Since the start of the year, SAM has added over 90 employees in Washington, South Carolina, Texas, and Maryland through acquisitions. The firm jumped 15 places on this year’s ENR Top 500 Design Firms list. 

IMEG (Rock Island, IL) (ENR #57): With a focus on the built environment, building optimization, infrastructure, planning, and construction engineering-related services, this national engineering and design firm—and recipient of the Morrissey Goodale 2023 Most Prolific and Proficient Acquirer Award—has announced four acquisitions this year. Its largest acquisition in 2023 has been that of Lilker Associates (New York, NY), one of New York’s most prominent MEP firms, in May. The firm jumped 14 places on the 2023 ENR 500 and has added over 270 employees through acquisitions this year in Pennsylvania, Florida, and New York.

RMA Companies (Rancho Cucamonga, CA) (ENR #146): This leading provider of technology-enabled laboratory testing, inspection, and quality management services for infrastructure end markets received a strategic investment from private equity firm OceanSound Partners, LP in September 2021. Since then, RMA has gone on to make multiple acquisitions, including four that it announced in calendar 2023. Its most recent acquisition was in March of 15-person A.J. Edmond Company (Long Beach, CA). Since the beginning of the year, the firm has added over 140 employees through acquisitions in California, Florida, and Washington. RMA rose 36 places on this year’s ENR Top 500 Design Firms list. 

Salas O’Brien (Irvine, CA) (ENR #54): With locations across North America and 2,000-plus employee owners, this engineering, construction management, technology, and commissioning firm has made four acquisitions this calendar year. The firm’s largest acquisition in 2023 was that of 160-person Plus Group (Cincinnati, OH) in February. Salas O’Brien has added over 270 employees this year through acquisitions in California, Georgia, Ohio, and Florida. The firm jumped 24 places on this year’s ENR 500 list.

UES (ENR #26) (Orlando, FL): This fast-growing, 3,500-plus-person geotechnical engineering, construction materials testing, building code compliance, threshold inspections, and environmental consulting firm with capital backing from BDT Capital Partners and Palm Beach Capital has announced four acquisitions this year. The firm’s most recent acquisition of 170-person Riner Engineering (Houston, TX) in June was also its largest of the year. Since the beginning of 2023, UES has added over 300 employees through acquisitions in Texas, Arkansas, Florida, and Alabama. The firm rose six places in the 2023 ENR Top 500 Design Firms list.

NV5 (Hollywood, FL) (ENR # 22) (NASDAQ: NVEE): This leading provider of technology, conformity assessment, and consulting solutions for public- and private-sector clients supporting infrastructure, utility, and building assets and systems has also announced four acquisitions this year with the largest being that of 340-employee Axim Geospatial (Sun Prairie, WI) in February. This year, NV5 has added over 370 employees through acquisitions in Wisconsin, Florida, and Colorado. NV5 rose two places on this year’s ENR 500.

Not the same as it ever was: These seven leading design firms are not only really good at serving their clients and creating opportunities for their employees, they are also extraordinarily skilled at acquiring and integrating firms. One of the most remarkable features of these firms is the cadence of their acquisitions. To illustrate that point, prior to 2018, the most active acquirers in the industry each made an average of two acquisitions a year. Each of these seven firms is operating at a pace at least four times faster than that. It’s a testament to the competency of their M&A teams.

You can contact Mick Morrissey at [email protected] or 508.380.1868.

Where Buyers Go Wrong

Mark Goodale

Last week, I sat down to lunch with Jon Escobar, Morrissey Goodale’s head of buy-side M&A, and talked about where buyers of AE firms tend to go wrong at specific points in the M&A process. Bear in mind that “lunch” was really a Teams call that happened around the time people typically have lunch. I believe Jon’s lunch was a bottle of water—a rare indulgence for him. Anyway, here’s the transcript:

MG: First of all, Jon, what are the stages of an acquisition for a buyer?

JE: I think of five distinct phases. First, there’s strategy development. That involves establishing the criteria for acquisition in the context of the firm’s overall goals. Second is research, outreach, and relationship-building—or courtship. Next is negotiation—essentially establishing the value and terms of the deal via a letter of intent (LOI). Fourth is due diligence, which is followed by the fifth and last step—post-acquisition integration.

MG: What can cause buyers to get off on the wrong foot?

JE: Not having extreme clarity around what they are after and why. It’s the first step in the process, and not having that nailed down before starting the search is asking for trouble. Firms that stumble out of the gate don’t know what they are looking for or how it fits their organization—which looks like misalignment or diversifying too far outside of their core business or core competency. They get caught up in the bright, shiny objects and allow themselves to get distracted.

MG: What’s critical to get right from the beginning?

JE: Getting a dedicated champion in place and agreeing on the rules that will be followed during the process, and establishing under what specific circumstances those rules would be bent or broken. M&A is just a tool in the toolbox, not the be-all, end-all. Yet some firms, perhaps because of the intense competition in the market, tend to feel like they must do deals under any and all circumstances.

MG: So, what can and does go wrong in courtship?

JE: A number of things. Poor communication, which can be a lack of consistent contact and interest, or not regularly touching base or developing a relationship with a target firm. It can also be failing to clearly articulate the strategic rationale. If a seller can’t understand how things will fit together, the rest doesn’t really matter.

MG: Listening is part of communication, too. What do you observe in that regard?

JE: Sometimes there is a distinct lack of it. Buyers that tend to push their own narrative and their own concept of how and why an acquisition would fit into their organization fail to connect with sellers. It sounds good to them but is ultimately not aligned with the goals and objectives of the target firm. Why do they miss the mark? Because they don’t ask the right questions and they don’t listen for the answers. You’ve got to ask thoughtful questions, then listen to understand the motivations and objectives of the prospective seller. Unsuccessful buyers have the attitude that, “Hey, we want to give you money for your company, and you should be excited and grateful that someone as prestigious as us has made you an offer.” These folks forget that good firms are getting calls from multiple suitors. With all of the capital floating around the AE industry these days, money is not the separator it once was. Most of the time, targeted firms are not looking to sell. And often the leaders of these firms have promised their protégés that they will be running their companies someday, so the seller is going to need to explain why they decided to transition externally. It’s not purely a focus on where the executive or executives on that initial call stand and what’s in it for them—it’s about being mindful of the impact to the employees, clients, and the rest of the leadership.

MG: What gets negotiations going sideways?

JE: I can think of three things. The first is complexity. On one side of the table is a number of experienced professional buyers who know their way around the kitchen. On the other side of the table is the seller who is going through this for the first time and has little, if any, experience in what happens after initial discussions. It’s a mismatch, and it doesn’t take much for well-intended buyers to overcomplicate negotiations and deal-structuring, which only serves to add costs and contribute to greater misunderstandings between the two parties. The second is when buyers get overly aggressive. It goes back to that attitude that we are bringing you money, so be happy about the offer. It’s not the best way to start a long-term partnership. Pushing too hard during negotiations can not only strain the relationship, but it can also jeopardize the deal. The third is not knowing where to draw the line. Not every deal is a good deal. A lot of buyers fall victim to the sunk-cost fallacy. They think, “We spent all of this money and we’ve gone too far down this road to turn back now.” So, it becomes a situation where they are throwing good money after bad. They don’t know the extent to which they are willing to stretch, and they end up negotiating a deal that is harmful to the overall organization or taking on unnecessary risk.

MG: Where can buyers step in it when it comes to due diligence?

JE: When they rush the process—and that’s been happening more and more over the last two years with these unprecedented levels of industry consolidation. New buyers entering the market are ratcheting up the already highly competitive environment, and that’s putting pressure on timelines. But due diligence requires a fairly thorough understanding of the business, and when that step gets rushed, risk increases, and red flags get ignored for the sake of expediency—and it all leads to unpleasant surprises after the deal.

MG: What mistakes are buyers prone to making during integration?

JE: The first mistake is waiting too long, thinking integration should start after the deal is done when it should actually begin at the LOI phase, if not sooner. Failure to plan early enough for integration leads to delays, unforeseen costs, attrition, and other issues. The second mistake is making changes too quickly. Buyers are often dealing with legacy businesses that have been built over decades. They have an established culture and a client base that hires them for a reason. Making wholesale changes overnight creates uncertainty for employees and clients who have not been in the know every step of the way. 

Call Jon Escobar at 224.577.8595 or send him an email at [email protected].

Market Snapshot: Manufacturing (Part 2)

Weekly market intelligence data and insights for AE firm leaders.

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

Drivers

• Economic environment as it relates to exporting trends, interest rates, lending standards, and property values
• Manufacturing capacity utilization
• Private investment in manufacturing structures 
• Government consumption and investment
• Technological advancements

Trends

• Technology investments will continue to impact manufacturing design and construction processes. Recent developments in AI, machine learning, robotics, and language processing will help improve areas such as predictive maintenance for manufacturing facilities. 
• Digital twins allow manufacturers to more quickly assess how different business scenarios can impact production lines and building layouts. 
• The number of Industrial Internet of Things (IIoT) use cases continues to go up, enabling robust management practices and efficiencies in production, such as integration of data for analyses across different systems.
• Increasing workforce shortages within manufacturing and supply chain elements will require companies to invest in a variety of strategies to retain and develop talent. Employers will need to create better work environments not only with regards to flexibility and career advancements, but also in areas such as safety, maintenance, and sanitation. Engineering firms have started leveraging Augmented Reality and Virtual Reality tools to help industrial clients identify such improvement opportunities in their facilities.
• Environmental regulations continue to evolve and impact manufacturing operations. Furthermore, companies are increasingly adhering to the concept of decentralized manufacturing, trying to identify ways to build products closer to the end customers in order to reduce distribution and warehousing costs as well as comply with ESG reporting frameworks. Another trending initiative aimed at reducing environmental impacts involves additive manufacturing, which leverages 3D printing technology. 

Hot Spots

• California, Texas, and Ohio have the most manufacturing companies and jobs in the U.S.
• In recent years, the cities of Elkhart and Columbus (both in Indiana) have thrived in terms of their manufacturing economies. Reno (Nevada) has also attracted major investments in the sector.
• In addition to Indiana, multiple cities in Wisconsin, Michigan, South Carolina, North Carolina, Georgia, and Tennessee have relatively high concentrations of manufacturing jobs.

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

Weekly M&A Round Up

Congratulations to Sanderson Stewart (Billings, MT): The 90-person firm with offices in Montana and Colorado merged with Bellecci (Concord, CA), a 45-person company with offices in Concord and Pleasanton, California, to form a new holding company, Sanderson Bellecci, Inc. The new partnership creates a multi-discipline firm providing infrastructure engineering, community planning, surveying and mapping, landscape architecture, and communications and visualization services to public and private clients and communities across the West. We’re thankful that the Sanderson Stewart team trusted us to initiate and advise them on this transaction.

Two architecture deals in Texas: Last week two architecture firms acquired in Texas were among eight other domestic deals. You can check all of last week’s M&A news here. To learn more about M&A activity in Texas and the Southern States, early-bird registration is now open for the Texas and Southern States M&A, Strategy, and Innovation Symposium.