August 24, 2020

DEAL-MAKING IN THE DOG DAYS OF SUMMER: INDUSTRY M&A REBOUNDS IN AUGUST

  1. The late summer has seen a marked uptick in industry deal-making. In August alone, we’ve reported on 24 design and environmental deals in the U.S. This is by far the highest monthly rate of activity that we’ve seen since the start of the pandemic.
  2. The M&A market essentially froze over in the Spring. March, April, and May combined saw a total of 43 deals – down 51% over 2019. The uncertainty during the first three months of pandemic put at least half of the national deals that were in the pipeline on hold.
  3. The pace of industry consolidation picked up somewhat during June and July. We reported on 33 transactions in the early summer months, down 38% over the same period the year before. Deals that had been “paused” in the Spring were brought back on-line as buyers and sellers adjusted to the industry’s New Reality.
  4. However, what we are seeing in August represents a dramatic step function increase in M&A activity. In fact, this month is shaping up to be the strongest August on record for deal announcements. After lagging last year’s record pace by some 19% through the first five months of the pandemic, year-over-year M&A activity is now down just 12% – largely driven by August’s torrid pace of transactions.
  5. The deals announced this month herald the New Reality for industry M&A. Most of these deals were NOT in the pipeline in the spring when the pandemic hit. These are new transactions consummated by buyers and sellers making business decisions to take advantage of opportunities presented by the industry’s New Reality.
  6. These August deals also represent the New Reality for industry deal-making. There are fewer on-site face-to-face meetings, less physical due diligence, and fewer travel-related expenses. In their place are more focused, direct, and structured video calls between management teams at every stage of courtship and integration, more virtual data rooms, more legal and accounting expertise to navigate PPP loan hangovers, and more due diligence around safe work environments in compliance with state and local COVID regulations.
  7. The late summer deals emphatically reinforce the trends in industry consolidation. August has not only has served to amp up the pace of deal-making to 2019’s record level, but it has also provided further evidence of the major factors at play, with the following two particularly standing out:
  8. First, private equity accounts for over one-in-five transactions. The inescapable truth is that the industry is being remade – from top to bottom – by private capital. Over 7% of the ENR Top 500 firms are backed by private equity. A late summer example was the announcement of “a significant investment” in PBK Architects (ENR #134) by DC Capital Partners.
  9. Second, the median deal size continues to be small at 15 employees. Why so small?  It has to do with the law of averages, for one thing. The industry is largely comprised of smaller firms, so there is proportionately more activity in that size range. It also has to do with the dearth of talent in our industry. Even though national unemployment is at record levels it’s STILL close to impossible to quickly recruit good design or environmental talent. So, more and more firms are turning to small acquisitions to bring on the talent that they need – fast.

How will the M&A market play out through the end of the year? What is 2021 shaping up? Where are valuations headed? How are PPP loans being factored into transactions?  Get the answers to these questions and more, hear from the industry’s most prolific acquirers and connect virtually with buyers, sellers and investors at our livestream 4th Quarter U.S. M&A Symposium on October 22nd and 23rd.

Want to collaborate with your CEO peers AND lean into the industry’s New Reality?  Then join us for CEO Week – the first of its kind, fully immersive VR+AR event exclusively for industry CEOs and presidents. In five curated, 90-minute VR+AR sessions this September, industry CEOs and presidents from around the country will come together in 3-D virtual reality to workshop the most important and pressing challenges for their firms and our industry. CEO Week provides a unique forum for CEOs and presidents to safely network and engage with each other while reimagining the future of their firms. Early bird registration expires August 28 so register for CEO week today.

If you have questions about this week’s WORD ON THE STREET or if you need help navigating the New Reality call or Mick Morrissey @ 508.380.1868 or email him at [email protected].

To see last week’s WORD ON THE STREET report click here>

SIGNS OF LIFE— HOUSTON, ORLANDO, DENVER

Houston – Oil Slowly Clawing Back

About a third of Houston’s GDP is based oil and gas— a sector that has taken a significant beating.  In the last few months, with the workforce already depleted from the oil price crash of 2015-16, Houston oil-related businesses shed another 26,000 jobs. The current downturn that began in 2019 with deep credit problems and bankruptcies took two more body shots earlier this year in the form of the Saudi-Russian oil war and COVID-19.  But the floor may have been found and it appears there may even be signs of improvement, even if slight. West Texas Intermediate (WTI) oil prices have stabilized at around $40 per barrel and remained in that neighborhood throughout July. Furthermore, oilfield activity ticked up with fracking and the completion of drilled wells. The rig count, a broad measure of oilfield activity, has room to grow from its currently depressed levels. A slow economic climb for the market is predicted through 2021 with a potential return to pre-pandemic levels before the second quarter of 2022.

Orlando— Travel Industry Showing a Pulse

Florida’s travel industry recorded spending of over $1.1 billion for the week of Aug. 8, a slight improvement over the several weeks prior, according to a study performed by multiple organizations, including Tourism Economics – An Oxford Economics Company, and the U.S. Travel Association, among others.  While spending is down $993 million from the same period last year, the weekly bleeding of $1 billion-plus for the previous seven weeks dating back to June 20 has been stemmed. (Note – national travel spending was also up 49% from two weeks prior, equaling 54% of spending during the same period last year). The average occupancy rate of Orlando hotels was 30.3% in late July. While still less than half of the usual 70% rate, it’s a solid improvement from the historic low of 12.3% recorded during the early stages of the pandemic. In addition, according to the “Visit Orlando” tourism bureau, Labor Day hotel bookings are currently up about 10%-15% compared to July 4 holiday bookings.

Denver – Home Sales Exploding

In the face of enormous impacts of the pandemic, a record number of homes and condos in Denver were sold in July, resulting in record-high sales prices. During the month, 6,664 residential properties changed hands, representing a nearly 8% increase from June and a 12.5% rise from the same period last year. The number of July sales beat the old record set in June 2017 by 7%.  The median closing price of single-unit homes was a new record at almost $504,000, which was an increase of 5% the previous month and 8.4% from the same period last year. It also hit a new record.  Condo pricing also saw strong gains. The law of supply and demand has apparently superseded the fact that nearly half of the state’s households reported declining incomes due to the pandemic. Record-low mortgage rates are helping to spur the buying spree along with some combined impacts of COVID-19 and demographics— e.g., there are millions of more people in the 26-35-year-old bracket who tend to shift to home ownership despite economic conditions— and especially when faced at being confined in small urban apartments during a pandemic.

CEO Week
Virtual & Augmented Reality

Sept 21-25, 2020 • VR & AR Event

A unique Virtual & Augmented Reality event exclusively for A/E CEOs and presidents.

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Fourth Quarter U.S.
M&A Symposium

Oct 22-23, 2020 • Livestream Event

Deal-making in turbulent times:
For A/E and environmental buyers, sellers and investors navigating the new normal.

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