Word on the Street – A/E Industry Intelligence

June 21, 2021

All aboard? Our digital future is arriving

If you’re like most A/E firm leaders, you’ve spent the last 18 months mostly in quadrant 1 of the Steven Covey Time Management Matrix: urgent and important. Overwhelming demand for your firm’s services. Not enough people to do the work. Not enough time in the day. Exhausted but rewarded with record shareholder value. You’ve been “doing.”  But while you’ve had your head down leading your firm to record profitability, the industry has been slowly changing around you.

  • What’s going on in quadrant 2? While you’ve been busy in quadrant 1, other industry leaders and pioneers have been hanging out over in quadrant 2: important not urgent. They’ve been planning for—and executing on—investments to digitally augment or transform their businesses.
  • This is not your father’s acquisition: These strategic investments take the form of internal developments and strategic acquisitions. The former tend to take longer to come to market and have a relatively low success rate. The latter allow for immediate market impact and come with integration and branding challenges. The latter also provide the clearest examples of how fast the industry is digitizing.
  • Digital acquisitions on the rise: Prediction #15 in our 21 Predictions for 2021 anticipated more tech, software, and digital acquisitions by A/E firms than ever before. And sure enough, that’s what we’re seeing—domestically and overseas.
  • 2018 – the tipping point (redux): Last week we covered some telling stats on the rapid pace of industry consolidation as follows:
  • 1. There were 2,723 A/E and environmental firms that were sold or merged since 2010.
  • 2. Of those transactions, over 40% have taken place since 2018.
  • 3. Starting in 2018, the average annual deal volume jumped 53% from 202 to 311.
  • Buried in these stats is the doubling of annual digital, tech, and software acquisitions since 2018. They are like the market for electric vehicles – small, growing quickly, and transformational.
  • End game: As the industry continues to be recapitalized by growth-focused, efficiency-seeking private equity, we can expect to see a steady increase in digital and tech acquisitions. This combination of capital and technology likely foreshadows the replacement of the common CEO refrain “our people are our greatest asset” with “our brand, digital capabilities, and our people are our three greatest assets.”

M&A Update: Just like Bezos, Musk, and Pitt, industry M&A is headed Ad Astra. Year-over-year deals are up 20% with no slowdown in sight. Sellers are working hard to get their transactions closed by the end of the calendar year to lock in this year’s tax rates. Buyers and investors are expanding their industry positions to capture the step-functioned earnings stream that’s coming down the pike (no pun intended) from a federal infrastructure stimulus plan.

Coda: We got a TON of responses to our June 7 Navigating the 2021 tsunami of unsolicited M&A inquiries article. If you need help in understanding your fiduciary responsibilities as a CEO when it comes to M&A, let us know; we can refer you to some stellar legal counsel. Or if you need help in responding to unsolicited M&A inquiries, we can assist with that too.

Track record: To see a listing of the 10 transactions we have helped facilitate this year and over 120 deals that we have helped engineer since 2006, click here.

Registration is open for our 7th Texas M&A Symposium: And the event is filling up fast! Dealmakers want to network in person, and everyone wants to be in Texas! Join industry CEOs, M&A decision makers, and investors from Texas and around the nation on Oct. 21 and 22 in Houston. Learn about the latest M&A trends, deal prices, and best practices. We’re proud to once again partner with our friends at ACEC Texas on this premier industry event. Early bird registration rates are available through the end of June.

Who we’re following on Twitter: The Perryman Group is—in our opinion—the go-to economic research and financial analysis firm for all things Texas. Dr. Ray Perryman has spoken annually at our Texas A/E Industry Conference.

Is there something missing in your week?  We’ve heard from a number of readers that they’ve not been receiving our emails recently. Apparently, this started in May as a result of changes to the Microsoft 365 security platform. We’re working with our email provider, Constant Contact, as well as Microsoft to resolve the issue. If you wish, you can help us address this issue by having your IT department add the following Constant Contact IPs to your safelist to allow our e-Newsletter emails to filter safely to your inbox:

  • 208.75.123.0/24
  • 205.207.106.0/24

Sorry for any inconvenience, and thank you!

Questions? Insights? How are you preparing for our digital future? Email Mick Morrissey @ [email protected] or call him @ 508.380.1868.

FIVE FACTORS TO WATCH

1. Infrastructure Bill   

Senate Democrats are in discussions about their own infrastructure package that could total $6 trillion if a bipartisan agreement cannot be reached. The plan would go well beyond roads and bridges, including lowering the Medicare eligibility age to 60, providing legal status for certain immigrants, and a permanent extension of the child tax credit. Half of the plan, roughly $3 trillion, would be paid mostly through tax increases on corporations and the wealthiest Americans.

The bipartisan proposal features $579 billion in new spending, including $110 billion for roads and highways, $66 billion for passenger and freight rail, and $48 billion for public transit. An additional $47 billion would be spent on combatting climate change, with a smaller amount for electric vehicle charging stations.

 

2. COVID-19 Case Numbers  

In the last week, the seven-day average of daily COVID cases dropped from 14,480 to 12,200. The seven-day average of daily fatalities decreased from 383 to 301. Seven-day averages of COVID cases declined in California and Texas:

  • California: from 943 to 896
  • Texas: from 2,008 to 1,175

Texas appears to be the only reporting state with a seven-day average of COVID cases totaling over 1,000.

 

3. Employment  

First-time jobless claims rose from 375,000 last week to 412,000, the highest number in just over a month. Economists projected 360,000 claims. It appears that all of the increase was generated from two states; in Pennsylvania, claims increased by nearly 21,600, and in California, claims increased by just over 15,700.

 

4. Inflation   

Last week, U.S. Federal Reserve Chairman Jerome Powell used the drop of 43% in lumber prices from their high-water mark in early May to support the theory that inflation will ultimately prove to be a temporary condition. While Powell acknowledged that inflation has been higher than expected in the last few months, he says the main drivers of higher inflation are the increases from goods and services that were most affected by the recovery from the pandemic (e.g., lumber). Last week, lumber futures plummeted 18%, the largest drop in futures seen since 1986. Powell says used car prices could follow suit as supply and demand come more into balance.

Nevertheless, while the Federal Reserve shared that 13 of 18 participants on the Federal Open Market Committee thought it would make sense to begin raising interest rates by the end of 2023, St. Louis Fed President James Bullard then said stubborn inflation trends may trigger the Federal Reserve to raise interest rates as early as next year. While Fed officials have largely held the position that upward price pressures have been caused largely by the economy coming back online as the pandemic recedes (and are therefore temporary), many officials are beginning to think these conditions could persist.

 

5. COVID Vaccine Update  

More than 148 million Americans (about 45% of the population) have been fully vaccinated, up from 141 million last week. But the vaccination rate in the U.S. has dropped to around 1 million doses per day from its high of 3.4 million in April. In terms of COVID-related fatalities, it took about four months to increase from 500,000 to 600,000 deaths compared to taking only one month over the winter for the death toll to rise from 300,000 to 400,000.

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