The engineering sector is a key focus for Eaton Square. In recent days, we had the opportunity to meet with the CEOs or heads of M&A with ten of the world’s leading engineering firms to understand how COVID is impacting their M&A and operational plans.

Following these meetings, we were then able to run a series of ‘fire-side chats’ with small groups of CEOs from mid-market engineering firms to share the learnings from the global firms and explore what opportunities and challenges this provides for smaller firms, especially those contemplating an exit in the coming years.

Based on the great success of these sessions in Asia-Pacific, we are now inviting mid-market engineering firms in the US, Canada and Europe to also join us for a one-hour discussion where we can share some of the insights we have found.

These insights will address:

• How important is M&A to large engineering firms post-COVID?
• What sectors are the most important post-COVID?
• What size of firms are international acquirers targeting?
• Which geographies are most important?
• What operational changes are the large players making to deal with COVID?

The following video provides a brief summary of the findings, but we would welcome you to join us for a one-hour briefing by choosing a session time of your choice by clicking here: Join a Fireside Chat.

Here are 6 key takeaways from our chat with global Consulting Engineering firms:

1. M&A in strategic areas of focus remains unchanged. But naturally, each potential buyer will have a different focus and set of priorities. Areas of interest include rail and road infrastructure, minerals and metals mining, energy and energy distribution, urban design and planning, water and wastewater systems.
2. Better understood geographic markets, in terms of managing business risk, are a priority. Such as North America, Western Europe and Australia/New Zealand.
3. Size of the team matters. This is an interesting issue. Scale has always been a critical issue in an acquisition, it is a proxy for corporate sustainability and resilience – relative to the specific expertise and availability of that expertise. As a general measure, a headcount of less than 50 may be deemed as sub-scale. But also headcounts of over 500, depending on circumstances, may have too much impact on an existing business. So, both situations may impact the buyer’s existing management structure at a time their focus is on maintaining business as usual. The sweet spot appears to be in the 100-500 range.
4. Due diligence will be tougher, but there is no reason valuations will be impacted. Validating and interrogating forecasts and assumptions will be more rigorous. Questions from investment committees will be directed at understanding the depth of evidence based research to justifying proposals. Vendors will need to explicitly address the impact of COVID-19 on their market and their business.
5. Whilst travel restrictions are in place, the transaction process will be hindered and slowed down. This will act as a filter for buyers in determining where they should focus, from a deal completion point of view.
6. Recognition that the process will be longer, but it should not stop. Use the time to wisely to understand the companies that may wish to sell in 2021 or 2022. This will make preparing investment proposals for internal approval more robust.

The final message we received was a unequivocal, “please continue to bring us deals”. Because the larger international firms aim to come out of the COVID-19 crisis stronger than when they went in.

Lastly, an insight we gleaned from the conversations was that there could be a bubble of transactions in one to two years’ time, as a backlog builds. An oversupply may put downward pressure on valuation multiples and increased volume may further delay timing.

Given these factors, if you had planned to sell in 2020-21, and your business performance has remained relatively strong – talk to us. The opportunity for a successful transaction now may remain. But you will need to be prepared, particularly in justifying forecasts.

You may book a call with any of our Engineering team here.

Roger Collins-Woolcock
Principal

Roger is a Principal of Eaton Square and focusses on mergers and acquisitions particularly in the professional services of engineering, survey, planning, landscape architecture and quantity surveying. Majority of his 30-year career with ASX listed firm Cardno where he was the General Manager of the 2000 person Australia and New Zealand region.

Email: roger.collins-woolcock@eatonsq.com | Mobile: +61 412 778 807

Mark Goodwin
Managing Principal

Mark is a Principal of Eaton Square based in Perth and is focused on M&A and debt and equity raising. He brings over 15 years extensive M&A experience having led a large number of successful transactions in Australia, Asia, UK and the US.

Email: mark.goodwin@eatonsq.com | Mobile: +61 422 005 439

As the coronavirus crisis unfolds, its impact on the engineering sector is becoming increasingly clear. While there has been significant short-term disruption as firms move to remote working, the levels of activity and, importantly, longer-term confidence remains high. Many commodity prices are holding up reasonably well, and there is a growing consensus that Governments around the world will increase infrastructure spending as a means to stimulate economic activity.

Engineering Firms Remain Steadfast

Many of the engineering companies that we have been speaking to are reporting stronger than expected revenue. Remote working is proving effective, and Governments, miners, and other asset owners are pushing ahead with investment programmes. Some companies are even forecasting record profitability during this period.

Despite this, the crisis has impacted how owners of small to medium-sized businesses view their strategic options. From discussions, many are increasingly seeing the option of joining up with a larger player as a way to manage risk and balance wider life priorities. As a result, new, highly valuable businesses may now be open to discussions.

M&A Activity Integral for Growth

The large public engineering groups have, up to now, been taking a more cautious approach, with many pausing all M&A discussions as they seek to understand the implications of the crisis on their businesses. Will Governments cut capital budgets? What does this mean for cashflow? Will retrenchments be required?

However, given the positive messages coming from the sector, our view is that the global engineering groups will restart their M&A activities. M&A remains an integral part of their growth strategy, particularly now as it allows them to position their firms for a post-corona world and recoup any budget shortfalls resulting from the crisis.

Fair Pricing To Influence the Quality of Deals

While it is true that some acquirers will be looking for ‘bargains’, particularly with publicly listed targets, our view is that ‘fair’ pricing will predominate with the major groups paying for quality companies. Any short-term impact on profitability is likely to be explainable and increasingly normalised away as the impact of the virus on the economy is better understood.

There is no question that the coronavirus will continue to disrupt the economy. However, we believe that the engineering sector will fare better than most and will result in transaction opportunities for both buyers and sellers.

If you would like to discuss your plans for your Engineering firm, we are offering a one-hour complimentary call with any of our experts. You may book a call here.

Roger Collins-Woolcock
Principal

Roger is a Principal of Eaton Square and focusses on mergers and acquisitions particularly in the professional services of engineering, survey, planning, landscape architecture and quantity surveying. Roger worked for the majority of his 30-year career with ASX listed firm Cardno where he was the General Manager of the 2000 person Australia and New Zealand region.

roger.collins-woolcock@eatonsq.com
Ph: +61 412 778 807

1. The engineering sector is global, and it is important to undertake a broad search for acquirers

From the large US and European groups looking to strengthen their global footprint to smaller boutique engineers looking to leverage their expertise in new geographies, the majority of buyers for quality engineering companies do not come from the local market. Whether your company is worth $3000 or $10m, acquirers will come from across the country and globally.

In part, this is driven by the acquirers’ clients who themselves operate internationally and therefore need their service providers to have the same geographic footprint. It is also a function of today’s communication technology that allows information sharing and cross-border teams.

Importantly for sellers, International buyers will often drive up the sale price due to increased competition and companies paying based on their strong listing multiples. International buyers will also often gain additional synergies from new clients and new jurisdictions, typically with less overlap between the businesses.

2. Understand the importance of a stable and motivated workforce to an acquirer

The core value of any people business is in its staff and the culture of the organisation. A company where the shareholders are active and intend to remain active post-deal is more valuable, particularly when there is a strong supporting management team.

Promoting within the business, so that management and client relationships are broadly held, de-risks the deal in the eyes of an acquirer. Also, not leaving the sale too late, so that the shareholders still have the appetite to grow the business inside the acquirer’s organisation is critical.

It is also essential to have a plan in place to reduce and manage integration risk. This might include bringing key management on to the shareholder register before the sale or planning for retention bonuses to smooth the transition period. Understanding the motivation of staff, and ensuring that the transaction messaging highlights career benefits, is a vital step in sale preparation.

3. Work with the acquirer to develop a joint business plan

The value acquirers attribute to the business is based on their confidence in future earnings. A key way to increase confidence is to work with the buyers to develop a joint business plan early on in the sale process about how the business will perform post-acquisition.

Initially, this may involve conversations around integration but then developing into a discussion on a joint strategy including a granular opportunity by opportunity review.

We have found that this can be a useful way to identify synergies and therefore drive up the value of the deal. These conversations are also a way to build rapport between the two teams and also to provide the vendor with more comfort on their likely role post-sale.

Conclusion

We’ve seen many Engineering and Construction companies successfully turn to M&A to boost their profitability, increase their global reach, expand the services they offer, and reduce exposure to risk. If you’re thinking about selling, we recommend preparing your firm for global buyers, maintaining a motivated workforce, and open to collaboration to achieve the best outcome for all parties.

However, even with the market growing again, executives of major engineering companies across the globe see margins and traditional revenues being disrupted by five key forces which are changing their M&A strategies.

1. Competition from Management Consultants and Strategy Houses

Non-traditional competitors continue to expand their scope of technical advisory services. These companies are engaging early and influencing public and private sector project developers, the core client base of engineering services companies.

These new entrants are providing a more holistic view of projects, from early strategic options to operations, to understand both how the project will transform the clients’ business and how the business needs to prepare itself for deployment of the new asset. These high value strategy and advisory services not only command premium rates, but also provide these advisors with influence over investment strategies and downstream engineering service procurement.

From an M&A perspective, Eaton Square is seeing that this is causing international engineering companies to look more widely for management consulting expertise more common in the strategy houses, with the aim of being involved in large projects earlier. Interestingly this means that the competition for these targets is also increasing.

2. Engineering Design Services becoming a Commodity

Without early stage input into project strategy and feasibility, traditional engineering services are becoming commoditised with engineers increasingly competing on price. This is leading firms to offshore design services in order to compete.

One response is for engineers to grow services that are inherently difficult to provide remotely, where customers value local contact and responsiveness, and where knowledge of local customs and business practice are central to delivering a successful outcome. These services may include high-level specialist concept design, program management and project development.

Eaton Square is seeing the commoditisation of some services impact M&A in two key ways. Firstly, global companies are looking for services that are difficult to offshore. Secondly, firms are increasingly interested in acquiring tools and businesses that can take up the commoditised roles such as software and digital robots.

3. Use of Smart Design Tools

Technology and the rapid deployment of ‘smart’ design tools are increasingly changing the way in which engineering design is delivered. These tools include 3D modelling, smart process and instrumentation diagrams (P&IDs) and smart electrical and instrumentation tools. This is having a significant impact on the profitability of engineering companies because this phase of engineering design has traditionally generated the majority of billable hours in a project, with reasonable margins and little risk.

The complicating factor for engineering companies with the emergence of these tools is that it isn’t just a matter of these companies making ‘an acquisition or two’ to fill this revenue hole. Smart design companies have different business model, economics and cultures to most engineering companies presenting a challenge to the traditional labour-based engineering business model.

Engineering companies are very keen to find and acquire these companies and identifying them wherever they are based and utilising them internationally is central to the engineers M&A response.

4. Automating Core Processes

In the near future, technology will further disrupt the industry through automation and digitization of core processes within engineering companies, enabling, for example:

• Smart 3D models which can create a complete “digital twin” of the physical asset
• Models that overlay or leverage data captured via sensors, for example, air quality or noise readings on maps, and that use data for building management, people management and other purposes
• Replacing “bricks and mortar” engineering companies with task sharing virtual companies.

In the same way as Google Maps has transformed the way we think of and use maps, new technology will enable us to use engineering data in ways that we are yet to understand.

Over the longer time horizon, artificial intelligence (AI) may make today’s engineering tools and design guides defunct as companies use automation and digitization to build knowledge into AI algorithms.

All of these capabilities are uncommon or emerging in global engineering companies making them key acquisition targets. In additional, engineering firms also see the need for the technology infrastructure to manage and support the massive data files and storage required as an opportunity for new revenue streams.

5. Industries Served by the Engineering Sector are Changing

Technology will also redefine the sectors served by engineering companies. For example, autonomous cars will impact transport infrastructure, and urban design, and new battery storage and generation technology will impact power generation.

The electric power sector, as an example: a decade ago electric power flowed from generators to the consumer and current engineering and design tools and operating systems are based on this concept. Looking forward, the majority of generation will be behind the meter and the concept of one-way flow of power will be gone, requiring new engineering and operating concepts, models and tools.

As engineering firms seek to grow their share of new markets they will be targeting new capabilities and new industry expertise. A key challenge is that for some acquisitions, the global engineers are now competing with the giants from other sectors like technology, software, consulting and automotive for attractive deals.

These five disruptors are changing the engineering sector’s model of charging solely for time spent on traditional technical design services. Engineering companies are already seeing the need to acquire people, businesses and technology in order to implement new services and a new way of thinking.

In addition to changing the types of firms engineers are acquiring, Eaton Square notes that the way they make these acquisitions and compete with new players is also breaking from traditional industry approaches. If you’re interested in the engineering sector, feel free to contact me on mark.goodwin@eatonsq.com or +61 422 005 439.

Both domestic and international companies have been gearing up to take advantage of this growth, however, both are finding that when mining and government spend comes together, skill shortages quickly follow.

Recent movements in the Engineering space

Global growth remains high on the agenda for many of the global engineering groups, for example, WSP acquiring Opus, Mouchel, Louis Berger and Irwinconsult; Tetra Tech buying Coffey, EcoLogical and NDY; and Stantec buying MWH, Wood & Grieve and TDG. Australian and Canadian businesses continue to be in demand, with Europe and the US having their own issues, and Asia and Africa often considered too hard. World leading engineering groups have been among the potential bidders for many of Eaton Square’s recent transactions.

These groups are always competitive in a sale process, with expertise in assessing and integrating acquisitions, and strong trading multiples to allow them to price strongly.The inherent volatility in key engineering sectors has always required engineering companies to be flexible, scaling and adapting their services with each economic cycle. For example, there was significant downsizing of mining capability in Canada, Australia and Africa following the last boom, with staff redeployed or let go. Growth through acquisition is now a real option for these companies to quickly regain that capability.

Engineering firms are seeing M&A as a way to grow

In addition, the GFC forced many engineering firms to strengthen their balance sheets. Increasingly, boards are now looking to utilise this balance sheet strength, and often excess cash, to accelerate growth through acquisition. This has been led by the tier one firms that have grown significantly in this way. Inevitably, this filters down to other firms that are increasingly seeing M&A as a tried and tested way to grow.

To support this strategy, large firms are focusing more resources on integration planning with a willingness to keep companies and brands separate, at least in the short term, if more appropriate for the wider group.

On a more micro level, many mid-tier private companies are facing succession issues. This is particularly true with employee-owned businesses where the next generation of managers is often unable to afford, or unwilling to take the risk, of buying out its departing leaders. This issue can be exacerbated by the difference in value between an employee-owned company’s internal share price, which may be as low as its net asset value, and the value these shares can realise through M&A.

Technology playing a large factor in acquisitions

Finally, how engineering services are delivered continues to change, with digital technology both enabling new service and threatening to commoditise many of the traditional design services upon which engineering groups depend. In some instances, engineering groups are looking to acquire this technology. Other groups are looking to diversify into higher value advisory services, to strengthen their relationship with their clients and differentiate themselves from the mainstream. While these services can be developed organically, again many companies are looking to M&A as a means to quickly establish these services in a rapidly changing market.

Are you thinking of growth and expansion opportunities for your engineering firm? The Eaton Square team are always interested in meeting innovative business leaders and learning about great businesses. We are happy to discuss potential exit plans on a confidential basis. You may reach our Engineering team via mark.goodwin@eatonsq.com.

Roger Collins-Woolcock
Principal

Roger is a Principal of Eaton Square and focusses on mergers and acquisitions particularly in the professional services of engineering, survey, planning, landscape architecture and quantity surveying. Roger worked for the majority of his 30-year career with ASX listed firm Cardno where he was the General Manager of the 2000 person Australia and New Zealand region.

roger.collins-woolcock@eatonsq.com
Ph: +61 412 778 807