In recent years, the amount of acquisitions and mergers among engineering and infrastructure services firms has increased. Are we building stronger businesses or creating monopoly monsters?
At the recent Urban Transportation Summit in Toronto, I sat next to Colin Gordon. He was there because his company, Comstock Canada, was bidding on the Toronto Transit Commission (TTC) contracts that were released once Metrolinx’s regional transportation plan was approved. Hagay Marian with Aecon—one of Canada’s largest public construction and infrastructure development companies—was sitting at the same table hoping to bag the same contract.
Comstock, a provider of electrical and mechanical services, might not have a chance on its own, but as part of the much larger EMCOR Group, which has offices all over North America and the United Kingdom, suddenly it’s a contender for a major contract.
When a major contract is awarded, it’s not to a small, 50-person operation. If there’s a 100-megawatt wind farm going up, the question isn’t, “Who’s supplying the turbines?” Rather, it’s, “Is Siemens or GE supplying the turbines?”
It’s especially difficult for small companies to compete in this credit-shy market. Are small, local operations going to be eclipsed-or swallowed up-by increasingly larger, global firms?
“This is certainly a trend that’s accelerated over the past few years,” says Shayne Smith, president of Wardrop Engineering, a Canadian firm that specializes in resource management, energy and infrastructure design. “The billion-dollar firms now represent 70 per cent of the industry. Going back a few years, it was only a third.”
Wardrop was recently acquired by larger environmental engineering and consulting firm, Tetra Tech. Smith says the firm sought out a strategic partner like Tetra Tech because it wanted to be part of an organization that could execute larger projects. “We were realistic about what we could achieve as a private, employee-funded firm. We wanted to extend our global reach.”
Wendy Cooper, executive director of Consulting Engineers of Alberta, says many firms are making a conscious decision to grow. “That’s exactly their strategic plan.”
Firms are growing to match the increased size of both the customers and the projects. “Customers are getting larger, they’re procuring globally and they need a firm that can serve that market,” says Smith.
Projects are getting larger, too. And more of them are being completed as EPCs (engineer, procure, construct) or P3s (public-private partnerships). Smith says, “The capacity within municipalities or provinces doesn’t exist to work the old way-parsing it out into a bunch of contracts. It will probably evolve into packaging the work out into larger turnkey projects.”
Alberta’s new schools project is exactly one of those larger, turnkey projects. In a unique P3, the government of Alberta bundled the design and construction of 18 new schools in Edmonton and Calgary, turning it into one massive contract.
Smith says smaller engineering firms are going to have to join a large consortium in order to win contracts on these larger projects.
That’s exactly what many Alberta firms have done. “If they don’t want to get grow beyond 50 or so employees, they’ll often form alliances to bid on larger projects,” says Cooper.
AECOM’s Sam Sidawi says amalgamation-whether it’s a merger, a consortium or an acquisition-is positive for engineers currently being commodified by customers. “Becoming part a larger company can change the way the industry responds to us.”
Sidawi leads AECOM’s sustainable asset management practice, and if anyone knows about acquisitions, it’s AECOM. In 2008 the mega-company has acquired Earth Tech, Gartner Lee, TSH and UMA. Most recently, it acquired Savant, a 600-employee construction-management consultancy services firm.
“It’s a symbiotic relationship,” says Sidawi. Larger firms that want to serve a broader market and capitalize on stimulus spending can’t just diversify; they have to acquire a firm that’s already got the resources and expertise needed. And smaller firms with limited global reach may choose to duck under a larger company’s umbrella to win more contracts.
It doesn’t hurt that becoming part of a larger, international firm gives engineers access to world-class professionals and experts in their field, plus access to the global market. “We need something to attract new engineers,” says Sidawi. In an industry made up of mostly retirement-aged professionals, anything that might attract young professionals is a good idea.
Even so, Sidawi says smaller firms don’t have anything to worry about. “There will always be a need for smaller firms. They’ll continue to be around.”