Mergers and acquisitions – a view from down under
Nelson Ogunshakin’s visit to Australia has given him fresh perspective on why companies need to buy.
One of the privileges of being chief executive of ACE is the opportunity to travel internationally to support our sister organisations. Last month I was honoured to accept the invitation from Consult Australia to assist with the inaugural launch of the Asia Pacific region’s CEO Conference. The gathering of 45 CEOs provided me with an insight into the major challenges facing their markets and how they are being tackled.
I was also able to meet with representatives of our UK member companies such as Arup, Hyder, Mott Macdonald and WSP which are currently operating in the region. Interacting and engaging with them provided me with a lot of food for thought. It brought home the sad reality that the last five years of low investment has hit the consultancy and engineering sector particularly hard worldwide, and I was able to sympathise with their concerns having seen the impact of the UK’s recession on my own ACE members.
There are positive signs of modest growth although this is below the days of the big boom with profit margins tight due to high salaries and the up front costs needed to search for new markets. The engine for expansion has been boosted by the welcome pension fund investment into major capital projects, with the mining and extractive sector predicted to be the biggest growth area in the future.
Mergers
One of the most interesting and dramatic issues we discussed was the current wave of consolidation and new entrants into the industry, and the increased visibility of the Chinese and the new capital flow they have introduced. The two year lull in the market has also created opportunities for mergers and acquisitions.
We will see the continuation of US based companies expanding globally such as AECOM’s recent acquisition of URS which sent shock waves through the industry. At the conference 98% of the CEOs agreed that diversification encourages consolidation and can achieve market efficiency and competitive advantage.
Indeed there was lively debate around the reasons that CEOs are pursuing M&A activities and I have put together a ‘top ten’ from the discussions I was involved with:
- ‘Bigger begets Bigger’ – consolidation begets consolidated
- Globalisation encourages consolidation – the Chinese and US based companies will prove a challenge in the future
- Proliferation of public & private equity capital – trends towards the ‘plc’ business model
- Valuation “arbitrage” – public value vs M&A value vs traditional value
- Cash surplus and low interest rates – what to do with excess cash or debt
- Diversification encourages consolidation – as I saw at the conference 98% of CEOs there acknowledged it
- Pursuit of changing “hot” areas – power, utilities and transportation
- Merger of Equals – exchange of stocks for stocks such as the merger of GHD with Conestoga –Rovers & Associates making it one of the largest private stock transactions in the engineering and environmental consulting industry
- M&A as a “game changer” – the impact of acquisitions on the rate of growth [25% vs 5%]
- M&A track record – successful track record
Interestingly, I was intrigued to observe that CEOs measured M&A success through cultural fit and retention of strategic staff, with CFOs concerned about the valuation and price paid for the asset.
Global opportunities
My trip to Australasia provided a good insight into the global challenges and opportunities for consultancy and engineering firms. Established players will continue to leverage on the growing market sector. Forging strategic partnership with companies in the Northern Hemisphere will become more pronounced. Companies will focus on wider regional markets such as China, Hong Kong, Indonesia and Singapore, rather than domestically in Australia or New Zealand. Increased market consolidation will generate regional critical mass and affect more M&As. The only area of concern I noted is the potential lack of transparency at the political level.
The inaugural conference was a success for Consult Australia and followed the best practice model of the ACE European CEO conference, now in its fifth year. The challenge for ACE is to continue to be innovative and creative on how it serves its UK membership and leads the global industry. I have come back from my trip with new ideas and perspective to feed into the planning for ACE’s next European CEO Conference & Awards scheduled to be held in London in November 2014.
International experiences helps keep ACE fresh and open minded to change and maintains our position at the forefront of thought leadership.