Closing the deals

Summer merger romances are moving towards marriage. Jackie Whitelaw reports

Jackie Whitelaw
01 October 2014

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CH2MHill said this month that it is to cut 1200 jobs or 5% of its staff worldwide in a bid to “right size” the business in response to anticipated growth that did not materialise. The business purchased Halcrow back in 2011. 

It is the latest company involved in recession prompted UK merger activity to have something of a strategic rethink.

Elsewhere URS, purchaser of Scott Wilson in 2010, is well on the way to being sold to AECOM in a game-changing $6bn deal. And Balfour Beatty is about to offload its 2009 Parsons Brinckerhoff buy to WSP at a whopping 100% profit, a deal which followed and epic tussle with rival contractor Carillion which wanted to merge with Balfour’s and hang on to PB. 

"When a supplier gets to a huge scale it is far more likely to want to shape the service it offers round what it thinks will generate margin or turnover, not on what the client wants." Graham Dalton, Highways Agency

Even Hyder Consulting, which having floated in 2002 managed to avoid falling prey to larger competitors until now, is succumbing to the embrace of ARCADIS – which itself worked hard to see off rival Hyder suitor Nippon Koei.

And while no one is saying that the past merger activities have led directly to the current rash of business sales and job cuts, it does seem that strategies dreamed up before or during recession haven’t necessarily carried through to recovery.

Both in terms of sustainable growth and in creating an integrated service offering it seems that much of the early aspiration for business development and cost savings hasn’t necessarily played out.

So having put tens of thousands of employees through a summer of turmoil will the latest merger victors do better this time around? 

One of the main justifications for the new round of mergers is that size brings synergies (otherwise known as economies of scale) that will benefit clients. And for multi-national, private sector clients that could well be right.

But for public sector clients operating only in their home markets the case has still to be made. 

Highways Agency chief executive Graham Dalton voices the concerns of many.  “When a supplier gets to a huge scale it is far more likely to want to shape the service it offers round what it thinks will generate margin or turnover, not on what the client wants,” he says.

“And because that sort of business will have a large range of what seems relatively small customers in terms of percentage of turnover, it will be much less responsive and potentially less innovative.

“If consolidation results in stable businesses, better able to promote great engineering, great people and great supply chain capability, that’s good for us,” London Underground capital programmes director Miles Ashley.

“A smaller firm will put some very high quality intellect into being innovative and demonstrating that it is aligned with a client’s needs whereas bigger businesses can be slow to change and over time there is the potential for a worse deal for the client.”

There is also a fear that the UK’s major clients may also find themselves not quite as important to the new breed of globally focussed mega-businesses as they once were.  

For example, will a giant, international organisation send its chief executive or chairman into meetings with clients to demonstrate commitment as the “traditional” mid-sized businesses do now? Perhaps yes; perhaps no; perhaps don’t know.

But those questions are some that the men and women driving the newly merged super-companies will want to answer as a priority, because they also know that the UK’s infrastructure clients do also see potential benefits from the creation of bigger consultancies.

“If consolidation results in stable businesses, better able to promote great engineering, great people and great supply chain capability, that’s good for us,” says London Underground capital programmes director Miles Ashley. 

And at a time when good human resources are in high demand, working with one supplier which a client knows has the ability to respond to programme changes or new requirements by bringing in the necessary people in terms of numbers or knowledge would be a big advantage. “That’s what scale ought to get us,” Dalton says.

So right now all eyes will be on the men in the hot seats of the latest rash of mergers. And arguable with AECOM’s Steve Morriss taking on the role of leading what will be an 18,000 strong AECOM Europe Middle East and Africa operation post URS merger, that puts him in the hottest seat of all when it comes to building client confidence.

How he and his new management team manages the size and power in favour of local public sector client satisfaction could be a model others will want to emulate. And given the size of the challenges being set by 21st century public clients, it is unlikely that scaled up business-as-usual will be the solution. A more compelling offer can – and surely must – now be put on the table. 

So across the public and private infrastructure sector we should expect that, to generate the necessary synergies and savings, the on-going trend of business consolidation will lead to some exciting and game changing shifts in procurement and delivery. JW

Watch out for 16 October

• Completion date for the AECOM/URS merger and ARCADIS/Hyder is 16 October. WSP/PB will follow before Christmas it is anticipated.
• US consultant AECOM is paying £3.7bn for URS and the move will create a business of 95,000 staff with annual revenues of £11.7bn and pretax profits of £800,000.
• Dutch consultancy ARCADIS’ offer for Hyder of £7.50 a share puts the value of the UK consultancy at £296M.  The combined business will employ 26,000.
• Canadian firm WSP is currently on track to buy Parsons Brinckerhoff from Balfour Beatty for £820M creating a combined business of  31,000 employees with net revenues of £1.4bn.