Consultants File 2006 - Overview
- Published: 23 August 2007 14:48
- Last Updated: 30 August 2007 17:25
All together now
Consolidation is the watchword for this year, with some of the bigger firms expected to merge or be bought out. But when, and how?
Buoyant demand for consultancy work slowed the pace of consolidation among major consultants last year, judging from the evidence of the rankings in this edition of NCE’s Consultants File.
The last time a Top 10 consultant changed hands was two years ago when Babtie was taken over by US consulting giant Jacobs. Since then the Americans have stayed away from the UK. At home, the bigger domestic firms have contented themselves with smaller acquisitions to plug gaps in their multi-disciplinary skill bases, or have shopped overseas.
This explains why there are no significant changes in position among the Top 10 consultants in this year’s file. With all the Top 10 reporting fee increases of between £10M and £30M, the need to buy to maintain size and meet growth targets has perhaps been less urgent.
Total fees earned by UK consulting firms in 2005 increased by £200M, rising from £5.9bn to £6.12bn, roughly the same amount as last year. The strongest growth was in roads where total fees earned by the 10 biggest firms in the sector increased from £594.5M last year to £693.7M. The building structures market was also strong, with fees earned by the top 10 firms increasing from £738M to £870.7M. And water consultants had a good year, with the top 10 earning fees of £363.9M, up from £317.7M.
Overseas, the booming Middle East markets continue to boost consultants’ foreign earnings. Fees earned per head in the region are reported to be lower than in other parts of the world, but companies like Hyder say that low fees can be offset against low overheads to produce reasonable profits. Chief executive Tim Wade points out that much of Hyder’s work in the region is in site supervision, where its engineers are located in the client’s office, usually at the client’s expense.
But although there is plenty of work to go round, consolidation through mergers and acquisitions remains at the back of everyone’s mind, if only because some major clients prefer to deal with major multi-disciplinary suppliers.
“Our view is that there is a consolidation of the supply chain among all the big clients,” says Mouchel Parkman chief executive Richard Cuthbert. They want to deal with increasingly small numbers of suppliers who can offer a multi-disciplinary, one stop shop service.
It is hard to predict where future takeover bids will come from, however. American firms look less likely to make further inroads into the UK market. Recent US-led takeovers of British consultants have had little impact on their acquisitions position in the UK and some like Black & Veatch have had to carry out major reorganisations when takeovers have failed to deliver.
But there are definite signs that more consolidation is on the cards if only because major consultants are reporting increased approaches from prospective merger partners and from firms looking for buyers. Top 10 consultant Scott Wilson has also declared its intention to make acquisitions following its recent Stock Market flotation. And major consultants worry that if they slip down the rankings, they will start to disappear from tender lists.
Amey’s recent takeover of Owen Williams also suggests that takeover bids for consultants could start coming from contractors or facilities management firms. Perhaps the increasing use of multi-disciplinary highway maintenance contracts and design and build will tempt contractors to take consultancy work in-house.
Perhaps one reason for the current slow down in consolidation is that mergers between the major UK consultants would bring little benefit in terms of new clients, new skills or geographical presence. “I suspect there will be more cross border consolidation,” says Halcrow chief executive Peter Gammie, whose firm has looked overseas for its most recent purchases.
In 2004 his company bought Canadian structures specialist Yolles, adding new skills and north American presence to its traditional civils business.
Scott Wilson is pursuing the same line, recently buying leading Polish consultant Transprojekt Poznan.
Gammie’s view is not shared by all of his competitors. “We are open minded about acquisitions in the UK and Europe,” says WSP chief executive Chris Cole, pointing out that targets can be of any size. “We made at least seven acquisitions last year and expect to do at least that again this year,” he says.
Hyder’s Wade is more cautious, seeing little value in merging just to boost size. “I am not going to triple our business by buying 30% of our turnover (through acquisition),” he says. His view is born out by the firm’s preference for smaller niche acquisitions, often overseas.
| Major consultants looking to buy firms outside the Top 20 will do little to boost their rankings because such purchases would be relatively small and would only really add value through the specialist skills acquired. The larger firms just outside the Top 20 also have complex ownership structures which are hard to break down, like Buro Happold; are family owned like Pell Frischmann; or are owned by larger foreign parents like Carl Bro.
Owen Williams had been a prime acquisition candidate, having transformed itself from a difficult to take over partnership into an easier to buy limited company while stabilising its balance sheet. This explains why it was snapped up by Amey at the beginning of this year. But increasing skill shortages resulting from the buoyancy of the market mean that some firms will also look for acquisitions as a way of increasing their staff. “If I had to say what is the number one issue for us, it will be access to quality staff,” says Halcrow’s Gammie. “Larger groupings can get to resources more effectively than smaller organisations.” |
Large businesses have sizeable balance sheets and can afford to take considerably more risk, as they tend to have a wide spread of projects. These large players also have more buying power for services such as insurance and can obtain lower cost cover. Their strong balance sheets also help them secure more and lower cost funding, putting them in a better position to pitch for business than the smaller engineering consultancies. But there are a number of solutions for smaller or mid-sized consultancies. A method that has worked well for engineering consultants, is selective invoice discounting. Selective invoice discounting can be described as short-term finance by using the bank to purchase selected receivables from the business at an agreed discount. This service has been specially developed for businesses that supply goods and services to large firms or entities such as government bodies. It is of particular interest for the engineering consultancy industry where numerous companies depend on sub-contracts from larger companies or from public and quasi-public companies. This service can also cover both international and domestic invoices. It is important to note that the guide for the minimum sized deal, for selective invoice discounting, is £100,000. The benefit of selective invoice discounting for consultancies is to provide extended credit to selected buyers, which can be used as a sales tool at the negotiating table. In addition, selective invoice discounting will also improve cash flows while the existing borrowing levels remain unaffected. And it is non-recourse. Using selective discounting as a method of funding when working with larger businesses can be cheaper than some other financing options and can also prove essential in securing cash flows in large transactions. Take, for example, a medium sized engineering consultancy which has secured a major contract with a blue chip, that is unwilling to pay any sums due until June 2007. The smaller consultancy, unable to fund this type of transaction, can ask the bank for a solution. Using the credit risk of the blue chip company, it is possible for a bank to purchase the invoices from the blue chip. The bank can then pay the consultant on the client’s behalf. In doing so, the bank is effectively lending money to the consultant with repayment coming on payment of the invoice from a much larger firm with a lower credit risk. This means it can charge the firm a relatively low interest rate. This will provide funding to the smaller consultancy and enable it to enter safely into a contract far larger than it would typically be able to consider. By borrowing against a larger business’ credit risk, the engineering consultancy does not consume its own borrowing capacity, and it is done against the much lower credit risk of a larger business, which should mean lower interest rates. Forfaiting can be described as the bank’s purchase of agreed trade debts or other receivables that have been agreed with the business at an agreed discount. This process enables the small to mid-sized business to offer extended credit to its buyers and assists in improving the business’s competitive position. Forfaiting is financing organised against a Bill of Exchange. Forfaiting is available to any business that sells on credit term. It can be of particular benefit to businesses that export services, to secure deals, which might not otherwise be possible. A flexible, efficient, non-recourse form of finance and forfaiting is off-balance sheet. Cash is provided shortly after shipment and up to 100% finance is available in a wide range of currencies. The minimum deal size guide for forfaiting again amounts to £100,000. The benefits of forfaiting include:
Essentially, forfaiting allows small to mid-sized businesses to compete on equal terms with larger suppliers. Financial instruments such as selective invoice discounting and forfaiting can significantly enhance the competitive advantage of a small or medium-sized engineering consultancy. Capitalising on this opportunity by adopting these products should level the playing field between the financial capabilities of a small to medium-sized consultancy. By David McHattie, Barclays relationship director for the engineering and consultancy sectors. |
