When WS Atkins confirmed last week that it was negotiating a takeover of construction manager Bovis, the consultant's share price plummeted from 602p to 495p in two days.
City analysts were concerned about the deal, which would see Atkins' 366M high margin engineering consultancy and facilities management business com- bine with Bovis' respected but low margin operation. Last year Bovis made an operating profit of 16.3M on turnover of 1.8bn - a margin of just under 1%, while Atkins produced an operating profit of 24M on turnover of 365M - a margin of 6.5%.
Not surprisingly, news of the deal wrong-footed investors. Atkins' profits have grown largely from its inroads into the high margin facilities management sector. 'Atkins has been positioning itself as a facilities management company, and away from its exposure to construction,' says BT Alex Brown analyst Paul Morlam. 'The tie up with Bovis takes it back to its roots.'
Atkins chief executive Mike Jeffries argues that profit margins are not the only measure of a company's performance. He points out that Bovis' 5,300 staff make more profit per head than Atkins' 8,412 strong workforce. This suggests there is scope to cross-fertilise the two corporate cultures to produce a sharper, more efficient and more profitable organisation post takeover.
In any case, Bovis under the chairmanship of Sir Frank Lampl has probaly been delivering higher margins, as the firm's turnover reflects the value of projects it is involved in rather than the fees it earns.
Jeffries' main challenge will be to grow the new business to earn back Bovis' 330M plus price tag. With little disciplinary or geographical overlap between the two businesses, the scope for cost cutting will be limited.
But Jeffries sees this as just one benefit from combining the two businesses. For him the near perfect geographical and disciplinary fit will fill gaps in Atkins' skill base which is strong on design and facilities management, but weak on construction management.
The deal will bring together the Atkins design teams that have worked on projects, like the Chicago Beach development in Dubai and the privately financed Parc Prison in Bridgend, with Bovis' management experts from complex projects as diverse as Canary Wharf, Waterloo International station and Eurodisneyland.
Abroad, the two companies work in different countries - Atkins is strong in Hong Kong and the Pacific Rim while Bovis is big in the US and India.
Atkins will also be able to merge its client list - which includes 75 of the FTSE 100 quoted companies - with that of Bovis. The construction manager counts blue chips like Philip Morris, BP and Marks & Spencer among its regular customers.
Jeffries expects profit growth to come from turning the two companies into a one stop shop construction management consultancy, able to offer a cradle to grave design, construction management and facilities management service to clients.
'We are experiencing increasing client demand for integrated solutions,' says Jeffries. This is especially true on Private Finance Initiative contracts where private concession companies are expected to design, build, finance and operate infrastructure. PFI is spreading across the world, and at the same time, large private sector clients are increasingly looking for construction firms who can deliver and manage new facilities.
But developing the new business will not be easy. Established world players like Bechtel are already well placed to respond to demands for integrated construction services and will no doubt make life tough for newcomers. Others have spotted the potential too. In the US, Jacobs Engineering is in talks with construction manager Sverdrup Corp to create 2bn turnover group with similar aims. Laing and Hyder have formed a joint venture to bid for PFI projects, combining Hyder's infrastructure management and civils design expertise with Laing's contracting experience (NCE 10 September).
Another challenge will be to weld together the different cultures of two large organisations after what will be Atkins' biggest acquisition to date. Jeffries does not see this as a problem. He says that the issues are similar to those faced on a smaller scale by Atkins when it took over the Property Services Agency's Building Management North West Midlands and Wales businesses in 1993, which was just over half as big as Atkins at the time.
Jeffries suggests the new organisation could also have the balance sheet strength to compete for turnkey and PFI work alone, without having to form consortia of disparate groups of companies.
Reconciling the agendas of the individual shareholders can be difficult, a problem the new Atkins/Bovis group will avoid with its one stop shop approach. Overheads could also be reduced, as individual consortium members tend to have their own lawyers and bankers on hand to advise during contract negotiations.
But the City is still unconvinced of the value of the Bovis acquisition. Even though Atkins shares recovered some of the losses they suffered after takeover talks were announced, they have so far failed to bounce back completely. This suggests analysts are not sure the deal will give improved profitability.
Atkins' competitors are equally unconvinced by its claims that the new firm would be able to bid for large projects alone. Some believe it would still lack the financial muscle to compete for some of the larger infrastructure projects without linking up with other players. Roads consortium Connect, of which Atkins is a member, still needed to combine the financial strengths of giants like BICC and Philipp Holzmann before banks would provide it with project finance.
And in fact it seems unlikely that the new group would want to bid for large PFI type projects alone. Most companies involved in these projects form consortia so they can share risk with others - even if they could do the job on their own.
There is perhaps more scope for independent bids on smaller projects. Atkins has for some time been bidding for PFI schools but is understood to have been hampered by the lack of a contracting partner.
Consultants like Halcrow and Mott MacDonald are sceptical about the merits of the one stop shop concept. They prefer looser arrangements with contractors on an ad hoc basis, as this preserves their independence as consulting engineers.
But Atkins' competitors also see the opportunities resulting from the tie up and recognise that the new company will be one of Britain's few global construction companies. And some are even hoping that the giant's presence abroad could open up new opportunities for them.