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Market forces gather strength

Business - Scott Wilson and Owen Williams have sacrificed private ownership for growth, but why is size so important for consulting engineers? Andrew Bolton investigates.

RECENT YEARS have seen the number of top 20 consultants in private ownership diminish rapidly. Of the top 25, most are now publicly traded on the Stock Exchange or owned by larger, usually US, consulting giants.

Last week two more firms joined the ranks of those who have relinquished private ownership. Scott Wilson announced plans to float while Owen Williams succumbed to a takeover bid from Amey.

Both firms have ultimately made the decision because they feel they must grow to survive.

Executives at most major consultants agree that growth is vital because they need to keep up with competitors of similar size. Among the large multidisciplinary firms the view is that size gives clients reassurance about resource levels and ability to deliver on contracts.

When you are bidding for major multi-disciplinary projects, clients are looking for strength in breadth and depth, ' says Halcrow chief executive Peter Gammie.

As a top 10 firm, Scott Wilson's immediate competitors are all multidisciplinary firms which have expanded rapidly over the last few years, through merger, organic growth or both.

Its stockmarket quotation will make it easier to raise money through share issues. It will also enable the consultant to create new shares which can be mixed with cash as part of takeover deals. Rapid access to cash via the stockmarket is vital as many of the firm's competitors are already stockmarket listed and there is a strong belief that the consultancy sector is ripe for more consolidation.

'Scott Wilson as a private company is unlikely to be a consolidator as it would be competing against equity funded companies to fund acquisitions, ' says Michael Parkinson, an analyst at the firm's stockbroker Brewin Dolphin.

From Owen Williams' point of view the decision to sell was difficult and ultimately down to chairman and biggest shareholder Richard Williams. He wanted to expand the business because he was conscious that as a £40M a year turnover operation, Owen Williams was some way behind its increasingly dominant larger competitors.

'If you're not big enough, you just don't get to the table, ' he says. Williams had sought to make acquisitions to speed growth, but suitable opportunities failed to materialise. In the end, accepting Amey's offer was the next best thing, adding to Amey's Infrastructure Services operation to bring the new business up to the size of top 10 consultant Mouchel Parkman - one of Owen Williams' competitors.

The acquisition also keeps Amey and Owen Williams in tune with the Highways Agency's desire to award large multidisciplinary framework deals to individual companies, rather than joint ventures. Both firms are also involved with the rail sector and there is a feeling that Network Rail could move towards procuring its maintenance operations in a similar way to the Highways Agency.

Meanwhile top 10 firms Mott MacDonald, Halcrow and Arup remain stubbornly independent.

They have all grown strongly in recent years, securing their positions at the top of the UK consultants rankings without resorting to stockmarket finance or sale.

Mott MacDonald and Halcrow have grown through a mix of acquisition and organic expansion. Mott has funded its acquisitions largely through a pool of equity cash invested in the business by 1,000 of its employee shareholders. The firm currently has equity reserves of around £90M, half of which have come directly from staff.

Halcrow's staff have put less money into the business - only around £5M, so its expansion has been funded through its own financial reserves and bank borrowings.

And Gammie says seeking a stockmarket quotation is not without its risks and costs. He points out that the demands of investors and the need to publish regular financial information takes up an enormous amountof management time.

Mott MacDonald business development director Kevin Stovall agrees. 'We believe that not having to be accountable to analysts and investors every six months means that we think we have more freedom to take a long term view of things, ' he says.

Arup's wth been different. It makes few if any acquisitions, but has managed to expand as a result of a distinctive approach to design and an entrepreneurial approach to the development of projects like the Channel Tunnel Rail Link. 'I don't think growth is a target, ' chairman Terry Hill told NCE in 2004. 'Size is an outcome. If we are good, people will want more of us.'

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