Aecom’s acquisition of URS looks set to not only to redefine what a large UK consultancy looks like but also raises the possibility that it will trigger more shape shifting of the industry to the point that it will begin to mimic the likes of accountancy’s Big Four firms.
The surprise announcement earlier this month saw Aecom reveal its intention to buy its competitor URS for around $4bn (£2.3bn), equating to a total acquisition value of £3.5bn when the latter’s debt is included. In the process it forms a giant of a firm with more than 95,000 employees in 150 countries.
The combined revenues of Aecom and URS totalled over £11bn in 2013. Looking at the figures from NCE’s Consultants File, Atkins with revenues of £1.76bn and Arup with revenues of £950M will now be dwarfed.
“These firms are now looking decidedly medium-sized,” said Manchester Business School professor of innovation management and strategy Bruce Tether, who also conducts NCE’s annual analysis of the figures provided in the File. “Some, like Arup and Mott MacDonald are protected in part by their [employee] ownership, but in other cases, former predators now look increasingly like prey.”
A process of consolidation has been going on in engineering consultancy in fits and starts for some time, Tether added.
“When NCE first published its Consultants File back in 1979, a firm with 2,000 people was big - very big.
“Back then there was a ‘big seven’, but none would now be considered big - each had 1,000 to 2,000 people or so,” he added.
Since then there has been a whole series of mergers and acquisitions, first with British firms buying up other British firms, and later with foreign firms buying up British firms.
Mott MacDonald was created by a merger of Mott, Hay and Anderson and S MacDonald in 1989; Atkins has grown in large part through a series of acquisitions; and Aecom itself entered the UK by buying Maunsell and merging it with Oscar Faber to form its Faber Maunsell subsidiary.
Lessons from other sectors
What can consultants learn from consolidation in other industries?
A dominant elite - or oligopoly - is not always healthy for an industry or its clients.
Accountancy is one example. The Big Four - Deloitte, Ernst & Young, PW C, and KPMG - have achieved their dominance through mergers and acquisitions which date back a century or more, riding on the back of the expansion of UK and American multinationals.
Today they audit over 90% of FTSE350 companies, and between them have global revenues of £66bn.
They used to be the Big Five - but in 2002, Arthur Andersen collapsed. It had been employed by Enron as a consultant, as well as an auditor, and this conflict of interest was central to the energy firm’s high-profile bankruptcy.
The remaining four auditing firms would find themselves under the spotlight after the banking crisis of 2008. The House of Lords ordered a Competition Commission investigation to establish whether market dominance and cosy relationships at board level had led to complacency and ultimately a failure to pick up on the reckless practices of the banks.
The commission was highly critical of the Big Four, saying they “focus on satisfying management rather than shareholders’ needs”, and observing that a third of FTSE companies had used the same auditor for 20 years. It also expressed concern at the gap between them and the mid-tier firms, and barriers to entry and expansion for smaller auditors.
But the commission’s report proved toothless. It opted against ordering the break-up of the firms. A proposal that companies must make a mandatory change of auditor every five years was blocked by Big Four lobbying.
Another sector where consolidation has been rife is pharmaceuticals. Trade body the Pharmaceutical Research & Manufacturing Association was made up of 42 companies in 1988, and now comprises just 11.
Recently, the proposed Pfizer takeover of AstraZeneca drew criticism because of the potential for job cuts among its UK research and development staff.
Pfizer’s previous three acquisitions were followed by 60,000 job losses.
Business magazine “Forbes” observed that despite “excellent business reasons” driving pharmaceutical consolidations, ultimately they “had resulted in fewer scientists… trying to discover new drugs”.
Pfizer withdrew its bid for AstraZeneca, but with prime minister David Cameron saying he was “neutral”, it seems unlikely the Government would have blocked the takeover.
The lesson seems to be that, apart from a bit of crowd-pleasing sabre-rattling, regulators rarely intervene to protect competition in an industry. The dominant elite will do what they want; the losers are their competitors, and their clients.
In the past four years URS has bought Scott Wilson, Canadian firm Genivar has grasped WSP and CH2M Hill has purchased Halcrow.
“What this has done is made the industry more bimodal - essentially we have the big players and a lot of (specialist) minnows, with fewer and fewer firms in between,” pointed out Tether.
But Aecom’s URS acquisition is particularly significant for Tether who said it redefines what is large, and what is medium sized.
And it is unusual when most industries, by contrast, are deconsolidating - firms are typically getting smaller, not larger, he adds.
The exceptions are the all too familiar worlds of pharmaceuticals and accountancy, where global giants dominate (see box).
The skyrocketing cost of drug research forced consolidation in the former, but what happened in the world of accountancy is where there are the closest parallels to engineering consultancy, said Tether.
It will not have escaped anyone’s attention that accountancy has consolidated into a Big Four - Deloitte, KPMG, Ernst & Young and PWC - with myriad smaller players. There are few substantial mid-sized firms.
The Big Four’s dominance grew out of economies of scale and client’s desire to have global accountancy support from the same provider.
It is possible that, globally at least, a client’s desire for a full service, one stop shop in engineering may be causing the trend.
But this is possibly at odds locally with the news in May that struggling contractor Balfour Beatty had decided to put consultant Parsons Brinckerhoff up for sale because of client dislike for such a model (NCE 15 May).
With the increasing globalisation, and the emergence of a few dominant firms, Tether said it was vital for the UK to secure a home for one or more of the big players - just as it is home to two of the big pharmaceutical companies - Glaxo and Astra Zeneca - and two of the big accountancy firms - PWC and Ernst & Young.
This presence is vital to these firms’ efforts to grasp opportunities in the UK and for UK plc to secure foreign earnings. “We desperately need foreign earnings to pay for our terrible balance of payments situation,” says Tether.
Tether said he expected to see UK consultants respond quickly.
“I would expect to see a series of mergers and takeovers,” says Tether. “Size gives a sense of security, even if it doesn’t always lead to superior performance.
He said he was unsurprised by the fact that Atkins had already refused to rule out a bid for Parsons Brinckerhoff (NCE 19 June).
“In fact, I’d be surprised if Atkins didn’t [bid] given that Parsons Brinckerhoff is up for sale,” he said. “The question is how much would it pay, and will it pay more now, if it fears falling further behind the likes of Aecom and URS
Other interesting possible mergers would be between, say, Arup and Mott MacDonald,” suggested Tether. “These two are increasingly mid-sized firms which have a similar ethos (and ownership structure), although Arup doesn’t have a history of merging with others.
“And I do think it will be difficult for mid-sized firms such as Hyder to avoid getting swept up in all of this.”