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The risk business

Mergers, Knotweed, Microgeneration - Alfred McAlpine's acquisition of Enviros has highlighted the increasing trend for contractors to become involved in consultancies. But do such mergers work?

WHY DO contractors want to be consultants?

Well, the margins are better;

it allows diversification of work without taking on too much risk;

and it can increase the value of the company. So the question really seems to be why not?

Growth in consultancy services is anticipated across the industry and understandably contractors want to reap the rewards.

Just last week NCE reported that Alfred McAlpine had bought consultant Enviros for £30M.

It was a sum that generated speculation within the industry that the company had paid over the odds for the environmental consultancy. Analysts, however, have more faith in McAlpine.

Enviros will sit within the contractor's Business Services group. 'Business services is key to McAlpine's investment in the future. It has promised the market 10% growth every year and I can't imagine that it would do anything to put that at risk, ' says Numis buildings and property analyst Colette Ord.

Like fellow infrastructure provider Amec, McAlpine used to be classed as a 'construction' business by the London Stock Exchange, but changes in sector and types of work have enabled both to move into the 'support services' classification.

'Many prefer that rating because the multiples - the value the stock market gives them - are higher. Certain types of income in these businesses derive higher ratings as the quality of earnings has more visibility, such as public frameworks, ' says Ord.

When companies get it right the benefits are obvious, but integrating a traditional blue collar business with a professional services company presents its own challenges.

'The biggest risk is cultural.

Contractors have a more direct management style and it doesn't tend to go down well with consultants. Consultancies have more self-starters who don't like being directed, ' says one chief executive.

Perhaps this explains the recent reports of disharmony and staff exodus at Owen Williams, which was acquired by Amey last February (NCE February 2006). 'We have had a shed load of staff from them, ' said one source. Several other consultants have also told NCE that CVs have been landing on their desks from Owen Williams staff recently.

But Amey Infrastructure Services MD Chris Webster is not worried and says staff turnover is as expected in a heated market. 'Retention is a challenge for all of us, but we are happy with our (staff) levels.

When you have 1,200 staff you have to expect that some will move on.' Since the takeover 12 months ago an additional 100 staff have been recruited into the new organisation, Webster says.

Another reason for contractors and consultants to integrate is to better manage risk. 'Look at where things go wrong. It is usually in the gaps between contractual arrangements, ' says ICE president Quentin Leiper. Leiper is also head of sustainability at Carillion, which owns consultancy business TPS.

TPS head of engineering Frank Huidobro agrees that risk is better managed when you deliver the whole package.

'We are very prominent in the PFI market and we self-deliver everything so it is down to us to make sure that there are no 'gaps', ' he says. TPS grew by 70 staff to 400 last year and plans to be 35% larger by 2008.

So although hurdles exist, evidence suggests they are being cleared. Balfour Beatty Management is growing fast after being set up just four years ago. Its parent Balfour Beatty is looking for another consultant to boost its professional services arm with Mouchel Parkman understood to be one of the main targets.

With such acquisitions occurring regularly, integration seems to be the new partnering driving change in the construction industry and small and medium consultants are the fuel.

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