Y2K wrap-up

The trend continues - as in the last several years, the year 2000 saw substantial merger and acquisition activity in the environmental industry. Although the multi-billion dollar "front page news" type transactions declined a bit, consolidation activity continued at a rapid pace.

Some of the bigger consolidators - specifically IT and URS - were silent this year, wrestling with the challenges of integrating earlier acquisitions, and struggling to cope with the debt taken from financing earlier deals. Others, however, continued to press ahead. AeCom, after merging with the British firm Maunsell, picked up the well-regarded but financially troubled Metcalf and Eddy from Vivendi. Morrison Knudsen bought Raytheon's engineering business and later changed its name to the Washington Group. Earth Tech picked up some of the businesses of ICF Kaiser, as Kaiser teetered towards bankruptcy. And towards the end of the year, Montgomery Watson and Harza Engineering merged in a deal that was hailed as one of the largest ever between two employee-owned companies.

An emergent player over the past year has been MACTEC Inc. - originally a nuclear engineering firm, the firm underwent a financial restructuring in mid-1999 and acquired Environmental Science and Engineering. During 2000, MACTEC acquired the stock of publicly-traded Harding Lawson Associates - effectively "taking it private" - and later acquired government contractor Pacific Environmental Services. The overall firm now has revenues of over $325 million.

Also going private was ENSR, which, with the help of a private equity investor, financed a buy-back of the firm from German power and water utility RWE. Azurix, the troubled Enron water services company, which only went public less than 18 months ago, has also announced an intent to go private. After repeatedly failing to hit financial targets, the firm decided it couldn't play in the water service big leagues after all, and Enron recently announced that it would try to take the firm private at a fraction of the price at which public investors got in. Also attempting to revert to private ownership - via private equity financing - are two public engineering firms, which have struggled financially for years - GZA, a smallish New England based consultant, and Roy F. Weston, a larger national firm.

On a smaller scale, Tetra Tech continues to acquire smaller niche companies, this year including New England-based Rizzo Associates. TRC, riding a strong performance over the past two years, picked up Lowney Associates, strengthening its presence in Northern California. In a slightly different twist, Ecology and Environment picked up a 60 percent interest in Walsh Environmental, a small Colorado firm. Even at the local levels, growth and consolidation through merger and acquisition is taking on additional significance. Although these transactions - often valued in the range of a few million dollars or even in the hundreds of thousands - don't often attract much national attention, they take place every week.

International gains

A new trend crystallized in 2000 is an increasing move into U.S. businesses by European companies. Several foreign purchases were consummated this year, particularly by British companies. For example, England's AMEC acquired Agra Engineering, Canada's largest environmental and infrastructure engineering firm, recently announced that it was buying the environmental consulting operations of Ogden. In other English buys, PA Consulting acquired Hagler Bailly earlier this summer, and the WSP Group obtained several smallish U.S. engineering firms.

The trend towards foreign purchases is not restricted to British firms; other big European companies are also players. Skanska AB, the Swedish giant, recently paid $60 million for Baugh Enterprises, a construction management firm in the northwest, and Hochtief AG, a top German engineering and construction firm, gobbled up Turner Construction last year. The German giant Philipp Holzmann now owns several U.S. engineering entities, including J.A. Jones and Lockwood Green. Finally, a number of years ago, the Dutch engineering firm Arcadis purchased Geraghty and Miller and continues to build its presence in the Americas.

Major merger and acquisition transactions in the environmental consulting/engineering business, year 2000

Buying company

Selling company

Seller's revenues

Nominal transaction value

AeCom

Metcalf and Eddy

$160 million

n.a.

AMEC

Agra

$800 million

$320 million

AMEC

Ogden Environmental

$80 million

$17.5 million

Earth Tech

ICF Kaiser

~$150 million

n.a.

Enron

Azurix

$700 million

~$800 million

GTS Duratek

Waste Management Nuclear

$100 million

$65 million

J.A. Jones

McLaren-Hart

n.a.

n.a.

MACTEC

Harding Lawson

$168 million

$59 million

MACTEC

Pacific Environmental

$22 million

n.a.

Management Group*

GZA GeoEnvironmental

$60 million

$24 million

Management Group*

Roy F. Weston

$230 million

n.a.

Management/Private Equity

ENSR

$160 million

n.a.

Montgomery Watson

Harza

$100 million

n.a.

PA Consulting

Hagler Bailly

$180 million

$96 million

Shaw Group

Stone and Webster

$1.2 billion

$140 million

Washington Group

Raytheon Engineers

$2.7 billion

$800 million

* Pending, or not yet financed

This trend towards international transactions isn't a one-way street. U.S. firms have looked to Europe in order to grow and expand their services, too. Notable examples of west-to-east transactions include AeCom's merger with Maunsell of England earlier this year, and Black and Veatch's purchase a few years ago of Binnie, a major British construction firm. Asian firms are also beginning to dabble in the market.

What's the deal? In or Out?

Several deals this year were conducted under an atmosphere of severe financial pressure, such as the Earth Tech-Kaiser deal mentioned above. Stone and Webster also encountered severe financial problems and had to file for protection under the bankruptcy laws. The firm was ultimately sold out of bankruptcy court to the Shaw Group, a Louisiana-based pipeline and power services company hitherto unknown in the environmental industry. Environmental consultant McLaren-Hart, after going through a succession of different owners, also went into bankruptcy and its assets were recently picked up by J.A. Jones.

Sometimes the attempt to grow or solve financial challenges via merger and acquisition transactions doesn't work at all. Secor's investors put the company on the block in early 2000 and eventually announced a deal with the small public Canadian firm Conor Pacific. However, the deal later fell apart, with Secor ultimately taking itself off the market altogether.

It is interesting (and perhaps instructive) to note that there are several large industry players which have apparently made the strategic decision to sit out this current round of merger and acquisition activity. Some of them are among the larger and more successful companies in the business - for example, CH2M Hill, Bechtel and CDM are examples of larger firms who have not engaged in any kind of substantial transactions over the past few years.

In sum

Consolidation and diversification have been dominant themes in the consulting sector for the past several years. Most of these deals are ultimately driven by one of two major considerations:

  • an opportunity to buy revenue, profits or customers at a price below what it costs to develop them from scratch; and/or
  • an opportunity to quickly diversify into a strategically desirable end market or geographic region.

The first is certainly the key motivation driving the bigger domestic consolidators, while the latter factor characterizes more of the foreign players who are looking for a platform for growth and expansion.

Several other firms are known to be on the block today; for example, EA Engineering, a water resource-oriented consultant, was one of the first to go public in the 1980s. In short, the opportunity to grow in quantum leaps via acquisition is definitely still around for financially qualified firms. However, acquisition-minded companies need to remember that it is one thing to identify strategically desirable targets and cut attractive deals, while it is quite another thing to successfully integrate the operations and cultures of multiple firms and to truly merge several firms into a single and smoothly operating entity. If a proposed match doesn't make strategic sense at the outset, it is unlikely to ever make economic sense going forward. However, even for those that do make strategic sense, translating that strategy into long-term profitability is almost always a tough challenge. Many firms have demonstrated the capability to identify and have consummated deals, but few successfully accomplished long-term profitability on a consistent and thorough basis. A consistently successful integration and implementation record is the real hallmark of a prosperous acquirer (see "When the deal is done: Making the acquisition work by Steve Maxwell, Environmental Protection, October 2000, p. 84).

As long as this industry is characterized by an abundant supply of capacity, and as long as firms can grow more cheaply through acquisition than grass-roots internal means, look for the pace of mergers and acquisitions to continue at high levels. The year 2001 will undoubtedly see many more transactions.





This article appears in the January 2001 issue of Environmental Protection, Vol. 12, No. 1, page 53.

This article originally appeared in the 01/01/2001 issue of Environmental Protection.

About the Author

Sabrina Barker is a senior policy advisor with the United Nations GEMS/Water Programme and has 15 years' experience in international socioeconomic development. Her background is in international relations and biology. Currently, she is working on international relations and political economy of water resources and ecology. Barker can be reached through www.gemswater.org or by phone at (819) 953.0912.

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