From the Field: Civil engineering talent is in high demand (2024)

By Nicole Schmidt and Andrew Silver

In fields like civil and structural engineering, where a firm’s value is derived from the talent and expertise of the people it employs, growth depends on continual access to a steady stream of high-quality individuals. In the current economy, with high demand for talent, we are seeing increased merger and acquisition activity, driven by growing firms seeking to acquire the people they need to fulfill client demand for their services. And they are willing to pay a premium for it.

Middle market companies (any company valued at $500 million or less, which includes many civil and structural engineering firms) that performed well through the pandemic and have stable pipelines of business despite current economic uncertainty are attractive to potential buyers.

Our firm specializes in middle market mergers and acquisitions and has been tracking some interesting trends.

In one recent acquisition, Atlas Technical Consultant Inc., a 3,600-employee engineering firm that had previously been valued at a little more than $200,000 per employee, was sold to GI Partnersat a valuation ofmore than $270,000 per employee. Another firm, IBI Group, was acquired last year by Arcadisfor nearly $250,000 per employee. These per employee valuations, arrived at by dividing total purchase price by the number of employees, compare very favorably with sales that took place just a few years ago. The Berger Group Holdings Inc. (The Louis Berger Group), for example, was acquired five years ago by WSPfor a price equal to $80,000 per employee — which was about average for that time period.

Growing companies that can’t find enough professionals to support their growth are essentially seeking to obtain those employees as a large group — in the form of an entire firm that they acquire and absorb.

While acquisition of talent has emerged as an important factor in professional services and consulting industries like civil and structural engineering, it is not the only factor. Some see opportunities through deployment of technology at legacy businesses that can improve efficiency and margins. Others are interested in synergies in geography or capabilities, with a merger offering an expanded physical footprint and the ability to combine or broaden practice areas, adding, for example, a design group to a traditional construction practice.

There has been talk among commentators about the impact that rising interest rates could have on valuations and on the merger and acquisitions market generally, but the reality is not bearing out those concerns. We’re seeing a significant amount of flexibility from baby boomer sellers, ready to exit and seeing opportunity in a market that is holding up and continuing to trade at healthy multiples for knowledge-based services companies. Also, by historical standards, current interest rates are still relatively moderate. And there is general consensus that we are nearing the end of interest rate hikes by the Federal Reserve.

Also, there is a good chance that private equity firms, many of which have significant stockpiles of investment capital waiting to be deployed, are going to be far more active than they’ve been in the past few years — providing a major source of additional capital looking for investment opportunities.

Demand for strong companies with valuable talent is always high. With companies across the board competing for workers, the greatest scarcity lies in those professions that require the most professional skill.

And the greatest deal of activity we’re seeing is among firms of middle market size. Others are anticipating similar trends, as reported in a survey by Citizens Financial Group, which also found broad agreement among middle market companies and private equity firms that valuations would remain stable or increase in 2023 — with management teams attributing their interest in acquisitions to a need to drive growth.

That sentiment is well-founded and likely to add fuel to the accelerating consolidation and growth of strong middle market companies in fields like civil and structural engineering in the coming year. Owners who have contemplated selling in the past should be cognizant of the fact that, in the present environment, they could be attractive targets for acquisition.

Nicole Schmidt is a managing partner and Andrew Silver a managing director of Oberon Securities.

This article first appeared on Civil Engineering Online.