What made for another strong year for the MEP Giants?

Merger and acquisition (M&A) insights

• While down slightly, the 2023 MEP Giants had a record-setting year for mergers and acquisitions.
• External influences like interest rates may temper MEP Giants’ M&A this year, however that remains to be seen.

With a continued focus on and investment in sustainability and energy efficiency, Consulting-Specifying Engineer’s 2023 MEP Giants’ deal-making continued in 2022 at levels not seen before 2021. As a group, the largest mechanical, electrical, plumbing (MEP) and fire protection engineering firms completed 65 transactions in 2022 with more than one-quarter (26%) of the MEP Giants completing at least one acquisition.

This pace of deal-making is down slightly after 2021’s record-setting year of 70 deals closed by the MEP Giants, but remains elevated compared to prior years. As companies seek to expand their capabilities, tap into new markets and gain a competitive edge in the ever-changing business landscape, the demand for MEP firms and their respective innovative and sustainable solutions will continue to drive merger and acquisition (M&A) activity.

Figure 1: The number of deals made by the 2023 MEP Giants firms in 2022 was slightly down from the merger and acquisition activity by the group in 2021, with 2022 seeing five less transactions. Courtesy: Morrissey Goodale

Elevated M&A activity driven by public buyers

Fueled in part by publicly traded engineering firms’ access to capital; private equity’s increasing appetite in the architecture, engineering (AE) and environmental industry; a strong economy with ample funding and need for services; and a fierce war for talent, interest in and valuations for engineering firms remain high.

In 2022, 36% of all transactions in the AE and environmental industry were made by either a private equity-backed or publicly traded engineering firm, up from 34% the prior year. Looking at the 2023 MEP Giants, publicly traded firms accounted for 49% of deals consummated in 2022, while their private equity-backed and employee-owned counterparts were neck-and-neck at 26% and 25% of all MEP Giants’ acquisitions, respectively.

Why does this trend play out in the data year-over-year? First, publicly traded firms generally have even easier access to capital than private equity firms — that’s why a firm goes public. Second, public buyers typically self-finance transactions without a need to borrow money or solicit third-party lenders or other stakeholders beyond the board of directors. Third, Morrissey Goodale data indicates that publicly traded firms, all else equal, pay more for deals than even private equity-backed firms, thus making offers more attractive to sellers.

Figure 2: In 2022, 26% of the MEP Giants reported a transaction, slightly lower number compared to those who reported a transaction in the prior year. Courtesy: Morrissey Goodale

M&A activity by MEP Giants mimics overall industry

Last year was yet another record-breaking year for M&A activity in the AE and environmental industry with 715 deals globally. This is the second year in a row the industry saw a new high-water mark for consolidation and the seventh year in the last nine that the industry concluded the year with a record number of deals.

Bringing things back stateside, the domestic M&A activity within the AE and environmental industry mirrors what is playing out on the global stage. In 2022, U.S. industry M&A activity increased by more than 7% to 476 transactions. For the first time in five years, U.S. industry M&A activity slowed during the COVID-19 pandemic in 2020 as the world was faced with lockdowns and supply chain crises. Despite these challenges, the domestic M&A saw a decline in deal-making of just 1% from 2019’s record of 324 transactions, signifying the strength and resilience of the industry.

The 2023 MEP Giants have been on an acquisition spree for the better part of a decade and 2022 was no exception. Over the past five years, 26% of MEP Giants on average report making at least one acquisition. The slowdown in deal-making in 2020 in the broader AE and environmental industry did impact the MEP Giants as the number of transactions completed fell by 37% to just 33 from 52 the prior year.

In years since, the MEP Giants resumed their hunt for acquisitions completing 70 and 65 transactions in 2021 and 2022, respectively. As for the where the MEP Giants made deals — California and Texas were tied for the No. 1 spot for where the industry leaders made deals, both states accounting for nine deals each in 2022. That was followed by Florida with five deals. These trends mimicked the larger industry as all three of these states tallied over 50 deals each by the larger industry in 2022.

Figure 3: Global merger and acquisition activity in the engineering, architecture and environmental industry recognized a record-setting number of transactions in 2022. Courtesy: Morrissey Goodale

Usual cast of characters

The most prolific acquirers of the MEP Giants in 2022 were as follows: IMEG (Rock Island, Illinois; nine deals), WSP (Montreal; nine deals), Bowman (Reston, Virginia; eight deals), Salas O’Brien (Santa Ana, California; seven deals) and NV5 (Hollywood, Florida; six deals). This looked very similar to the most frequent buyers in the 2021 as NV5 accounted for eight deals followed by Bowman (seven deals), Stantec (Edmonton, Alberta) (six deals), Salas O’Brien (six deals) and WSP (five deals).

IMEG was the firm that stepped up its M&A game as the firm accounted for nine deals in 2022, up from three deals in 2021. Other MEP Giants that made more than one deal in 2022 were Tetra Tech (Pasadena, California), Stantec, Jensen Hughes (Baltimore), Stanley Consultants (Muscatine, Iowa), CMTA (Louisville, Kentucky), RTM Engineering Consultants (Schaumburg, Illinois) and Johnson, Mirmiran & Thompson (Hunt Valley, Maryland).

In 2023, we expect MEP M&A activity to remain strong as the MEP Giants seek growth opportunities. That said, we expect the number of transactions to remain flat across the AE and environmental industry given the turmoil in the global economy. Rising interest rates across the globe may tip the scales further to publicly traded buyers as preferred partners as the cost of capital continues to climb and valuations from private equity-backed firms decline due to the increased cost of debt.

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