WSP Prey or Predator?

Quality, Consequences and the Construction Industrial Complex (part 225).

What is the 2020 business outlook for AEC firms?

It is only January and the market is sending some interesting signals. On January 13th Bloomberg reported that WSP had “approached” AECOM about a deal.

Anecdotally, I know that WSP have been laying off a lot of people in Canada and USA. This could be a new CEO cleaning house, a survival tactic or both. People I know inside WSP are looking to leave before they are pushed. People I know at AECOM note similar house cleaning. It looks like both firms are “cutting fat” to survive in soft market conditions.

I travel to several countries on project work and I see soft market conditions everywhere I go. I would summarize the AEC market in 2020 as:

1. Too many firms chasing not enough work.
2. AEC firms are forced to take on high risks at low margins.
3. Even in a soft market competence and skilled people are hard to find, let alone pay for.

Comparing WSP and AECOM

Source: Yahoo Finance Jan 30th, 2020

Source: Yahoo Finance Jan 30th, 2020

Based on the above data I would say WSP is financially stronger and AECOM are the “prey”. However financial data like this are backward looking indicators.

BTW, those profit margins are horrible compared to other industries. When I was a partner in an MEP design firm “back in the day” we thought we were failing if we did not make over 10% net profit each year. Profit levels like that are now rare in the AEC space.

In the 2020 soft market context WSP and AECOM coming together makes sense because:

1. AECOM is more dominant in the USA and has good access to industrial military complex projects world wide.
2. AECOM is vertically integrated and from my experience they are doing well on Project Management work which feeds their other services.
3. WSP has multiple specialisms in house that compliment AECOM’s services.
4. There will for sure, be cost saving synergies.
5. It is a good way to get rid of the activist investors targeting AECOM.

In my experience AEC firms are bought and not sold i.e. they rarely sell at full valuation and end up selling or merging to survive in poor market conditions. So what is going on at WSP & AECOM?

I believe this is a market signal telling us that to survive you need to be a big firm with economies of scale and access to large government and infrastructure projects. IMHO, WSP & AECOM would come together to ensure their survival, it does not matter who is buying who.

In the whole market context, I see a “Premier League” of AEC firms emerging. To survive and prosper today a firm needs to be;

1. big, say over 5,000 employees,
2. well funded i.e. access to capital markets,
3. well run i.e. consistency in delivery and quality.

The times, they are a-changing……

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#224 – How to Change the Property Industry

#174 – Ductwork is Difficult?

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