黑洞社区

The last weekend of June 2010 will prove to be a pivotal moment in the history of UK consultancy.

In San Francisco, US giant URS was putting the finishing touches to a 拢161m bid for Scott Wilson. In London, the 188 equity partners of EC Harris were weighing up a proposal to float the business and raise a war chest of up to 拢350m. The green light came after what chief executive Philip Youell described as a 鈥渓ively debate鈥� over lunch on the Saturday.

It effectively stuck two fingers up to the American suitors that had been pursuing his firm for months.

Three days later URS won a tug-of-war with North American rival CH2M Hill for Scott Wilson with a knockout bid of 拢223m, and the fate of both UK companies was sealed.

What both situations have in common is the scramble for growth in a world of rapidly inflating project sizes, global clients and bundled contracts. But the differences couldn鈥檛 be starker: EC Harris has chosen the path of independence, while Scott Wilson will be catapulted into the big time, albeit as a small cog in a 拢6bn-turnover machine.

So, as any sensible consultant wonders 鈥渨here next?鈥�, 黑洞社区 examines the merits and pitfalls of both routes and asks the now famous question: deal or no deal?

When to sell

Last Tuesday morning, Youell shifted uncomfortably in his chair when asked if he had considered a trade sale. As a former banker he was prudent enough not to rule out any option, but said EC Harris had never 鈥渉awked itself around for sale鈥�.

Pointing to the convergence point of a Venn diagram in his glass-panelled King鈥檚 Cross office, he explained: 鈥淵ou have real estate, engineering and construction and business support. We want to be the market leader as a built asset consultant in the area where all three converge, which is the niche we鈥檝e carved for ourselves.鈥�

The terminology may be vague but the message is clear: 鈥淲e鈥檙e not for sale.鈥� As Youell says, a basic pitfall of going down the Scott Wilson route is a clash of cultures that can ruffle clients鈥� feathers. 鈥淎merican firms approach customers with answers in quite a dogmatic way. In Europe the approach is to influence and collaborate with the supply chain to deliver an outcome.鈥�

The widespread perception of US firms such as Aecom and Jacobs - which are currently the most hungry for acquisitions in the UK - is of faceless leviathans, but those who have been subsumed by them toe a more pragmatic line.

One employee of a firm bought by Aecom in the last two years said: 鈥淭he huge plus is the access to new clients. You are suddenly on a much bigger global playing field.鈥�

His fears of being 鈥渃hewed up and spat out the other end鈥� were not realised but he says frequent reporting into the US means there is 鈥渁 lot of pressure on hitting our numbers鈥�. He adds ominously: 鈥淭hey just want a return on the cash they鈥檝e spent buying you, but they are looking for more than the market can give at the moment.鈥�

As Aecom gets within touching distance of a deal for Davis Langdon, what advice would he offer to an employee of the British QS ahead of the sale? 鈥淜eep your head down and get on with the day job and you鈥檒l probably be given a free rein as normal.鈥�

According to one dealmaker in the sector, the degree of autonomy after any sale should be a key consideration when choosing how to grow. He says: 鈥淚f the US acquirer has no presence in Europe already you will have a bigger say over your destiny. Although what I often hear when I talk to firms that have been bought by Americans is that they have to defer to the US for any big decisions anyway.鈥�

Indeed, many senior Aecom staff claim to have been left in the dark during their parent company鈥檚 drawn-out and public pursuit of Davis Langdon.

Whatever the pros and cons, the dealmaker says that a takeover is the best option if you need to grow in a hurry. 鈥淭he scale of projects is getting bigger and clients increasingly want to bundle contracts and procure through one firm rather than five, so the imperative to grow is huge.鈥�

The independent route

The EC Harris plan to remain independent via flotation will no doubt stir nationalistic passions at a time when the relationship between corporate America and UK plc is strained - just think of BP and Cadbury.

But floating is not without its risks.

Peter Gray, a corporate finance adviser for Cavendish Capital says many could be put off by the red tape and the loss of freedom enjoyed as a private company.

He says: 鈥淚 once floated a sausage-making business who complained afterwards that they were at a disadvantage because they had to play everything by the book due to the extra scrutiny. Their private competitors would push the boundaries in terms of their fat content, for example.鈥�

Add to that the fact that a company will have to fork out up to 拢2m in fees to float, plus the ongoing charges of about 拢500,000 a year to stay on the Stock Exchange and it is clearly not a route that is open to all. 鈥淵ou鈥檒l need a market cap of about 拢200m to make it worthwhile,鈥� says Gray.

You also have to get the timing right. Cyril Sweett and Baqus both floated just as the credit crunch bit and Turner & Townsend shelved plans to do likewise at the eleventh hour. T&T plans to go back to the market when the time is right, but as another corporate financier says wryly: 鈥淛ust ask Cyril Sweett and Baqus whether they鈥檝e enjoyed life in the listed lane so far.鈥�

But what such companies will have, when the market recovers, is easier access to capital in the shape of a rights issue. As the dealmaker says: 鈥淟isted companies such as WSP, RPS and White Young Green have grown massively compared to private companies like Arup and Mott MacDonald in recent years.鈥�

Even so, he predicts it might not be enough and says that in three years the consulting landscape will look different across both public and private sectors. 鈥淚 can鈥檛 see firms like Atkins, WSP or Hyder being here in their present form. They will either have to rapidly buy others or face being bought themselves.鈥�

The words may ring in the ears of Youell. EC Harris plans to grow into a $1bn-turnover (拢660m) firm in about four years. The fact that Atkins already has a turnover of 拢1.4bn and is being touted as a takeover target must make Youell wonder whether his firm will ever be able to slug it out on a level playing field with some of the American hulks.

An alternative route to flotation would be a cash injection via a private equity sale, where capital is exchanged for a seat or two in the boardroom. It鈥檚 an option Cyril Sweett considered before listing in October 2007. Outgoing chairman Francis Ives once said it had been ruled out because the company didn鈥檛 want a 鈥済rizzly bear in the boardroom鈥�.

Gray admits it can be a cut-throat environment. 鈥淭hey will let you get on with running the business as long as you hit your numbers. But if things do get a bit tough then private equity firms have a whole raft of rights to come in and take control.鈥�

Other growth options suggested by some firms at the smaller end of the scale include a mega-merger between six or seven companies. Michael Thirkettle, chief executive of McBains Cooper, thinks the time is right for merging several SME consultants: 鈥淚t鈥檚 a good market now - you have got the time as the volume of business is down.鈥�

He adds that any merger would have to be based on shares rather than a cash buyout: 鈥淪MEs are not going to have the cash to fund acquisitions, and banks aren鈥檛 going to fund it either.鈥�

However, getting different business cultures to gel together would be tough, he admits. The problem is more about getting personalities to work together than having compatible businesses. 鈥淭hat鈥檚 the $64 million question. If you don鈥檛 get it right then you get no value. If you get the people right then everything will fall into place.鈥�

Thirkettle says he doesn鈥檛 have any specific partners in mind yet, but McBains is on the hunt. 鈥淎s soon as I find the right businesses and the right people, then we鈥檒l go forward.鈥�

And then you have strategic partnerships. Last week Cyril Sweett announced the formation of a 鈥渢ripartite alliance鈥� with a Japanese and Chinese firm. A statement to the City said it 鈥減rovides all parties with an extended international footprint鈥�. They don鈥檛 require huge commitment but as many firms who got burned in the Middle East will attest, such casual relationships have their downsides.

The Scott Wilson, EC Harris and Cyril Sweett announcements came within four days of each other. As the world recovers from near-financial meltdown, the race to beef up and snatch the spoils has just hotted up dramatically.