bigfish littlefish

Call BFL Consultants in St. John’s, Newfoundland and the receptionist answers “Agra Atlantic.” Look up Kilborn Consultants in the Toronto telephone book and you will find it listed — but only by cross-reference to SNC-Lavalin, the giant which gobbled it up in 1996. Or try further afield and ask the operator for a number for C.C. Parker, a firm that operated in Hamilton and southwest Ontario: no luck. Parker, along with nine other consulting firms of less than 80 people, were bought out by Stantec last year.

These days the largest consulting engineering firms are turning out to be a lot like fish: they are expanding in size along with the extent of their available habitat. With the globalization of economies the relatively small pond that was Canada is opening out into a wide, open sea, and consulting engineering firms like Stantec are growing apace. Indeed, most economists would argue that today companies have to become bigger in order to compete and survive.

One way to become a big fish is by eating up lots of smaller fry, and in the consulting engineering waters of Canada, there has been a spate of acquisitions. In particular, two of the three publicly traded megafirms in Canada have been buying smaller companies. Stantec of Edmonton (formerly Stanley Consulting) has acquired 18 consulting firms in the last four years. Most of these acquisitions are in western Canada and Ontario (with the remainder in the southwest United States). Stantec’s gross revenues of $94 million in 1995, had almost doubled to $185.5 million by last year. The firm now has 2,000 employees, 40 offices, and is the third largest in the country.

AGRA, another firm with its headquarters in Alberta, is not acquiring companies at quite the same rate, but it has bought nine firms in the last two years. Then earlier this year the company dropped the bombshell that it was negotiating to take over one of the largest consulting engineering firms in Canada: Simons International of Vancouver. With Simons’ 2,100 employees and 26 offices added to its existing roster of 5,300 and 160 offices, Agra is vying with Montreal’s SNC-Lavalin to be the largest firm in Canada.

Meanwhile the large but privately owned firms — Giffels, Jacques Whitford, CBCL, for instance — have also been buying or consolidating with other firms. And earlier this year, Proctor and Redfern of Toronto, one of the oldest employee-owned companies in Canada with a history going back before the First World War, sold itself to Earth Tech, a giant U.S. firm.

Mergers and buy-outs have never been that unusual among professional firms, but most people in the consulting engineering industry sense that acquisition activity has been particularly frenzied of late. The “buzz” around is that large firms are on the prowl, that boutique, specialist firms will survive, and that mid-size firms are the most at risk because they cannot compete with the largest firms for work.

A study done this year by the Association of Consulting Engineers of Canada (ACEC) shows that small and medium-sized firms are still far from being on the endangered species list. Firms with between 10 and 200 people are 56% of the total number of ACEC’s member companies. Microfirms with a staff of 10 or fewer are also holding their own at 37%.

Still, the ACEC survey suggests that indeed there has been a lot of acquisition activity. The association has seen a marked decline in the number of its member firms in the last two years. Counting head offices only, numbers have dropped from 720 firms in 1997, to only 600 now. The shortfall is dramatic considering ACEC lost only half that number in the entire period between 1989 and 1997.

The loss of firms does not appear to be due to a shortage in consulting engineer work. Though ACEC has lost 120 firms since 1997, the number of people employed by its members taken collectively remains about the same. Evidently the industry is still supporting the same number of people. Moreover, while 120 firms have disappeared in the post-recession period, in the entire turbulent period between 1989 and 1997, only half that number of firms went off the map. If today’s decline in firms is not owing to any outside economic factors, at least some of it must be due to take-over fever.

Stantec, at least, is not shy about its appetite for other firms. Its 1999 corporate strategy says: “The company’s strength and competitive advantage lie primarily in a proven ability to find, acquire, and integrate specialty or regionally dominant consulting firms into a unique corporate model.” Consulting engineering in Canada is becoming an industry of fewer but larger fish.

What’s causing the change? “Succession planning” is often cited as one reason why so many firms are trading hands. Because Canada is a young country, it has many companies that were started 20 or 30 years ago. The engineers who founded these companies are ready to retire but often they don’t have natural heirs waiting in the wings to succeed them, while the staff either haven’t the funds or the desire to buy the firm. Kerry Rudd, P.Eng., president of Consulting Engineers of British Columbia, says: “It wouldn’t surprise me if many acquisitions are due to the age of the industry in Canada. Principals are growing older and there isn’t the wherewithal to buy them out — at least at the price they believe is appropriate. Young engineers in the firms are not stepping up to buy shares because it is a relatively expensive proposition and they haven’t had chance to accumulate the funds required. The economic climate of the 1990s has kept salaries too low for that.”

The big catch

Far from being a hostile takeover, therefore, often the change in ownership comes when senior principals of smaller firms approach a firm like Stantec to see if it will buy them out and hopefully keep the operations going. Sometimes it is young engineers at the other end of the career scale who do the approaching. They are entrepreneurial types who started their own firms just a few years ago, but now feel they need to join a large firm that has a lot more resources, and financial and political clout.

Howard Goodfellow, P.Eng. is one of these. He started a company 12 years ago in Mississauga, Ontario that specializes in clean air technology. Goodfellow Consultants became part of Stantec last August. “We had about 50 people and had reached a situation where we needed to make changes in our mode of operation,” Goodfellow says. Computing power was a very critical factor that drove them to approach the larger firm. They needed to have access to much larger and advanced computer systems than they could afford. “The nature of consulting engineering business has changed,” Goodfellow says. “Whereas you used to need a table, chair and pencil, it is now much more capital intensive.”

Ray Allard, P.Eng. was one of four enthusiastic young engineers who started the multi-disciplinary firm of Paragon Engineering 20 years ago, and which had since accumulated about 160 staff. “We were in the plight of the mid-sized firm,” Allard says. “Larger firms were able to compete more effectively for work.” Like Goodfellow, they needed much more sophisticated computer systems than they could afford in order to be able to service their clients. Web sites, intranets and other communication systems can cost millions of dollars and need to be upgraded every three years. Yet, as Allard points out, the cost for these is the same for a small operation as it is for a firm of 1,000 people.

Economies of scale take on a new importance in the globalized economy, not only because doing business depends on expensive telecommunications, but also because a firm has to have strong marketing abilities to obtain the work in the first place. Smaller firms cannot compete with the slick packaging produced by the international corporations to promote their firms. And even if a small firm does manage to find overseas work, it often proves too expensive to run an office in another country.

For Goodfellow, a major benefit of joining Stantec was that it brings the corporate prestige and marketing resources
he needs to sell a specialized software product he developed at his former firm. The award-winning EFSOP program has been exported and implemented at Sheerness in the U.K. and was recently sold to a steel company in Mexico. The technology measures emissions and helps improve the energy efficiency of electric furnaces. Goodfellow says that Stantec can export the product much more effectively around the world than they could have ever managed to do as a small localized firm.

Two-way flow

Obviously the benefits of acquisition flow both ways. Large firms have to be able to draw on a whole range of engineering and project management skills these days in order to compete against international teams. By buying another firm they add to the personal expertise they can offer clients, and they strengthen their position in a particular sector or geographic region.

Stantec decided 15 years ago that it needed to expand because the construction market was growing more complex and sophisticated. “As the body of knowledge increases, you need more people,” says president and chief executive officer, Tony Franceschini. “There are 10 different ways to model a building, and it is impossible for one individual to know everything. Our basic strategy was formulated in 1983-84. We saw that the consulting engineering industry was becoming more specialized…. You now need about 20 to 40 people specialized in an area to call yourselves an expert.”

Changing client demands are driving the trend towards bigger firms. On infrastructure projects, for example, many governments want to be able to do one-stop shopping, which often means they will only entertain bidders that can provide engineering, project management, construction and financing all rolled into one. Only a firm on the scale of Agra, Stantec or SNC-Lavalin can hope to assemble the multi-disciplinary teams and international players to compete for a project like the Confederation Bridge or Ontario’s Highway 407, for example. In the recently awarded contract for the Highway 407 extensions, SNC-Lavalin joined with a huge Spanish construction company as a consortium that will not only design and build the road, but also own and operate it for decades to come.

Big firms have to become bigger in order to compete on the world stage. SNC-Lavalin has bought only four firms since its big purchase of Kilborn Holdings, a Toronto firm of 1,200 employees three years ago. However, Tarot Alepien, P.Eng., executive vice president at the Montreal firm, says that move was key in winning a contract for the Voisey’s Bay project, with its vast nickel deposits waiting to be explored. Alepien explains that SNC-Lavalin pursues firms in sectors where it already has expertise. Thus at Voisey’s Bay the mining expertise of Kilborn along with SNC-Lavalin’s mining and project management skills combined to win the day even though they were competing against the three largest engineering firms in the world: Bechtel, Kvaernar, and Fluor Daniel.

Similarly, Agra was attracted to Simons because it felt the two firms were “very complementary.” In this case, though, the match came about because they operate in different sectors, rather than the same. Simons is strong in mining and forestry, two areas which Agra has not previously concentrated on. Perhaps more importantly, the Vancouver firm has also built up a strong presence in the U.S. constructing automobile plants.

Access to U.S. and world markets was part of Proctor and Redfern’s goal in seeking to join a global player like Earth Tech. Stuart Angus, P.Eng., ex-chief executive officer of the former Proctor and Redfern and now president of Earth Tech (Canada), suggests that they had to be able to work at an international level in order to compete at home. “A huge shift that has taken place,” he says, “is that Canada is finally becoming global. The border only exists for politicians. It doesn’t exist for business.”

Stantec is turning its eyes south too. “In three years we expect to be 50/50 in the U.S. and Canada: that’s a goal,” says Franceschini. Stantec also aims to be one of the top 10 global design firms in 10 years, which means tripling in size. It was 120th in the last Engineering News Record survey. “There are only 110 firms ahead,” says the ever optimistic Franceschini.

How does it feel?

We might attribute takeover fever to vast and impersonal global economic forces “out there,” but at the deepest level when a firm changes hands it has a radical effect on people’s lives. How does the owner who is used to being in charge feel when he suddenly has to answer to corporate executives thousands of miles away? For many principals it has to be a disturbing and stressful experience, and not every acquisition has been successful. There often seems to be a honeymoon period when the acquired firm is left alone, but eventually pressure comes down the line to bring the new company into line, whether it be in achieving certain profit levels or standardizing procedures.

According to Franceschini, most of the principals stay on in the firms Stantec has bought. Since the parent company is buying “what is between the ears,” as he puts it, it doesn’t make much sense if the most important people with the best brains and contacts don’t come with the firm. Both Alepien and Franceschini stress that when buying a firm it is essential that the companies share the same corporate “culture.” What they mean by “culture” is less clear, but seems to refer to agreeing on policies for things like employee rewards and levels of service done for clients.

Ray Allard is a bit nostalgic for the days when he and his friends pioneered their firm. “The old times were good. We had a lot of fun,” he says. But with Stantec the firm has reorganized their operations so that there is a lot more communication between divisions. “It’s pretty exciting. At the beginning there was a fear ‘they’ might be telling us what to do. I kept telling everyone, ‘They’ are ‘Us.'”

Being part of a large corporation doesn’t seem to bother Howard Goodfellow. “You’re never your own boss,” he says, even when you have your own business. “With Stantec I am still an entrepreneur, but in a different environment.”

What about the employees? They have both the most to lose and most to gain when a firm becomes part of a larger corporation. Senior engineers suddenly have a much wider career horizon, and their engineering skills will benefit from working in teams with many other experts. Sometimes, however, these people are disgruntled and feel that the company has sold out. “I wanted to work hard to build up the company and be a major shareholder,” says one who wants to remain nameless. He and all the other senior engineers walked out when the small specialist firm they worked for was taken over and they found their career paths were blocked. Since then the firm has changed owners twice.

In many cases a company wants to buy another to have coverage in a certain geographic location, so the parent company will keep the premises and continue to operate it as a local unit. But if there are two offices in one city or other duplications there will likely be closures, layoffs, and other “integration savings,” as one executive put it. Administrative staff — secretaries, accountants, human resource people — are most at risk. Every day they come to work expecting to be told their jobs have been axed in a corporate rationalization.

Janson, the new chair of Agra, says that in their new marriage with Simons they will be looking for savings in administrative areas, which suggests there may be staff cuts. Still, the expected layoffs do not always happen. As part of Stantec, Goodfellow’s firm has kept the same number of staff and Allard’s former firm has added 100 people. Alepien says jobs can even be safer in a large corporation because it can move people about into different sectors as the economy shifts. When the pulp and paper sector crashed a few years ago, SNC-Lavalin moved people from that part of their operations into the industrial division.

Perhaps what is saddest in all this acquisition activity is that the diverse character and
history of individual firms is lost. Janson says that at Agra, “We will do absolutely whatever we can” to keep the local character of an acquired firm. But big corporations work by standardizing their procedures. A firm like Stantec believes in the concept of “branding,” so pretty soon out goes the old letterhead paper into the garbage, and up goes the smart new sign with the corporate logo on the lawn. Janson says that it is necessary to have a name change in the firm, “otherwise there are psychological barriers.”

Sentiment has little place in business, so maybe we should watch the passing of a firm like Simons or Proctor and Redfern with equanimity, accepting it as simply part of the great sweep of history. With globalization little fish are eaten by big fish; diversity succumbs to the brand. Don Redfern, son of the founder of the old firm, and someone who ran the business for many years, isn’t concerned: “Losing the name doesn’t bother me at all. You do your own thing in your own time,” he says over the telephone from his Muskoka cottage.

Others are not so blas. One secretary, a veteran of 20 years at a firm that was recently sold, is sorry to see it go: ” I’ve loved my job and I always thought I would retire here. Well, maybe I won’t… ” Then, as if trying to reassure herself about the future, she adds: “Change is good… I’m not having a hard time with this.”