With flotation looking distinctly iffy – as Turner & Townsend realised last week – cost consultants are looking for other ways to expand and survive.
The QS has long inhabited a more Darwinian world than the other construction professions and trades. Unlike architects, builders and engineers, who have been with us in one form or another since the dawn of civilisation, and will presumably be with us until it sets, people have always looked at QSs and wondered what, if anything, would happen if they disappeared.
Those with longish memories will recall Sir John Egan encouraging a group of QS students in May 1999 with the news that advances in IT would shortly make their jobs extinct. This led to an excited debate among QSs, which reached a climax when Andrew Hemsley, then head of quantity surveying at Cyril Sweett, told a more traditionally minded correspondent to “adapt or die!”
Jump nine years to the present day, and it is easy to see that that process of adaption has intensified to the point where firms are faced with making an evolutionary leap. Guy Leonard, the Mott MacDonald Group board director responsible for Franklin + Andrews, puts it like this: “Firms that started out as QS practices have developed hugely and are now also major project and programme management specialists.” This puts them in a position where they need to reconsider their business strategies.
In a situation where a number of large players are all searching for the right strategy in an environment that they do not fully understand, herd behaviour is natural. So a number of large firms recently adopted less professional and more commercial structures, becoming LLPs and then, the latest trend, plcs. Cyril Sweett and Roger Knowles’ smaller Baqus confederation were the first to list, and Turner & Townsend was about to set to join them, before being forced to abort by the force 10 gale blowing through the stock market.
The rationale for flotation was simple. The dominant development since Egan delivered his harsh truth has been the acquisition of smaller and more specialised firms by larger and more general ones. This process has accelerated as the largest firms grew larger (on page 21 of this issue, for example, is news that F+A has bought Needlemans for its knowledge of airports). So the reasoning was that flotation equals more money equals more acquisitions. And this appeared to be validated by Cyril Sweett’s raising £25m and Baqus £2m. If T&T’s £200m offering had succeeded then other firms would have come under intense pressure to follow.
But its plans are now on the backburner, and Cyril Sweett’s share price has fallen from £1.10 to 87p since it listed in October. The result is that the QS industry has been “shaken up”, in the words of Rob Smith, senior partner of Davis Langdon. “Everyone is looking at how their business model is configured; everyone is having second and third thoughts.”
One thing straight
The constant in all this fog and flux is that firms still have to grow. Smith is clear that there will be fewer, larger players in the future. “Hardly a week goes by without an M&E business putting itself up for sale to us,” he says.
Two other business strategies are international expansion and diversification.
In an increasingly globalised industry, grabbing a share of international work is a priority for many QSs. As Francis Ives, the chairman of Cyril Sweett, said last year, contracts and framework deals are increasingly multinational and multiregional. And what executive worth their salt does not aspire to manage a multibillion-pound tower in Dubai or break into central Asia?
Bucknall Austin led the way last summer by merging with Australian firm Rider Hunt and Far East expert Levett & Bailey to form Rider Levett Bucknall. “We wanted global reach and to strengthen our credibility,” says Lance Taylor, chief executive of the merged company. It now has more than 65 offices worldwide and employs over 2,000 people. Taylor has announced plans to open offices in Oman and Dubai this year and another in Abu Dhabi in 2009. The practice aims to also have established itself around Europe and India by 2012.
David Bucknall, the company’s chairman, says being a global practice was also an opportunity for their clients to expand. “I feel we’ve got the expertise to shift with our clients around the world, because we have global reach.”
Hardly a week goes by without an M&E business putting itself up for sale to us
Rob Smith, Davis Langdon
International expansion not only allows companies to widen their reach, it is also an incentive for recruitment. Taylor says young people, in particular, are attracted by the chance to work abroad. “If you want to go work in Maui in Hawaii and surf all day, you can. If you want to get choked up and smoked up living in the City and do 14-hour-shifts, you can do that too,” he says. Senior staff appreciate the prospect, too. Nine of Bucknall’s senior employees have taken advantage of the merger by moving to exotic places such as Honolulu and Wellington.
International work also accounts for a solid part of Gleeds’ turnover. With 30% of revenue coming from overseas operations, its share of international markets has been a vital contributor to its growth. Richard Steer, the senior partner, says: “International expansion is really where the growth will come from in the next five to 10 years. We can grow in the UK, but it’s a very mature market and that’s hard to push against.”
Despite this drive for growth, mergers and acquisitions are not on Steer’s mind. “Acquisitions are always difficult,” he says. “All our growth has been organic.”
If Steer changed his mind, it would be easy for him to find a company to take over. Philip Youell, chief executive of EC Harris, says for the past few years bigger QSs’ phones have been ringing off the hook with smaller firms looking for a buyer.
This is because for smaller practices, joining a global firm is the easiest way of expanding internationally. For example, last month £2.4m-turnover QS John Shreeves was bought by Hill International, which has offices in North America, Europe, Asia, the Middle East and Australia.
The third option
Although an international focus makes sense for some firms, others prefer the less risky option of diversifying their services. Covering a breadth of sectors is often regarded as the safest route to success, especially in a slowing market.
F+A covers 21 sectors, from aviation and railway infrastructure, to urban regeneration. Guy Leonard says this variety is his business’ strength, as “we are not overly exposed to any one sector”.
Although this means F+A will not reap the full benefit of a booming sector, diversification diverts risk and is also a sensible way for a business to grow. For
F+A at least, it is a top priority. The company’s turnover stood at £65m last year; Leonard aims to be a £100m business by 2010. “We’ve got to deliver a growth rate of 15-20%, but I am confident we can do it,” he says.
However, growing into new sectors is more easily said than done. An organic expansion is time-consuming, as staff need to be trained with specific skills. Building a reputation does not happen at the speed of light, either. Leonard sees buying local expertise as an effective way to establish a firm in a new sector, as his firm’s takeover of Needlemans shows.
What about QSs with smaller pockets? John Rowan & Partners, which won Building’s QS Employer of the Year Award in 2007, has moved forward by collaborating with companies of similar size. “When there are projects for their clients that can be better covered by us then we pick them
We have 35 shareholder partners in T&T. With a listing we can open it up to incentivise 200 partners
Tim Wray, Turner & Townsend
up, and vice versa,” says Stephen Gee, managing partner at the firm. His business has a successful track record of diversification. “It takes many years to become a diverse business. That has been one of our strategies over a number of years. Four or five years ago, we had 80% or 90% of our work in the hotel and retail sectors. If that was still the case now we’d be in trouble.”
Back to the floaters
So what about the firms that chose to float? Cynical critics of the rush to the City say it is an excuse for business leaders to cash in their share of the company. For example, Dean Webster, chief executive of Cyril Sweett, was awarded £1.6m worth of options at the time of the flotation.
Francis Ives is convinced that it was the right move. “We haven’t dropped as much as others have. Everything is still going to plan.”
Cyril Sweett’s rationale behind going public was that it opened the door to acquisitions.
The company’s growth strategy is to raise money to buy companies around the world through its flotation. “Our expansion plans are still in place,” says Ives.
“We want to increase our international share to 25% by 2010 and are looking at a number of international and UK companies to buy.”
This reasoning also convinced bosses at Baqus. The company was formed out of the merger of Boxall Sayer, Denley King and Fletcher McNeill in August last year, always with the intention to float.
Clive Sayer, Baqus’ chief executive, says listing as a public company enabled it to take on firms who were “too small to be big and too big to be small”. He says that since the flotation, it has had quite a bit of interest from companies putting themselves up for sale. “We’re talking to about six or seven at the moment, we’ve already dismissed a few.”
Then, there is the PR argument for flotations. “Giving staff the opportunity to buy a part in their own company” was an often repeated statement, especially by T&T. Tim Wray, its chairman, said at the time of the first announcement: “Flotation will allow us to keep our staff and incentivise them. We have 35 shareholder partners in T&T and with a main listing we can now open it up to incentivise some 200 senior partners.”
While T&T’s plans have merely been postponed, they might have second thoughts after reading that Baqus’ share price has also felt the crunch of the market, as it dropped from 12.25p to 9p.
Then again, when the market recovers, this may prove to be the most profitable of all three strategies.
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