THE ENGINEERING CONSULTING & SERVICES GLOBAL M&A REPORT 2020 Market trends and key transactional insights for owners of knowledge-intensive services and software businesses information services information and communications Marketing, Management consulting Management services Technology & services consulting Engineering management Human capital / Software SaaS FOREWORD David Jorgenson CEO Equiteq Equiteq is delighted to present the results of The most notable technology-enabled engineering our thirteenth annual review of M&A and equity deal was Capgemini’s purchase of Altran, which market trends across the engineering consulting enables the buyer to take a leading position in & services industry. engineering, research and development A deep understanding of the latest digital technologies In 2019, engineering consulting & services deal that are fusing to enable many of the latest count dipped, but there was a strong rise in capital engineering innovations is crucial for success in invested. M&A drivers included strong demand for the digital age. These capabilities can enable more niche capital projects & infrastructure consulting efficient services and competitive advantages for capabilities, disruptive technology-enabled engineering players, as well as their clients. engineering skills, rising stock prices, strong levels of capital available for new deals, and talent Despite recent market volatility, buyers are pushing shortages in hot segments. Regionally we noted forward with their acquisition strategy. The outlook a strong rise in deal activity in Europe and capital for the remainder of 2020 is expected to be invested in North America, as well as a large uptick more uncertain than the prior year. Nevertheless, in cross-border deal activity. Demand remains there remains an unparalleled opportunity for strong for those disruptive businesses that are pioneering business owners and entrepreneurs innovating rapidly with new processes and tools in to create value, and make profitable exits within this changing environment. the disruption zone of the industry. We hope that this latest edition of The Engineering Consulting & The Equiteq Engineering Consulting & Services Services Global M&A Report gives you a taste of Share Price Index rose with broader equity Equiteq’s deep insights into deal activity within this market indices. Entering the new decade, we are space. experiencing new stock market turmoil, but also continue to observe strong levels of dry powder If you would like to have a chat about your current among buyers. Solid levels of capital available for sale journey as a business owner or acquisition M&A is coupled with skill shortages in hot areas of strategy as an acquirer, please get in touch. the market. This is maintaining some pressure on strategic and financial buyers to put their cash to work on new disruptive acquisitions. 2 Confidential | © Equiteq Advisors Ltd. 2020 | equiteq.com ENGINEERING CONSULTING & SERVICES SEGMENT REVIEWS ENGINEERING CONSULTING & SERVICES KEY FINDINGS M&A deal volumes dipped, but capital invested in the sector rose. 13% 65% Deal count Capital 9.0x 2019 vs. 2018 invested 2019 vs. 2018 127 deals 29% 47% 0.8x of deal count of capital by private invested by equity private equity 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Deal Count EBITDA valuation multiple Revenue valuation multiple The Equiteq Engineering Consulting & Services Share Price Index (EECSPI) rose strongly outperforming the overall market. 350 300 250 41% 14% EECSPI EECSPI 200 return 2019 average return 10 years 150 100 26% 17% 50 EKESPI EKESPI return 2019 average return 10 years 0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Engineering Consulting Equiteq Knowledge Economy Share Price Index S&P 500 Engineering consulting Equiteq Knowledge Economy Share Price Index (EKESPI) S&P 500 & services equiteq.com | © Equiteq Advisors Ltd. 2020 | Confidential Segment Reviews | Engineering consulting & services 3 ENGINEERING CONSULTING & SERVICES KEY TRENDS Demand for Disruptive Notable activity in capital projects technology- the environmental & infrastructure enabled engineering consulting space. consulting capabilities. capabilities. We noted strong demand The most notable technology- There was strong buyer for capital projects and enabled engineering deal was demand in the environmental infrastructure consulting Capgemini’s purchase of Altran. consulting space. The sector capabilities driven by talent The deal enables Capgemini is considered to have robust shortages and increasing to take a leading position as industry tailwinds relating to infrastructure spend. a service provider focused government regulations for Investment in new technologies on engineering, research and environmental protection. There is driving a convergence among development (ER&D) as part is notable demand for waste management consulting of the digital transformation of management, site assessment and engineering services industrial and tech companies. and remediation, as well as firms working on complex Other buyers also entrenched regulatory consulting. Major infrastructure projects. themselves in the innovation deals in the space included consulting and technology- WSP’s purchase of Ecology Management consultants enabled product design space. & Environment, Terracon with specialized big data-led This included PA Consulting Consultants’ acquisition of St. infrastructure advisory practices which acquired innovation John-Mittelhauser & Associates, are able to effectively compete consulting firm 4iNNO. These Anthesis Group’s purchase of for project management roles capabilities will enable the Lavola and Hydrock’s acquisition previously led by specialist firm to continue to win various of MRB Consulting Engineers. construction and engineering high-profile transformative firms. In turn, the latter are consulting engagements, which also investing in new digital has included Virgin Hyperloop technologies to move into the One, a potential disruptor to the management consulting space. transport sector. Despite the dip in deal flow over the year, many of the industry fundamentals remain supportive of M&A activity in 2020. Activity will be maintained by continued demand for infrastructure spending in developed economies. Potential disruptors to current levels of activity will be a potential economic slowdown and its impact on commodity prices. We expect continued strong interest in capabilities related to new technologies that enhance services and improve efficiencies for clients. 4 Confidential | © Equiteq Advisors Ltd. 2020 | equiteq.com ENGINEERING CONSULTING & SERVICES REGIONAL REVIEW Strong rise in overall deal activity in Europe, capital invested in North America and cross-border M&A globally. High-profile cross-border acquisitions across the knowledge economy are common and enable foreign buyers to penetrate new markets, gain new clients and grow revenues with existing global accounts. See Consideration 4 in the back for our perspectives on incorporating international buyers into your sale process. Figure 1 Regional M&A and cross-border review Europe North America 50 Deal count 69 Deal count Deals Capital invested 4% 23% Asia Pacific Deals Capital invested 23% 133% 1 Deal count Deals Capital invested 50% n/a Australia & NZ 7 Deal count Deals Capital invested 17% 1,048% The proportion of M&A that was cross-border in nature accounted for 32% of all deals in 2019 (versus 21% in 2018) equiteq.com | © Equiteq Advisors Ltd. 2020 | Confidential Segment Reviews | Engineering consulting & services 5 ENGINEERING CONSULTING & SERVICES Figure 2 Engineering consulting & services M&A activity, annually (2010 to 2019) 150 120 90 60 Number of deals of Number 30 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Note: Bubble size reflects comparative average deal size for the respective year. The optimum size of a transaction will vary among buyers and the specific opportunity that they are considering. See Consideration 1 in the back of the report for our perspectives on the relationship between business size and acquisition appetite. In addition to running a competitive well-negotiated sale process, there are plenty of steps that owners can take to reduce risk in the eyes of a buyer which can make a material difference to their target deal structures. See Consideration 2 in the back for our perspectives on the factors that influence deal structures. INDUSTRY TRENDS Areas of industry convergence Hot spaces Engineering Technology SaaS / consulting & services Software services IoT product High-tech Predictive Advanced building information modeling and design manufacturing engineering analytics predictive engineering analytics Engineering Technology Management consulting & services consulting services Artificial Testing Building intelligence & services information machine learning modelling, VR Innovation strategy & AR Buyers in adjacent industries may be willing to pay a strategic premium for an acquisition that enables expansion into a new space. See Consideration 3 in the back for our perspectives on how to consider buyers across adjacent industries. 6 Confidential | © Equiteq Advisors Ltd. 2020 | equiteq.com ENGINEERING CONSULTING & SERVICES OVERVIEW OF EQUITY MARKET PERFORMANCE The Equiteq Engineering Consulting & Services Share Price Index outperformed broader equity market indices. Figure 3 Equiteq Engineering Consulting & Services Share Price Index (2019) 155.0 145.0 135.0 125.0 115.0 105.0 95.0 85.0 Jan-19 Feb-19 Mar-19 Apr-19 May-19