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2016State of the Construction & Surety Industry
Presented by:
William J. McConnell, P.E., J.D., CEO
The Vertex Companies, Inc.
Engineering | Construction | Environmental | Claims | Technology
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The U.S. Economy is Doing Very Well by Most Measures
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Private Construction is BOOMING while Public Construction Remains FLAT
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Construction is Outpacing the U.S. Economy by a Wide Margin
U.S. Construction Industry Growth Rate Since 2011: 9%
U.S. GDP Growth Rate Since 2011: 3.5%
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Number of Construction Establishments in the U.S. – Bureau of Labor Statistics:
2007: 896,200
2015: 763,559
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Number of Construction Employees in the U.S. – Bureau of Labor Statistics:
2007: 7.7 million
2001: 5.4 million
2016: 6.6 million
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The Surety Industry Continues to be Profitable for the 12th Consecutive Year, Despite a Lack of Premium Growth.
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Market Share of the Top 10 Surety Providers:
1980: 21%
1990: 42%
2004: 67%
2008: 68%
2014: 63%
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Top Risks that Face Contract Surety Providers in 2016:
1.Quality Issues2.Labor Shortages3.Lack of Growth in Public Construction4.Inflation
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The Lifecycle of a Construction Company
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Corporate Lifecycle
Birth
Go-Go
Infancy
Prime
Stable
Aristocracy
Bureaucracy
Death
Adolescence
Source: Dr. Ichak Adizes, Adizes Institute
Top 100 Contractors of 1964
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• Bechtel Corp. (#4 / #1)
• Peter Kiewit Sons’ Co. (#5 / #3)
• Brown & Root Inc. (#8 / #8)
• MW Kellogg Co. (#31 / #8)
• Fluor Corp. Ltd (#50 / #2)
• Swinerton & Walberg Co. (#52 / #35)
• Walbridge-Aldinger Co. (#63 / #42)
• Manhattan Construction (#66 / #52)
• Granite Construction (#80 / #25)
• Frank Messer & Sons Inc. (#80 / #68)
• HB Zachry Co. (#98 / #32)
• Perini Corp. (#13 / #13)
• Walsh Construction (#15 / #15)
26 Surviving Contractors
• Gilbane Construction Co. (#10 / #14)
• Noble J. Dick Inc. (#32 / #62)
• The Lane Construction Corp. (#41 / #44)
• Henry Beck Co. (#48 / #108)
• Dinwiddie Construction Co. (#70 / #84)
• Great Lakes Dredge Co. (#75 / #98)
• Boh Bros. Construction Co. (#85 / #177)
• Basic Construction Co. (#26 / n/a)
• Raymond International Inc. (#40 / n/a)
• Miller Davis Co. (#78 / n/a)
• Teichert & Son, Inc. (#81 / n/a)
• James D. Morrissey Inc. (#86 / n/a)
• Millstone Construction Inc. (#99 / n/a)
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Corporate Lifecycle
Birth
Go-Go
Infancy
Prime
Stable
Aristocracy
Bureaucracy
Death
Adolescence
Large Contractors - $600M+ in Rev
Corporate Lifecycle
Birth
Go-Go
Infancy
Prime
Stable
Aristocracy
Bureaucracy
Death
Adolescence
Large Design Firms - $130M+ in Rev
Corporate Lifecycle
Birth
Go-Go
Infancy
Prime
Stable
Aristocracy
Bureaucracy
Death
Adolescence
Source: Dr. Ichak Adizes, Adizes Institute
Reinvention
Aristocracy
Results of Top 100 Construction Firms of 1964
33% failed
26% survived
41% were acquired
Status of the 41 Contractor Acquisitions – 46% Survival Rate
9 failed post acquisition
19 survived and continue to offer construction
13 voluntarily dropped construction
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• Turner Construction Co. (#6) acquired by Hochtief in 1999.
• Daniel Construction Co. (#7) acquired by Fluor in 1977.
• J.W. Bateson Co. Inc. (#14) acquired by Centex in 1966; Balfour Beatty acquired Centex in 2007.
• C.F. Braun & Co. (#16) acquired by Santa Fe in 1981; Halliburton acquired C.F. Braun from Santa
Fe in 1989; KBR (including CF Braun) separated from Halliburton in 1989.
• Fischbach & Moore, Inc. (#18) acquired by Sullivan & McLaughlin in 2005.
• Huber, Hunt & Nichols, Inc. (#22) (now Hunt Construction Group) acquired by AECOM in 2014.
• Pittsburgh-Des Moines Steel Co. (#28) acquired by CB&I in 2001.
• Tishman Realty & Construction Co. (#29) acquired by AECOM in 2010.
• T.L. James & Co. Inc. (#35) acquired by Primoris in 2009.
• Fruin-Colnon Contracting Co. (Fru-Con) (#51) acquired by Bilfinger in 1978; in 2011, Balfour
Beatty acquired Fru-Con from Bilfinger.
• Frank J. Rooney Inc. (#73) acquired by Centex in 1978; in 2007, Balfour Beatty acquired Centex
Construction.
• Beacon Construction Co. of Mass., Inc. (#74) acquired by Skanska AB in 1996.
• Ragnar Benson, Inc. (#84) acquired by William Charles Ltd. in 2005.
13 Successful Acquisitions
Results of Top 100 Design Firms of 1964
41% failed
24% survived
35% were acquired
Acquirers of the 35 Design Firms
3 by Parsons (employee-owned)
12 by AECOM (public)
4 by Jacobs (public)
2 by CH2M (employee-owned)
2 by Dewberry (private)
14 by Other Large Design Firms
Market Consolidation - Design(1995 – 2015)
2005 Top 10 Firms had 44.2% Market Share
1995 Top 10 Firms had 30.2% Market Share
2000 Top 10 Firms had 40.5% Market Share
2010 Top 10 Firms had 50.4% Market Share
2015 Top 10 Firms had 50.0% Market Share
Company Profile – AEC Firm
Dames & Moore
Headquarters: Los Angeles, CA
Current Rank: Acquired by URS in 1999
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Company Profile – AEC Firm
IT Corporation
Headquarters: Torrance, CA
Current Rank: Declared bankruptcy in 2002
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Company Profile
Morrison-Knudsen Co. Inc.
Founded: 1912
Acquired by: Washington Group
Current Rank: #7 (2015 / AECOM)
Landmark Project: Hoover Dam
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Company Profile
J.A. Jones Construction Co.
Founded: 1894
Acquired by: Phillipp Holzmann A.G.
Current Rank: n/a
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Subtle Strategic Changes with Market Shifts
Contractor Takeaways
Planned Leadership Transition
Seldom and Selective M&A Transactions; Growth is Primarily Organic
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Poor Leadership Transition – Lee Iacocca Effect
Contractor Takeaways
Failure to Adjust to Market Conditions and Market Shifts
Excessive Bureaucracy Causes an End to Most Large Contractors – Too Slow to Move and Top Heavy
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Acquirer has Long History of Construction
Contractor Takeaways – M&A
Acquirer in Similar Vertical as Acquiree
Current Trend: AEC Companies Acquiring Large Construction Companies – Success is TBD
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Developers that Manage Construction Companies have Difficulty Achieving Long-Term Success
Contractor Takeaways – M&A
Both Development and Construction are High RiskEndeavors but Development has More Reward
Construction as a Non-Primary Sector Does Not Work in the Long-Term
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Large Non-Construction Buyer is Often Quick to Exit Construction to Focus on Service Business
Contractor Takeaways – M&A
Large Public Buyer Tends to Shed Most, if Not All of the At-Risk Work
Value of Predictable Service Components Far Exceed Value of At-Risk Vertical (more buyers)
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Design Firms Must Diversify; an Over-Concentration of Work in One Sector Often Leads to Failure, Particularly When the Sector Compresses
Design Takeaways
Design Firms Must Embrace an Effective M&A Strategy to Continue Growth Over the Long-Term
Design Firms Must Keep in Front of Technology Improvements that Improve Efficiency
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The End
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