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Scott Wilson acquired by URS

by Mel Starrs on July 12, 2010

in Industry gossip

Those who follow me on Twitter will have seen my slight obsession with the acquisition story of the past few weeks, as URS and CH2M battled over Scott Wilson.

My obsession has as much to do with the fact that I get to look at financials of listed companies in my industry rather than any particular interest in Scott Wilson (although we did poach one very good member of staff from there recently).

When I was doing my MBA I was fascinated that so few companies in our industry are publicly listed (I’m guessing because it’s a mature industry with stable but low returns, so not particularly attractive to investors?) and it meant that learning about financials felt a bit removed from ‘real’ life. So takeovers interest me, as I get to pore over the numbers and test my learning.

The Independent did a good synopsis here:

The winning bid from the San Francisco-based engineer comes at a massive 233 per cent premium to Scott Wilson’s closing share price of 87p on 4 June, the last trading day before it confirmed that it was in talks about a takeover.

A rival suitor, the Colorado-based engineer CHM Hill, will confirm this morning that it cannot match the new £233m price tag, and will withdraw its 245p a share offer made on Monday evening.

On Monday afternoon CHM became Scott Wilson’s biggest shareholder when it bought a 12.97 per cent stake in the group at 245p a share, hours after URS’s first offer of 210p a share had been recommended to shareholders. CHM is now likely to sell its stake to URS in a move that could net it a £4m profit in less than a week.

The initial offer was for £161m. CH2M countered with £189m, with a final value of £233m. How did URS settle on their first offer?

One rule of thumb used is that a company is worth a multiple of the profit – 7x is often quoted (I would love to know if this is correct for our industry – gut feeling is it should be a bit lower?). Scott Wilson’s profit for the last financial year was £23.9m which makes the initial offer 6.7x profit. The final offer was 9.7x profit which is quite high. However, when the first offer was made, the market cap (capitalisation) was in the region of £67m, which was only 2.8x profit.

How does this compare with other acquisitions in the industry. It is quite hard to compare, as I said, most companies are not publicly listed and it makes it a bit harder to get information for free (you can pay to download any companies financials from Companies House database for £1 – useful to know if you are for instance contemplating doing work with someone or contemplating potential job offers etc. Alternatively, the information is available at British Library if you are a member). I’m no financial wizard, but if the market cap is significantly lower than the 7x profit rule of thumb, then probably ripe for takeover?

At a market cap of over half a billion, it would take very deep pockets indeed to acquire Atkins. Pre-tax profit came to £96.6m for the year to 31 March 2010, which at 7x profit, would mean the company is ‘worth’ £676.2m (very close to the market cap of £682m as I write this).

As White Young Green dropped into AIM in February, I haven’t looked at them. Instead I’ve looked to another W – Waterman. Current market cap at £14.3m, last year’s profit was a tiny £0.5m on a turnover of £42.9m. Here, they have optimistic investors who are valuing the company at nearly 28x profit! The previous profit was £3.1m which is 4.6x profit on today’s value.

Of course, I’m not looking at other factors here such as how much debt or assets companies have.

I suspect the next company to be acquired will be a medium sized privately held company. So is it possible to become a millionaire by selling your company? Let’s look at a hypothetical company. Imagine you wanted to set up and sell a sustainability consultancy for £1m. Let’s work back from that and see quite how big an ambition that is. For £1m at a 7x profit multiple, you would need a profit of around £143k. OK, let’s assume you’re above average and manage to get a profitability of 15%. For that, turnover needs to be around £950k. I’m imagining this hypothetical company provides both sustainability and building services consultancy. Typically fees are about say 3.5% of capital cost (depending on the size of the job). So the capital cost of projects supporting this company is £27m. The company could probably support 12 full time staff. If we leave out building services and assume sustainability only at say 0.5% of capital cost, projects of £190m would be required. This is say, half a Shard. Or about in the region of 40 BREEAM assessments on sizable projects. In black and white, it sounds quite easy, doesn’t it! Ha! As I said before, another option would be for the top layer of your staff to buy you out, rather than be acquired. But if you’ve valued your company at £1m, will the top layer of your 12 staff be able to afford to buy you out? Depends what you’ve been paying them and how long they’ve worked for you. The days of staff leveraging loans against mortgages to buy into partnerships are surely numbered given today’s financial landscape?

I do find all this stuff fascinating. My thirst for financial intelligence is currently being sated by finally getting round to reading Niall Ferguson’s The Ascent of Money. Expect more ruminations on finance and capitalism as I get further into the book.

  • andrew

    Mel,

    It was a while ago and a slightly different sector, but the contractor I work for was bought by the current parent for about 5x profit.

    The types of businesses you refer to are all about their people, the networks they have and services they provide.

    There is a risk for a purchaser of such a business that if the staff leave there may not be much of a business left!

    When companies can make 4m almost overnight from trades or moving money around the risk/reward of these types of business is much less attractive.

  • andrew

    Mel,

    It was a while ago and a slightly different sector, but the contractor I work for was bought by the current parent for about 5x profit.

    The types of businesses you refer to are all about their people, the networks they have and services they provide.

    There is a risk for a purchaser of such a business that if the staff leave there may not be much of a business left!

    When companies can make 4m almost overnight from trades or moving money around the risk/reward of these types of business is much less attractive.

  • kw

    hi,

    i am extremely pleased to find your posts. i have a project under mergers & acquisition on construction industry. thank you!!

  • kw

    hi,

    i am extremely pleased to find your posts. i have a project under mergers & acquisition on construction industry. thank you!!