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Mergers and acquisitions: A construction company growth tool

Peter Caulfield
Mergers and acquisitions: A construction company growth tool

There are more ways for a small- and medium-sized construction company in western Canada to grow than by taking on more and increasingly larger projects.

Taking the financial path enables the owner to become part of a bigger business entity by merger or acquisition (M&A), says a Vancouver-based investment banker.

Ian MacKay, managing director of investment banking in the Vancouver office of Raymond James Ltd., will discuss the ins and outs and ups and downs of construction industry M&As at Buildex Vancouver 2017 in a session called M&A and the Changing Landscape of the Construction Sector in Western Canada. MacKay’s presentation takes place on the morning of Feb. 15. He says it will be of interest to owners of privately held companies.

"The presentation is targeted at business owners from two aspects," said MacKay. "First, it provides some perspective on why some construction companies might be willing to sell all or a part of their business."

In addition, he says, the presentation can supplement the strategic thinking of business owners by helping them to understand who is interested in buying construction companies in Western Canada and why. Whether they’re a prospective buyer or seller, MacKay says, construction companies need to stay on top of the M&A activity in their industry.

"It markedly affects the competitive environment," he said. "It can reduce the number of competitors in the market and at the same time increase the size of some of them."

When a construction company decides to cash in its chips, the owner receives the immediate benefit of increased liquidity, of course, but what else does he get?

"We are fortunate to have many entrepreneurial owners who have capitalized on a robust industrial environment to create some very strong businesses," MacKay said. "They may want to become part of a larger entity for several reasons."

One of the benefits of selling part of a construction company is the opportunity to remain operationally involved in it.

"A private equity investor will typically allow a business owner to maintain the company’s autonomy and brand," Mackay said. "Such an investor typically structures its investment to provide participation for the owner or manager in any upside of the enhanced company."

Selling the company might also help the owner with succession planning.

"The owner might not have family members that are well positioned to continue to run the business as currently constituted," MacKay said.

Selling his company might also give the owner a better chance for it to grow.

"A private business owner may have a business that could benefit by combining with an entity that can enhance its financial and operational resources," he said.

Finally, selling up can also improve a company’s strategic positioning.

"An M&A may be a vehicle to better position the company to gain market share, to sell additional services or to diversify the customer base," MacKay said.

What about buyers? What do they get?

There are two types of buyers in the construction industry, MacKay says.

"The first type are strategic buyers," he said. "Typically, they’re companies already operating in the construction sector that are looking to expand their business platform, to expand or to add a new service."

This might involve buying or investing in a company in western Canada in order to gain access to a new geographical area.

Or, the buyer may want to combine with a construction company in western Canada in order to provide a wider array of skills and services to its clients. The second type of buyer are private equity investors.

"In general, they are firms that make an investment in a company, typically owning more than 50 per cent," MacKay said. "They partner with the construction company they purchase in order to develop and grow the business with a view to exiting their investment in five to seven years."

In British Columbia, about three-quarters of the mergers and acquisitions that have taken place are with other construction companies that have been moving into the province from other parts of Canada, the U.S. and Europe.

"As mergers and acquisitions of western Canadian construction companies continue, the trend will affect the competitive positions of many companies in the sector," MacKay said.

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