Verit Advisors’ view is that construction and engineering (C&E) companies are currently facing an uncertain political landscape, a weak economic recovery since 2009, volatile financial markets, and slow M&A activity. As a result, companies are finding internal and external strategic growth alternatives limited and increasingly competitive. Successful C&E leaders are becoming more creative in optimizing equity allocation, capital structure, employee incentives, and project organization to overcome these challenges.

Conflicting Information

Owners and managers of C&E companies are hearing conflicting information regarding the industry outlook. Reports published by leading commercial and investment banks covering the industry express optimism that infrastructure end markets will drive growth across the sector due to factors including population growth, environmental compliance, and President Obama’s February 2012 plan to invest $476 billion in infrastructure over six years. In spite of these data points, companies continue to experience negative trends including significant uncertainty in government spending and continuity, ongoing reticence of other industries to make investments, and a widening performance gap between C&E public company indices versus the S&P-500. Indeed, it is becoming increasingly difficult for C&E leaders to successfully navigate companies through the uncertainty of today’s financial and political landscape.

Successful Tactics

How are successful C&E companies driving value today? Many of the top performing companies have significant employee ownership in the form of options, direct ownership, stock appreciation rights, and employee stock ownership plans (ESOPs). Parsons Corporation, Black & Veatch, HDR, Garney Construction, Terracon, HNTB, Messer Construction, and Austin Industries are examples of companies that have partial or full ESOPs as part of their capital structure. Partial ESOPs are particularly attractive for C&E firms because the structure allows for equity-based incentives outside the ESOP, providing an effective talent recruitment and retention tool that companies use to differentiate themselves and to drive growth and value. After all, talent is critical and equity is a precious corporate resource that needs to be allocated strategically.

As always, it is Verit’s vision to bring a fresh approach and customized solutions to advise private business owners on ownership transition.