- Hunt acquisition brings several synergies because it adds construction and contracting expertise and focus on different U.S market segments.
- My long thesis predicted stock price rise based on EPS growth and share buybacks. While the stock is up and buybacks were large, I didn’t predict any large acquisitions.
- I reiterate my long thesis, although the URS integration will likely be challenging and volatile. The fair value is ~$36 per share, offering a ~7% upside within a year.
AECOM Technology Corporation (NYSE:ACM), a global leading architectural design company, surprisingly announced a second large acquisition within two weeks. After announcing a merger with URS Corporation (NYSE:URS) in the middle of July, two weeks later, the company announced that it would acquire Hunt Construction, a privately-held construction management firm with $1.2B sales in 2013. The acquisition of URS was largely driven by the need to stay the number one global design company due to the acquisition-driven pressure from Jacobs Engineering Group, Inc. (NYSE:JEC) which jumped from the spot number four to a number two on the list of the top global design firms as well as the top U.S. design firms ranked by revenue. Jacobs surpassed - surprise - URS Corporation. So the URS acquisition makes strategic sense for both companies. AECOM will maintain a large lead in its number one status, which is a great selling point for its sales and marketing teams, and URS will be better off merged with AECOM than drop to a number three or four with uncertain prospects. But apart from boosting the industry rank, other synergies will be hard to find. Both partners have struggled with falling or stagnant sales recently. Their sales often overlap, so the merger may take some competitive pressure off and boost margins. But some sales are likely to be cannibalized.
Returning to the list of top companies, there is one very important top list where AECOM has been completely missing until the acquisition of Hunt - the top contractor list - while its archrival Jacobs Engineering currently holds the number ten spot on this list. The acquisition of Hunt will add significant contracting and construction capabilities to AECOM's primarily architectural and engineering expertise. AECOM will now be able to offer a truly integrated solution on par with Jacobs Engineering. Synergies from the Hunt acquisition should be significantly better than from the URS deal. In many U.S. projects, Hunt was often a partner rather than a competitor for EACOM due to Hunt's specialization in construction and contracting, as well as its focus on the U.S. markets, whereas AECOM drives ~60% of sales from overseas. Moreover, while AECOM expertise lies primarily in the commercial tall buildings, residential and hospitality sectors Hunt adds a strong position primarily in the sports, health care and aviation markets.
Being the number one in architectural design globally makes it very tough to keep growing sales in the core business segment, and the URS acquisition was one of the few options. On the other hand, the acquisition of Hunt Construction makes great sense and has a deeper strategic context than mere sales ramp-up. The integrated services will expand EACOM's reach in the construction and contracting business where it will have further room to grow as it combines Hunt's expertise with its own sheer size and project and client database. While Hunt had ~1.2B revenues in 2013, it has only 700 employees, which should make its acquisition a breeze, unlike the URS merger with a combined workforce of almost 100,000 employees. Due to the probable challenges and risks of the URS merger, I expect some temporary volatility in the company's earnings and stock price, but reiterate my long thesis. The stock's fair value is roughly $36 per share in current terms before the URS acquisition, offering a roughly 7% upside and a long-term potential for roughly 7% to 10% annual stock gains.