Joan Franco Poblet – Chairman, BAC Engineering Consultancy Group, Spain
Joan Franco Poblet, chairman of BAC Engineering Consultancy Group, talks M&A both in Spain and further afield, international expansion, and his advice for the next generation of Spanish engineers.
Could you please start by introducing BAC Engineering Consultancy Group, which was born out of the fusion and merger of several big engineering and construction inspection companies?
“90 percent of the domestic tendering disappeared practically overnight in 2009 and the situation has not really recovered again, so all of the companies operating in our business segment are compelled to look abroad for future contracts.”
Today our offering includes a broad range of consultancy services spanning civil and structural engineering, naval inspection and quality control, to name but a few. We initially started our expansion back in 2009 by purchasing two companies: one dedicated to transport engineering called INPASA, with a specialty essentially in bridge and motorway engineering, and another company, FORMILAB, dedicated to the quality control of the material used in construction. Then, that same year, I held negotiations with another company called BOMA (Brufau, Obiol, Moya & Asociados), with strong capabilities in edifice engineering including the conceptual design and structural calculation. Sensing the obvious synergies between these different entities, we resolved to merge them thus giving birth to a company called BOMA INPASA. Then, in 2012, ever attentive to new opportunities to consolidate our competencies and branch out into new diversifications, we started talking to Catalan outfit called CICSA that possessed a strong track record not just in transport and railways engineering, but also in hydraulic works.
By 2014 we were ready to fuse the two businesses and thus established BAC Engineering Consultancy Group. It is this sequence of strategically astute mergers and acquisitions that has not just enabled us to weather some pretty turbulent economic times but also to attain the sort of critical mass, scope and the integration of portfolio to be able to confidently compete globally.
How would you define your M&A strategy?
We came to a conclusion that the best way to develop the company was to adopt what we refer to as a “growth matrix” so as to ensure that our inorganic growth trajectory followed a systematic and well thought out pattern. We therefore visualized our strategy in a certain manner. On one axis of columns we aligned our capabilities in terms of sub-sector and identified those functions where we wished to operate. On the other axis, we listed geographical territories in order of priority. Step by step, we then started filling in the gaps and seeking out specific companies with synergistic competencies, either in terms of sub-sectoral activity or in terms of geography. The idea was never to purchase a direct competitor, but rather businesses with complementary capabilities whereby a joined-up approach would produce an effect that would be greater than the sum of the component parts.
Looking back at the sub-sectors that we cover, we started out predominantly with civil engineering, but over time supplemented this with entire new dimensions such as edification and quality control functions. Our most recent addition has been to establish an energy and environment division, under which we support clients in the hydrocarbons industry. The footprint that we cover has also increased in a sequential fashion. Our priority geography was quite naturally the domestic market. From there, we complemented our Spanish activities with a North African dimension, by implanting ourselves in Algeria. The next geographies we chose to expand out into were quite naturally Latin American where, as a Spanish company, there are many cultural commonalities, not least a shared language. Nowadays we maintain a presence across 10 different economies, the bulk of which are Latin American countries.
We notice that one of those countries is Armenia. That looks like a bit of an anomaly in relation to the rest of your portfolio of countries. How did that come about?
That was very much an instance of us following one of our clients abroad. We were working with the Spanish construction firm Isolux Corsan, which is one of our longstanding customers and they had just successfully secured a big-ticket contract to construct a major motorway and wanted our support with aspects of the Quality Control. Having established that initial foothold, we considered it sensible to branch out into other areas. As a general rule, when we first enter the countries, we follow that up by trying to develop other services there. We tend to enter through one activity – engineering or project, testing, inspection, whatever, and then we try to develop other types of activity and so on.
When we spoke to Juan Ignacio Lema from Tecniberia, he was saying that there is no such thing as a merger. He believes that merger is really an acquisition because there is always a dominant company in the relationship, and that there is always a dominant cooperate culture that takes over. Do you agree with this point of view? And how does that relate to the situation of BAC?
I have considerable experience with mergers and there is some truth to Juan Ignacio’s comments. The cultural aspect is usually the most difficult element and takes significant time to sort out. When you have just eaten a big, heavy meal, it then takes a while to digest the food and exactly the same is true of a sizable merger. The reality is that corporate cultures tend to be deeply embedded within businesses. This is especially true when dealing with iconic companies with their own well-established histories and legacies. The larger and older the company, the more time will be required to accomplish the digestion process. When you try and blend two different entities together that each have their own deep roots it is obviously going to take a great deal of time and effort to encourage those two sets of roots to entwine and become one. BAC is still going through its own digestion process, though I would estimate that we have completed around 85 percent of the process… so we are definitely getting close towards realizing our objective of fostering a single corporate ethos.
Your acquisitions to date have all been related to Spanish companies. Would you consider purchasing a foreign entity?
We are always on the lookout for additional inorganic growth opportunities and would absolutely consider foreign entities in the future. Incorporating a foreign business is even more difficult when you take into account the cultural identity aspect so we probably need to bolster our internal muscle a bit more before we reach that stage.
However, do not forget that here in Spain, we are in the middle of exiting a very harsh recession and financial crisis. 90 percent of the domestic tendering disappeared practically overnight in 2009 and the situation has not really recovered again, so all of the companies operating in our business segment are compelled to look abroad for future contracts. We are talking about a domestic market that disappeared vertically and not in a progressive way. Businesses had to enter foreign markets very speedily or face an overnight collapse in their revenues and free fall in their cash flow. Our international development, just like for everyone else, was partly born out of the crisis and averting extinction, but now that we find ourselves with a global portfolio we need to consolidate that and one way we can do that will be by the acquisition of foreign outfits.
I suppose the crisis also brings opportunities to deploy a counter-cyclical strategy?
Absolutely. When the market is in free fall, and when many decent companies are experiencing cash flow and existential problems, it is the right moment for those who have capital to snap up new assets cheaply. BAC was lucky because we had the capital to finance acquisitions that would have cost a lot more had it been under conditions of business as usual.
So, which parts of your business are generating the most revenue today?
Civil engineering represents around 50% of our overall business. Next are buildings engineering, which constitute a further 25%. Then we also have our quality control and inspection services. Energy and environment represents the newest and youngest division. Right now, this part of our offering only accounts for 5-10% of the revenue, but we have high hopes to extend it and grow it further.
Tell us more about your youngest division then and the types of services that you can offer to energy sector clients.
In energy and environment, we initially opted for the inorganic increase so, 4 years ago, we purchased 100 percent of a business from Madrid with 17 years of experience in the inspection of petrochemical products storage tanks, ICIASA. Firstly, we associated it to the quality control division, but, later, it kept growing, and we decided to open a new division of Energy and Environment.
The most important contracts we have are related to inspecting pipes and storage tanks for CLH, the company charged with much of Spain’s hydrocarbons logistics. We have also supported the engineering of one of Petronas’ refineries in Malaysia and supervised the construction of the modules in studio for Petronas’ operations in Vietnam as well. Then when CLH acquired a British company we were sent over to inspect the assets. We foresee a lot of business coming our way in the domain of non-destructive testing (NDT) as well. In terms of growing this part of the business, we started by amassing capabilities in inspection and quality control and intend to extend our activities over time to the point where we will be contributing to the actual engineering as well. On the naval side, we have also secured contracts in Algeria with clients like Hyproc Shipping for the inspection of LNG vessels and installations.
How do you go about differentiating yourself from the competition?
We feel competitive in terms of what we have done by purchasing a company that had already been competitive. So, we find ourselves extremely competitive. We are step by step putting together the sort of integrated portfolio that will allow us to compete with big international groups from all over the world. Everything right now is geared towards growing and developing ourselves. We are not imprudent, we are conscious that we are undergoing a training process and will be not looking for the biggest contracts per se, but rather those which will permit us to train even more.
How do you judge the reputation of Spanish engineering and construction firms abroad?
Spanish construction firms occupy first position globally in terms of reputation for quality and price ratio. What is the secret? I think that if we look back in history, there was an important training period for a whole cadre of engineers during the timeframe 1986 (the year of the announcement of the 1992 Olympic Games in Barcelona and Sevilla Universal Expo) and 2006. These two events provoked around them, the construction of great infrastructure, of a scale and style that had never been seen before in our country. Major, iconic works happened during this period including the Madrid-Sevilla high speed train line, the upgrade and reconstruction of our airports in places like Barcelona and Madrid, new motorway construction and much more. Not only was the international spotlight upon us, but our engineering and construction firms were exposed to the very latest techniques and methodologies. They started to specialize a lot more as well and really became pioneers and innovation leaders in their sub-sectors. It was an incredible learning curve and one that manifested itself in a great number of successes. It is no coincidence that today Spanish cities feature heavily in the list of the top ten best airports of Europe.
This great period of flourishing was also the point when major construction firms started to go abroad and established internationally recognized brand names. Engineering Consultancy followed a similar trajectory, but rather later. The Spanish engineering consultancy landscape has always been pretty atomistic with high volume of small family run consultancy firms. It was the financial crisis, the housing bubble crash and the onset of recession that enticed many of them abroad and triggered mergers and consolidation. Beforehand, the big 4 Spanish engineering companies – SENER, IDOM, TYPSA and AYESA – all had international footprints, but not many of the SMEs. That all changed post-crisis with a big shake out of the market. Newly fused and consolidated entities then started spreading their wings and emulating what had happened in construction years earlier.
What advice would you give to those young generations of engineers in Spain who are going to become CEOs eventually? What are the keys to succeed in engineering and construction work with your experience?
You need to believe that what you do helps to make people’s lives better. If you ask a doctor, why have you studied medicine? The response that you will get is that they have studied it because they want to save lives. Why does anyone want to be an engineer? One wants to become an engineer to make life better. If I had to give a piece of advice, I would say they should think about it. What do we do in this sector? Make people’s life better, easier.