US's Aecom investor Starboard Value calls for Jacobs-style turnaround
IN-DEPTH: 4% investor says Aecom is 'a good company' but must implement major changes with an 'open mind'
A 4% investor in American engineering company Aecom, Starboard Value, has called on the firm to consider the sale of its construction services unit as part of a wider operational overhaul to raise profitability, a letter addressed to Aecom chairman and chief executive officer, Michael Burke, by the hedge fund's managing member, Peter Feld, shows, wherein the latter offers Jacobs as a model for an operational turnaround.
Feld writes in the letter that Aecom's "consistently poor operating history has resulted in several years of disappointing shareholder returns", adding that the "underperformance is particularly striking" given Aecom's acqusition of UR Corporation.
URS was a California-headquartered federal government contractor that Aecom acquired in 2014 through a transaction that Feld says was "billed as transformational and highly synergistic".
In his letter, Feld adds: "We believe the company’s recent operating performance is directly a result of poor execution, rather than a result of uncontrollable external factors.
"When analysing each segment against their respective peers, there appears to be substantial room for improvement."
Aecom's three major business units include design and consulting, management, and construction services.
On 17 June, Aecom said its board had approved a plan to spin off the management business as a standalone government services firm in a transaction due to complete by H2 2020, and the Starboard Value leader says this "positive development" is "just one piece of a broader set of opportunities to unlock significant value" at the engineering company.
Feld suggests Aecom's construction services unit is sold off to spur growth at the firm: "While we believe there is room for margin improvement and mitigation of project delivery risks, ultimately it may be in the best interest of the company and its shareholders to sell [the construction] business."
Aecom's design and consulting services business, according to Feld, operates at a 310-point Ebitda margin gap against its closest peers, and the Starboard Value leader shares advice to improve the performance of this unit as well.
"Our research indicates that project managers are optimising for billable employee utilisation rather than managing delivery margin," he writes.
"In addition, heightened non-billable employee costs and other corporate overhead allocations burden the business’s ability to bid competitively for projects.
"With respect to business development, [the design and consulting unit] currently does not appear to sell its suite of services in a client-centric manner.
"Instead, we have heard several anecdotes of competing client coverage across the business-line verticals demonstrating a lack of integration and organisation. We believe that these and other operational shortcomings are eminently addressable through management action."
JACOBS' OPERATIONAL TURNAROUND MODEL
Feld offers fellow American engineering company Jacobs' growth over the past five years as an example that Aecom should review to improve its operations, Feld writes.
"When Jacobs’ current CEO was appointed to this role in August 2015, he inherited an underperforming organisation that had similarly been built through acquisitions that remained unintegrated," he explains.
"In addition, the organisation suffered from a similar office-centric and employee utilisation culture where overall client and portfolio profitability were not closely managed.
"Over the course of the subsequent year, Jacobs implemented a substantial organisational restructuring that touched all aspects of the firm. Nine business segments were reduced to four, simplifying decision making and client coverage.
"Over 10% of the existing book of business was reassessed to meet internal profitability hurdles. Hard cost savings were achieved by eliminating or downsizing 33% of the office locations and reducing over 8% of the total employee base.
"We believe the operational opportunity at Aecom is similar in both scope and scale to the turnaround at Jacobs. Management should closely evaluate the methods and actions implemented at Jacobs and assess, with an open mind, the applicability to [Aecom]."
Feld says he and Starboard Value remain optimistic about the future of Aecom, which he adds has a "bright future" ahead despite current challenges.
He explains: "We believe Aecom is a good business with a bright future. However, as highlighted in this letter, we also believe Aecom is deeply undervalued with significant opportunities for material improvement within the control of management and the board.
"Significant change is urgently needed given the persistent underperformance at the company. We look forward to engaging with you and other shareholders to discuss these topics further."