The most closely followed merger of the year is currently more “off” than on, after Carillion failed to win over Balfour Beatty at its second attempt. However, Carillion is still advancing its case and there’s much speculation that it will refuse to give up in its pursuit of Balfour Beatty, and that it is only a matter of time before it restarts the courtship of a reluctant bride.
The merger that was under discussion is said to have soured due to an uninspiring offer of potential profit for Balfour, as well as persisting differences in opinion regarding the sale of US-based design consultancy Parsons Brinckerhoff. However, the relevant question to be asking is not why did the deal fall through, but why was it brought to the table in the first place?
This is not a paywall. Registration allows us to enhance your experience across Construction Management and ensure we deliver you quality editorial content.
Registering also means you can manage your own CPDs, comments, newsletter sign-ups and privacy settings.
The decision of two of the biggest construction firms, both nationally and globally, to even consider joining forces is a perturbing development for the industry as a whole. The implication that the indomitable Balfour Beatty had a weak spot that Carillion could help remedy points towards a lingering vulnerability in the sector, as well as a motive for larger companies to band together as insurance against a future crisis.
This approach to business growth is hardly a new one, with big money mergers commonplace in every sector, from media to finance to pharmaceuticals. However, the consequences of such mergers often, if not always, exert a serious impact on smaller businesses and subcontractors that are left in the wake.
When two industrial frontrunners merge, the amalgamation of the companies imposes a limitation on what smaller businesses can achieve. This concentration of the pool of available work is particularly damaging in the aftermath of an economic downturn, as SME subcontractors and suppliers on already shaky ground can be sent under by the monopoly position created by the formation of “super giants”.
“The joining of two heavyweights could quickly dampen the industry’s renewed optimism, particularly if the resulting giant was to go on to dominate the market and reduce the opportunities for smaller players in the field.”
All industries need diversity, and while the future of a Carillion/Balfour Beatty partnership looks unlikely for now, smaller contractors and subcontractors should not be breathing a sigh of relief. On the contrary, the very fact that the conversation took place should be treated as a sign of things to come.
The restriction of competition is also a problem, as it not only means that clients may be forced to pay a higher price for buildings, but also that subcontractors and suppliers are left helpless to resist the commercial muscle exerted by these dominant companies. Opportunities for smaller subcontractors are restricted and exploitation can be the word of the day for the commercially unwary.
It has been said that Carillion has a reputation for being particularly tough in this regard, and indeed it was the first to introduce “supply chain finance” to the sector. With its sights clearly set on major expansion, those that have already experienced Carillion’s tendency to extend credit terms whilst demanding more work for less reward, might well anticipate more of this to come from the industry super powers.
The main problem with mergers of any kind is that no industry should put all of its eggs in one basket, particularly at a vulnerable time financially. The construction sector took some very hard knocks in the recession and is now grappling with a sharp spike in demand at a time when supply chains are looking increasingly stretched.
There can be no doubt that a dramatic surge in demand for housing in particular, as well as renewed interest in office, industrial and retail development is good news for contractors, subcontractors and suppliers across the UK. However, the joining of two heavyweights could quickly dampen this renewed optimism, particularly if the resulting giant was to go on to dominate the market and reduce the opportunities for smaller players in the field.
The apparent disintegration of the Balfour Beatty/Carillion deal might stave off the dominance of the super giants for a while, but the proposition itself is a reminder to smaller businesses to think about their own trading partners and supply chains.
The Balfour Beatty/Carillion talks might have ceased for now but be aware that the decision to sever ties was not based on the impact on the industry, but on the limited potential for profit for shareholders from the larger business.
Peter Vinden is managing director of Manchester-based construction and property consultancy The Vinden Partnership
