Cuts will lead to overcapacity, consolidation and job losses

1 November 2010

A spate of company takeovers and job losses could be the consequence of the reduced workload following from public spending cuts announced last week, reports Construction News.

Public sector work is likely to drop significantly over the next four years as the government slashes its total capital spending from £68.7 billion in 2009/10 to £47.2bn in 2014/15. The weekly quotes experts from PricewaterhouseCoopers and KPMG who warn that increased competition for work and pressure on margins will force  consolidation in the industry, which will be accompanied by more redundancies.

CIOB president and ConstructionSkills chairman James Wates highlighted the prospect of job losses: “As work does not come through, people will have to take the unpalatable step of having to ‘right size’ their businesses,” he told the paper. “There will be a run for business, and the cut-throat pricing and unsustainable margins and consequences that go with that.”

The firms that survive cuts will be those that can adapt, he added: “You will see agility from people who can see opportunities. If it’s a sector that’s going to be potentially hit by the cuts, people will either wither or they will say we have got to go into a different sector.”

Pressure on margins and increased competition could lead to overcapacity in the industry and a round of consolidation among contractors, particularly if the private sector fails to recover fast enough to make up the shortfall, writes CN.

“I would expect to see consolidation in the contracting industry, plant hire specialists and engineering consultants,” said PricewaterhouseCoopers strategy partner Chris Temple. “Companies need to either scale down or merge to take out this extra capacity, and large publicly listed firms are most likely to lead the consolidation.”

And struggling firms are the most likely to be taken over, said Fiona McDermott, partner at accountancy firm KPMG: “Future mergers and acquisitions activity could be along the lines of what happened with Connaught. Organisations close to going under could be bought out for a good price.”

Acquisitions will be triggered when the market starts to improve, said another source: “Firms that have won work through a downturn at low or zero margins can often struggle as the market picks up as they do not have enough capital or capacity to invest. This could be a catalyst for merger and acquisition activity.”

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