Baird Sees Current Industry Trends Driving Increased M&A Activity in the Nearly $200 Billion U.S. Facility Services Industry

2005 a record year for mergers & acquisitions in the sector with announced deals valued at $9.4 billion in the U.S. alone

The facility services industry posted record dollar volume for mergers and acquisitions transactions last year and is poised for continued consolidation in 2006, according to a new report released today by Robert W. Baird & Co. (Baird). The sector ended 2005 with $20 billion in total global M&A deal volume, including a record $9.4 billion in the U.S., and the highest number of M&A transactions in the last four years.

In the report, “Facility Services M&A,” Baird includes building services (janitorial services, lawn care, pest control and carpet cleaning), security services (guard and patrol services and electronic monitoring services), food service contractors, and engineering services (HVAC and plumbing services, electrical services) in its classification of the industry. The market for these services in the U.S. is estimated to be approximately $200 billion.

“Growth in facility services is being driven by the continued increase in the rate of outsourcing as competitive pressures are forcing firms to improve their organizational focus and structure. Outsourcing non-core functions allows management to focus on core business operations, free up resources and better utilize existing assets,” said Peter Kies, Managing Director at Baird and one of the report’s authors. “Additional outsourcing benefits include higher quality service at reduced costs, access to best practices and specialized expertise which would be difficult and costly for an in-house staff to replicate.”

In the report, Baird highlights the unique characteristics of the residential and non-residential markets served by the industry. The residential market represents one-third of total industry revenues and is more economically sensitive but has benefited from a sharp rise in consumer spending over the last several years, resulting in a faster growth rate for this group.

At the same time, commercial contracts generally provide a more dependable revenue stream and account for two-thirds of the overall market. Demand in the commercial sector is also growing, driven by a number of factors that include increased occupancy rates, new building construction, the aging of the building stock and increased long-term demand for new healthcare and educational facilities.

The Need for Consolidation

Baird notes that the industry is highly fragmented and is undergoing a wave of consolidation. The report highlights a number of key factors that Baird expects to drive increased industry consolidation, including the ability to gain economies of scale, increased globalization and product, market and geographic diversification. Going forward, Baird expects the business to be driven by the growing demands of corporate clients, favoring those vendors with the resources to invest in new technologies and to manage facilities across multiple locations. “We believe that acquisitions will be a key factor for companies in this sector to quickly achieve the kind of operational scale that will allow them to meet the growing demands of their customers with increased efficiency,” said Kies.

2005 a Record Year in M&A Dollar Volume

Baird noted that there has been a steady increase in U.S. M&A activity in this sector over the last five years, driven in part by the outsourcing trend. The firm identified approximately 3,000 global facility services M&A transactions over the past 10 years, peaking at 488 deals in 1998. The number of announced M&A deals then fell to just 202 in 2002 and rose steadily to almost 300 transactions announced last year. In addition, the size of transactions has climbed significantly with last year representing the highest aggregate disclosed deal value in the past 10 years, including marquis transactions such as the purchase of York by Johnson Controls and the take-private deal for ISS.

“We have seen a significant increase in transaction activity coming from both private equity firms as well as large multi-national companies looking to expand their presence here,” said Steven Bernard, CFA, director of M&A Market Analysis. “We believe that this confirms the healthy state of facility services M&A activity.”

John Lanza and Ross Williams, both Vice Presidents at Baird who also contributed to the report, noted that the public companies in the facility services sector are doing well and helping to drive M&A activity. They noted that during the 12 month period ending March 31, 2006, Baird’s index of facility services companies increased 29.9 percent, compared to just 9.7 percent for the S&P 500 Index. During the last three years, Baird’s index more than doubled, rising 157.2 percent compared to a gain of 57.2 percent for the S&P. This positive performance reflects strong business fundamentals, growing investor enthusiasm and awareness regarding the current industry dynamics and long-term growth potential of the facility services sector.

Baird, established in 1919, is an employee-owned international wealth management, capital markets, private equity and asset management firm with offices in the United States, Europe and Asia. Baird’s principal operating subsidiaries are Robert W. Baird & Co. in the United States and Robert W. Baird Group Ltd. in Europe. Baird also has an operating subsidiary in Asia supporting Baird’s private equity operations.

Committed to being a great place to work, Baird is one of FORTUNE magazine’s 2006 “100 Best Companies to Work For” and was also included on the magazine’s 2004 and 2005 lists. Robert W. Baird & Co. is a member of the New York Stock Exchange and other principal exchanges and the Securities Investor Protection Corporation (SIPC). Robert W. Baird Ltd. and Granville Baird Capital Partners Ltd. are authorized and regulated in the United Kingdom by the Financial Services Authority. For more information, please visit Baird’s Web site at www.rwbaird.com.