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Stantec offices in Edmonton

Call it a tale of two engineering companies, Aecon Group Inc. and Stantec Inc.

Both started in similar circumstances: Aecon's founder installed plumbing and gas lines in Hamilton in the 1870s, while Stantec's first projects were building sewers in rural Alberta in the 1950s.

But one of these companies is now a takeover target: Toronto-based Aecon acknowledged Friday that the company is up for sale. In contrast, Edmonton-based Stantec is an international leader in its field, on the short list of potential buyers whenever a rival firm is up for grabs.

Aecon hires bank advisers to explore sale, shares surge

The distinction between Aecon and Stantec – one dinner and the other diner in their consolidating sectors – reflects two different approaches to a quintessential Canadian challenge: How to evolve a successful domestic franchise in an increasingly global business.

Stantec opted to expand alongside many of its clients using what investment bankers call bolt-on acquisitions: small takeovers that built international scale and expertise. Since settling on this growth strategy in the 1970s, Stantec quietly rolled out 120 acquisitions to build a platform with 22,000 employees on six continents. It ranks among the world's 10 largest engineering firms and less than a third of Stantec's sales last year were to Canadian clients.

Over the past decade, Stantec's share price tripled and the company commands a $3.9-billion market capitalization. In a recent report, CIBC World Markets analyst Jacob Bout predicted Stantec will do at least two more acquisitions this year and noted that diversification allows Stantec to navigate market cycles. Mr. Bout said: "The company is currently experiencing a retraction of its energy and resource segment given the commodity downturn, but is seeing offsetting growth in its buildings and infrastructure segments."

Aecon, on the other hand, stayed narrowly focused on Canadian construction projects. The company has only made a handful of acquisitions over its 140 year history and the takeovers were domestic.

Aecon's share price went sideways for the past decade and an activist investor, Eric Rosenfeld of Crescendo Partners LP, joined the board this year. After a 20-per-cent spike in the stock price on Friday following a Bloomberg report that the company is open to offers, Aecon sports a $1-billion market cap.

Stantec, home to engineers, architects and project managers, is one of several Canadian service-sector companies that use bolt-on acquisitions as a relatively low-risk way to branch out internationally. Montreal-based CGI Group Inc. used the same game plan to become the world's third largest IT consulting companies, from modest roots as a supplier to Bell Canada.

These takeovers seldom make headlines – hands up if you noticed CGI recently acquired the leading IT consultant in Finland – but over time, steadily compounding growth creates significant wealth.

CGI has an $18-billion market capitalization. In a report Tuesday, CIBC World Markets analyst Stephanie Price said CGI deployed $375-million on four acquisitions this year and "we see a significant runway of tuck-in deals across the U.S. and Europe."

There is plenty of academic research showing takeovers destroy value as often as they yield positive results. Bolt-on acquisitions strip away much of the risk.

Mergers tend to fail if there is a clash of cultures between buyer and target. Anyone selling their company to Stantec knows which culture will prevail. CEO Gord Johnston states on Stantec's website: "We believe the best way to leverage the business combination is to fully integrate acquired companies into our model."

Takeovers also tend to fail if the buyer borrows significant amounts to fund a deal and struggles to pay back loans. Tuck-in acquisitions require relatively small amounts of cash – employees at companies acquired by the likes of Stantec and CGI are typically paid in shares that vest over time – so the financial downside is limited.

Aecon's corporate life cycle is all too familiar in Canada: An iconic national player is likely to be bought by a global company, with Chinese construction firms projected to be among the potential buyers.

The other way of doing business in the domestic service sector is to harness the intellectual strength of employees to a global growth strategy, fuelled by a seemingly endless stream of bolt-on acquisitions. The approach is transforming Stantec and CGI into world leaders.