Michael Baker Corp. Business Information, Profile, and History

History of Michael Baker Corp.

Michael Baker Corp. is one of the oldest and largest professional-services companies in the United States, providing engineering, construction, and operations and maintenance services worldwide. In the mid-1990s its primary services were engineering design for the infrastructure market, including highways and bridges; operation and maintenance of oil and gas production facilities; construction and construction management services for building construction; and digital mapping, airport design, and environmental engineering.

Michael Baker Jr. was born in 1912 in Beaver, Pennsylvania. His mother died when he was only six weeks old and, as one of 12 children, he had, he later observed, "a constant desire to express myself and get attention ... and a terrible hunger for affection." His father, a civil engineer, demanded strict dedication to church, duty, and hard work. Baker left home to study engineering at Pennsylvania State University but had to drop out after his freshman year because his father's business collapsed during the Great Depression.

After a year of drifting around the country looking for work, Baker landed a job in Jamestown, Pennsylvania, as timekeeper on the construction of a dam. Soon after, he struck out on his own as a contractor but wound up penniless when he bid too low on a land-clearance project. A $200 loan he solicited from a Beaver benefactor enabled him to return to Penn State, and he graduated at the top of his engineering class. Too restless and ambitious to work for others, he tried contracting again but went bankrupt before the end of 1939.

Undaunted, Baker launched the Michael Baker, Jr. consulting firm in Rochester, Pennsylvania, in 1940. Willing to take any job and backed by six-months' credit on his office rent, he grossed $15,000 by year's end and was employing eight men. In 1941 his billings reached $84,000. Soon after the Japanese attack on Pearl Harbor, Baker won an assignment to conduct surveys of a defense property near Paducah, Kentucky, and complete them in a near-impossible 60 days. Borrowing money for the necessary equipment from the local bank, he assembled 25 survey parties and finished the task in 45 days. By the end of World War II Baker had provided engineering services to 122 airfields extending from Brazil to Alaska. He also found time to design the eastern part of Pittsburgh's Penn-Lincoln Parkway East.

After the war Baker expanded his focus to community planning, aerial mapping, irrigation, hydroelectric projects, bridge design, and other public works, and he established an architectural association for the design of schools, hospitals, other public structures, and industrial plants. In 1946 he incorporated his firm as Michael Baker, Jr., Inc. Billings exceeded more than $1.5 million in 1948, when net profit came to over $100,000. By the end of 1949 the company had eight divisions offering engineering services ranging from architecture to water control.

One of these divisions was earmarked for international assignments. In 1951 Michael Baker was made the consulting engineer and construction administrator for Saudi Arabia. This post entailed the design of harbor facilities, customs buildings, major highway systems, airports, water supply and electrical systems, a private hospital for the royal family, a $30-million air base, and additions to the royal palaces. Baker also acted as purchasing agent for the king, and his firm was responsible for maintenance work in the king's harem, a signal honor.

Baker's billings reached $5.7 million in 1955, when the firm's profits were $200,000. Roughly half of the work came from highways, about one-sixth from defense projects, and about one-tenth from foreign operations. The number of divisions had grown to ten in 1957, when there were a dozen branch offices and four foreign ones. In 1956 the company became consulting engineer to the Pennsylvania Turnpike Commission and the Delaware River Joint Toll Bridge Commission, positions it retained into the 1990s. Michael Baker, a colleague told a Fortune reporter in 1957, "can smell engineering work like a bird dog smells game. And he's thinking about next year, while you're still thinking about today." He personally reviewed every proposal, project, bill, and billing.

In 1958, when Engineering News-Record ranked Baker as the largest architectural-engineering firm in the United States, the firm had 1,009 employees. In 1960 the company was awarded a contract to design Pittsburgh's Three Rivers Stadium. In the same year the Philippines awarded the firm contracts to design a wharf and marine slipway for the port of Manila and to procure dredging services. Baker surveyed and staked out a 236-mile natural-gas pipeline route from Ohio to Pennsylvania in 1967. Its revenues came to $12.7 million that year, when net income was $543,387.

Baker became a publicly owned corporation in 1968, with 60 percent of the first-issued common-stock shares, however, in Michael Baker's hands. The shares, offered at $12 each, rose to nearly $20 during the year. A year later Baker had 13 divisions. It had developed a data bank in excess of 300 computer programs used in the location and design of highways and utilities, the analysis and design of structures, soil analysis, population projections, and traffic and revenue studies. About 61 percent of its revenues were coming from state and local governments and agencies, nine percent from the federal government, and the remaining 30 percent from private industry.

By 1972 Baker could boast of having designed more than 7,000 miles of highway, the Pennsylvania Turnpike tunnels, the Squirrel Hill and Fort Pitt tunnels in Pittsburgh, the Mississippi Memorial Stadium (as well as Three Rivers Stadium), the 44-story Wells Fargo Building in San Francisco, and Seattle's Space Needle. But volume dropped from $21.3 million in 1970 to $19.8 million in 1971, and net income from about $1 million to about $500,000. In 1972 the company lost $473,000 on contract income of $20.1 million. In that year the firm's name was changed to Euthenics Systems Corp., but in 1975 it became the Michael Baker Corp.

Baker's fortunes were restored by the Trans-Alaska Pipeline. It designed the 360-mile main state road from the Yukon River to the state's North Slope plus more than 200 miles of access road connecting it to the pipeline route. The firm also designed part of the 796-mile-long pipeline itself and a suspension bridge to carry the pipeline over the Tanana River. Between 1969 and 1979 350 employees spent 3 million labor hours on the project, which accounted for about 50 percent of the company's revenue and 90 percent of its profit.

There were other notable accomplishments in the 1970s, including the design of the New River Gorge Bridge in West Virginia, with the world's longest single-span steel arch. When oil began flowing through the Alaska pipeline in 1977, however, there was little more for Baker to do, and the drawbacks of dependency on a single project immediately became obvious. Company president William L. Shaw later explained to a Management Review reporter, "We looked around for something else to do, and all those long-time clients whom we had served for many years said, 'Where were you when we needed you?"' Contract income nosedived from $28.3 million in 1977 to $19.8 million in 1978, and the company lost money in both 1978 and 1979.

Michael Baker Jr. died in 1977 and was succeeded by Michael Baker III as the company's chairman and chief executive officer. A protracted period of instability ensued, in which dissatisfied shareholders twice tried to overturn the management. Canadian investors holding nearly 14 percent of the common stock contemplated a takeover in 1982, and Century Engineering Inc. of Towson, Maryland, made an offer in 1983, when the company lost $1 million and was faced with impending bankruptcy. Instead, Baker workers agreed in 1984 to buy nearly 40 percent of the company's outstanding common shares, through an employee stock-ownership plan (ESOP), from Baker family members and a family trust for $8.9 million, or $9 a share. Shaw succeeded Baker as chairman and chief executive officer. Early in 1985 the ESOP raised its stake in the company to 70 percent.

In the last months of Baker's reign, Shaw conceded to Management Review, "morale was terrible ... probably as low as I've ever seen it in this company." About 600 of the 1,000 employees had been laid off and "Michael III isolated himself from the employees and the clients.... Our strategy at that particular point in our life was to be in business for the next year." Baker not only had to attract new customers and lure back old ones but improve its reputation. Shaw admitted, "We didn't do anything on time, we didn't meet the schedules, we didn't meet the budgets, and our performance was lousy." Even a client as old as the Pennsylvania Department of Transportation vowed never to give the company another job.

Baker's reputation was also damaged by its dependence on government contracts. A 1991 Barron's article described the company founder as "basically a salesman rather [than] an engineer [who] built his business through political links and contributions to politicians, especially those who influenced the awarding of public works contracts." When the U.S. attorney for western Pennsylvania, Richard Thornburgh, a Republican, brought Michael Baker Jr. before a federal grand jury to question him about contributions to the 1970 campaign of Governor Milton Shapp, a Democrat, Baker took the Fifth Amendment. He said that the company recently had paid the Internal Revenue Service an additional $100,000 in taxes, and that he had paid an additional $27,000 for the years 1970 and 1971 but added that no criminal charges or fraud penalties were involved.

Baker's profitability, aided by a $1 million cost-control program and an expanding national economy, soon returned, and in 1986 the company for a second straight year won an award for financial management achievement from the Professional Services Management Association. In 1989 contract revenues passed $100 million and net income reached nearly $2.3 million. One important asset was the acquisition, at the end of 1986, of Intelcom Support Services, Inc., a Texas-based firm providing contract operations and maintenance services to military and other government installations. Expanding Baker's core business to operations and maintenance meant, according to Shaw, "multiyear contracts with excellent cash flows ... not subject to the fluctuations you experience in the pure engineering design business."

Further acquisitions also expanded Baker's scope. In 1990 the company purchased MO Services, Inc., of Houston, a firm engaged in providing operations and maintenance services to oil and gas producers, utilities, and industrial customers. The next year it acquired certain assets of the former Mellon Stuart Co., an action that placed Baker in general contracting, construction, and construction management. This closed the gap between design and maintenance in company operations, and by late 1991 Baker was receiving half its revenues from construction. In 1993 Baker completed the acquisition of Overseas Technical Services International, which was providing operations and maintenance services worldwide to major oil and gas producers.

Between 1985 and 1990 Baker averaged annual growth of 20 percent. Employment rose to 2,040 in 1991, compared to only 420 in 1984. Shaw credited much of the company's success to its ESOP, which had a stake in the company valued at $28 million in mid-1991, compared to the initial $3 million in 1984. Employees, he said, rather than expensive consultants, not only identified Baker's acquisition targets but also participated in the ensuing acquisition process. "Previously, we had good engineers and scientists," the president of a Baker subsidiary told a Wall Street Journal reporter in 1991. "Now, we have good engineers and scientists who are also good businessmen."

Baker's outlook soured again, however, in 1993, when the company lost $15.1 million on revenues of $434.8 million. Shaw attributed Baker's problems to Intelcom, which began losing money in 1991 as a result of a misguided decision to branch into cable installation and housing renovation. Baker lost money again in 1994, more than $7.9 million on contract revenues of $437.2 million. The 1994 deficit arose from a $10 million pretax charge taken not only to deal with Intercom's problems but also projects by Mellon Stuart for government agencies in the Chicago area that became embroiled in claims and disputes. The company's stock lost 60 percent of its value in 1994. Long-term debt, however, fell from $7.7 million to under $4 million during the year. Baker's ESOP held 29 percent of Baker's common stock and 67 percent of the voting power at the end of 1994.

Effective in 1995, Baker converted its three groups&mdash-gineering, construction, and operations and maintenance&mdashø five market-focused units--transportation, general buildings, civil, energy, and environmental. The general-buildings sector accounted for 43 percent of contract revenues in 1994; transportation, 22 percent; civil, 18 percent; energy, 10 percent; and environmental, 7 percent. Among the principal markets for the company's services in 1994, some 40 percent came from commercial, industrial, and private clients; 35 percent from various state governmental and quasi-governmental agencies; and 25 percent from the federal government.

Baker's corporate staff in 1995 was being housed in leased office space in Coraopolis, Pennsylvania. The company owned a 75,000-square-foot office building on a 175-acre in Beaver County, Pennsylvania. Office space also was being leased in 13 other states and in Guam, Abu Dhabi, and England.

Principal Subsidiaries: Aerial Map Service Co.; Baker & Associates; Baker Engineering, Inc.; Baker Engineering NY, Inc.; Baker Environmental, Inc.; Baker/MO Services, Inc.; Intelcom Support Services, Inc.; Mellon Stuart Construction, Inc.; Overseas Technical Service International; Umwelt Consulting GmbH; Weston Geophysical Corp.