Both global and domestic mergers and acquisitions (M&A) activity across all industries reached an all-time high in 2015, spurred by low interest rates (i.e., cheap debt), a desire to improve efficiencies in a slow recovery, and the need to keep pace with both international and consolidating competitors. The engineering and construction (E&C) industry, specifically, is also consolidating at a rapid pace and is resulting in an altered competitive landscape.
The headlines in 2013 and 2014 were defined by large mega-deals as a number of multibillion dollar transactions led to the creation of even larger industry conglomerates. While 2015 did not see the same fireworks as recent years, deal activity in 2015 is on pace to reach a new record level (see chart this page). Through Dec. 9, 2015, FMI tracked 336 transactions in the E&C industry, including architects, engineers and contractors across all end markets.
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The headline-grabbing deals over the past few years were primarily in the industrial and civil markets, as firms looked to acquire additional capabilities and scale and expand into emerging or growth markets. In the general building construction segment, there is heightened interest among buyers and sellers but not the landmark transactions expected entering 2015. Conditions remain, however, for an improved M&A market entering 2016.
FMI forecasts nonresidential building construction put in place to increase 7 percent in 2016 (10 percent in the commercial segment specifically). Contractors are seeing backlogs return to pre-recession levels and operating results return to their historic sustainable average. However, many firms exited the recession looking for additional margin, which is leading to increased M&A activity. Some firms are choosing to focus on higher margin segments and exiting the building construction segment, such as KBR’s divestiture of its building group this year, while others are looking to move up or down the construction supply chain, by participating in the equity of a project, acquiring design capabilities or looking to increase self-perform capabilities.
However, the traditional drivers of acquisition activity in the general building segment remain at the forefront. Large regional contractors or national contractors looking to expand geographically or enter a new market niche remain the primarily catalyst for M&A activity among general building contractors. While many of these traditional buyers are working through substantial backlogs and maintaining focus on their core business during the market expansion, others are taking advantage of increased acquisition opportunities. Many firms who put off owner transition planning during the recession are now being forced to consider their alternatives, including a potential sale. And, despite the fact that public E&C companies are underperforming the broader market, private company valuations remain at their historic average trend, creating further incentive as operating results have improved.
In addition to traditional buyers, there is heightened interest from both international firms and large A/E firms. International buyer interest is present across all E&C sectors, but is especially evident in the building segment. Buyers from traditional locations remain (e.g., Europe), but new buyers from locations such as Asia, South America and the Middle East have entered or are interested in entering the U.S. market.
In addition to international interest, in recent years select A/E firms have begun looking at acquiring general building contractors in to order to build at-risk capabilities. Across the E&C industry, integrated design-build or EPC platforms have been a major contributor to M&A activity. Transactions involving engineers buying contractors or vice versa account for approximately a third of M&A activity in the industry. While this is more prevalent in other industry segment such as the industrial markets, the trend is becoming more prevalent in the building segment as owners re-embrace alternative delivery methods during the market expansion.
M&A activity among contractors in the general building segment should increase in 2016, including both smaller, regional firms and larger, multiregional acquisition targets. The market is expected to continue to expand into 2016, and M&A activity, especially in select geographic and end markets, should improve accordingly.
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Alex Miller is a vice president with Raleigh, N.C.- based FMI Capital Advisors Inc., FMI Corp.’s registered investment banking subsidiary. Miller works with engineering and construction industry firms across the country and internationally, focusing on merger and acquisitions (seller and buyer representation), growth strategy, ownership transfers and valuations.
