Middle market deals drive increase in engineering & construction M&A activity

NEW YORK — Merger and acquisition (M&A) transactions in the engineering and construction sector increased more than 50 percent in the second quarter of 2013, as companies in the sector looked to expand their geographic footprints and product sets with bolt-on acquisitions, according to PwC US, however total deal value continued its downward trend.

In the second quarter of 2013, there were 41 engineering and construction transactions worth $50 million or more, a 52 percent increase compared to 27 deals in the first quarter of 2013. Total value of deals worth $50 million or more declined to $7.8 billion in the second quarter from $12.1 billion in the first quarter of 2013, as the sector focused on smaller, middle market deals. With the lack of mega deals (transactions worth more than $1 billion), average deal size also decreased to $189 million, the lowest point in more than three years.

“We saw companies seeking growth opportunities through M&A in the second quarter, especially through smaller bolt-on acquisitions aimed to fill gaps in product sets or expand geographic footprints,” said H. Kent Goetjen, U.S. engineering and construction leader at PwC. “Ongoing economic uncertainty is still a factor in the engineering and construction M&A environment, and we’re seeing dealmakers being prudent in terms of execution. We remain cautiously optimistic that the deal market will improve, albeit slowly, as buyers see opportunities for further growth and expansion within the sector.”

The second quarter of 2013 saw increased financial investor activity in the engineering and construction space, with private equity players representing nearly 40 percent of deal value. “Despite uncertainty in the Eurozone and cooling growth in emerging economies like India and China, we’re seeing increased interest among financial investors especially in the U.S. where nearly half of the deals involving private equity firms involved U.S. targets or acquirers,” added Goetjen.

Regionally, North America, driven by an increase in U.S. activity, led in both deal volume and value in the second quarter, with a total of 17 deals worth $50 million or more, representing a total value of almost $3.7 billion. Despite continued economic woes in the Eurozone, Europe was the second most active region, with 15 deals totaling $2.8 billion, followed by Asia & Oceania with 12 deals representing more than $1.9 billion. The uptick in U.S. activity and cooling growth in a number of developing economies drove an increase in number of deals from advanced economies. Among the BRIC nations, there were two deals involving targets or acquirers in India, and Brazil and Russia each saw one deal in the second quarter of 2013, compared to zero deals in each country in the first quarter of 2013.

Cross-border deals increased to 16 deals in the second quarter of 2013, compared to seven in the first quarter of 2013. “Historically, cross-border transactions have been an integral part of the M&A story, and since 2012, they have been increasing as a percentage of deal volume in the engineering and construction space. Cross-border transactions typically entail greater levels of risk than local market transactions due to political, socioeconomic, and currency risks, so this greater proportion of cross-border activity during the second quarter may be indicative of increased buyer optimism,” said Goetjen.