Q3 engineering and construction deals continue to gain momentum

New York — The engineering and construction industry had a record-setting number of merger and acquisition (M&A) transactions (valued at $50 million or more), with 66 deals in the third quarter of 2014, according to Engineering growth, a quarterly analysis of the global deal activity in the engineering and construction industry by PwC US. This represents the most deals seen in a single quarter since at least 2007, when PwC began reporting quarterly engineering and construction deal trends.

Deal volume for the third quarter was up 54 percent on a year-over-year basis compared to the 43 deals that took place during the third quarter of 2013, and increased 40 percent from the 47 deals recorded in the prior quarter this year. Among the third quarter deals, the majority were in the engineering segment (26 percent), with construction materials manufacturing coming in a close second at 24 percent.

While the three-month period did not surpass the $75.4 billion record set in the previous quarter, deal value continued its recent upward trend totaling $27.8 billion, a 100 percent increase over the third quarter of 2013 ($13.9 billion). Average deal value was also on the rise, increasing 31 percent on a year-over-year basis to $422 million. Much of this increase can be attributed to the continued popularity of mega deals, or those transactions with a value of $1 billion or more. The third quarter saw six mega deals valued at $15.5 billion, representing 56 percent of total deal value.

“Engineering and construction companies are scaling up and doing larger deals that better position them in the global marketplace by adding human capital or technical capabilities to their portfolios, especially in geographies where they might not have previously had a presence,” said H. Kent Goetjen, U.S. engineering and construction leader at PwC. “This can be achieved through both outright strategic acquisitions or joint ventures and in many cases is making companies more competitive to bid on larger projects with higher margins.”

Apart from the mega deals, another notable theme was the pick-up in consolidation among smaller, niche companies, particularly among local deals within Asia. All segments of E&C experienced a pick-up in local consolidation deals and these transactions accounted for 77 percent of total volume. The majority of local deals involved acquirers from Asia and Oceania, which recorded 33 deals in the third quarter (50 percent of total deal activity). Among those transactions, 77 percent were local deals. This trend is further underscored by the 22 percent decline in cross-border deals across the industry.

Private equity investors remained active in the engineering and construction industry, comprising about 32 percent of deals for the quarter, compared to 35 percent in the third quarter of 2013, while strategic investors remain the most significant source for deals.

“While we are seeing companies in other industries divesting niche assets or focusing on distinct businesses, many engineering and construction companies are doing the opposite. By adding additional services and skills they are not only seeking to become a one-stop-shop to have complete end-to-end services for their clients, but are also diversifying to protect their bottom line as certain areas in the industry slowdown, often due to oversupply,” Goetjen continued. “We expect to see continued robust activity in the engineering and construction industry as companies continue to expand both vertically and horizontally in the coming months.”

PwC’s engineering & construction M&A analysis is a quarterly report of announced global transactions with value greater than $50 million analyzed by PwC using transaction data from Thomson Reuters.

For more information on PwC’s Deals practice, visit www.pwc.com/us/deals.