Report reveals global engineering and construction deals off to good start

NEW YORK — With 29 transactions in Q1 2010 in the global engineering and construction (E&C) sector, the year is off to a fast start, according to the PricewaterhouseCoopers LLP report, Engineering growth: First-quarter 2010 global engineering and construction industry mergers and acquisitions analysis.

Deal value in the sector totaled $21.2 billion in the first quarter of 2010, compared with $3.8 billion and $23.7 billion in the first and fourth quarters of 2009, respectively.

On a year-over-year basis, 2010 is looking strong, with both the volume and the value of deals improving substantially during the first quarter. This year-over-year improvement comes as no surprise considering only 15 deals totaling just $2.6 billion were announced all of last year and may suggest that many of the factors that adversely affected deal activity in early 2009, such as the lack of credit availability and weak global demand, have moderated, which bodes well for deal activity in 2010.

Additionally, there was a strong rebound in mega-deals (transactions of at least $1 billion) during the first quarter of 2010, with four transactions announced. Conversely, no mega-deals were announced in the first quarter of last year and there were only seven in all of 2009.

“Although many macroeconomic factors have improved, others, like pervasively high unemployment and weak housing fundamentals, remain concerns,” said Kent Goetjen, U.S. engineering and construction industry leader at PricewaterhouseCoopers. “We anticipate companies with stronger relative share prices, stronger balance sheets or affordable access to capital markets will increasingly look to M&A this year for expanding into new markets, driving innovation, and broadening their products or capabilities while their competitors are still struggling to improve fundamentals.”

Targets located in North America, Asia and Oceania, and the U.K. and Eurozone regions were the primary drivers of deal activity in Q1 2010. Transactions involving both U.S. targets and buyers were the key drivers of deal activity, particularly in terms of deal value. Of the 29 transactions announced during the period, nine (31 percent) involved a U.S. entity. Of the $21.2 billion in deal value announced during the period, 61 percent was attributable to U.S.-affiliated activity.

Throughout 2009, the absence of the financial buyer had an adverse impact on the M&A environment. Financial buyers faced considerable challenges in fundraising and access to credit because of the global recession, which may have limited their participation in deal activity. While remaining secondary to strategic buyers in driving overall deal activity in 2009, financial investors are the primary drivers of mega-deal activity in 2010, which runs counter to historical trends.

For the first quarter of 2010, 75 percent of mega-deal activity was attributable to financial buyers, compared with 14 percent in 2009. This robust turnaround suggests that financial buyers are back in the deal market in force, which would be a boon for deal activity in 2010.

The first quarter Engineering Growth report takes a closer look at the role of mergers and acquisitions (M&A) due diligence in a recovering economy and the impact it will have in the engineering and construction (E&C) sector. As the global economy begins to recover, deal making might offer the leverage E&C companies need to push ahead of the competition. It will be the companies with strong balance sheets and robust cash reserves that are expected to be in the best position for strategic M&A opportunities.

To get the deals done properly, E&C companies should consider how two years of economic contraction have altered the balance of supply and demand within the value chain, as well as the cost structure impact of certain issues including healthcare, climate change, commodity prices, pension plan structures, and changing tax laws.

M&A activity inevitably generates a certain amount of immediacy, so it pays to be prepared. According to the report, companies that might be rusty in the area of due diligence because few (if any) deals were completed during the past two years may need to dust off their existing processes and make sure the right resources are in place so they are ready when opportunity knocks.

For information on Engineering Growth and to access the full report, or for more information about PricewaterhouseCoopers, please visit www.pwc.com/us/industrialproducts, or www.pwc.com, respectively.