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Engineering and construction deals insights: 2021 midyear outlook

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What's driving deals in 2021

PwC's Deals Sector Leader John Potter and other partners discuss the deals outlook for the rest of 2021.

Engineering and construction deal activity recovers to pre-pandemic levels

Despite progress on combatting the pandemic, indicators of improving economic activity, declining unemployment and an economy that will likely be largely reopened by midyear, engineering and construction deal volume and value declined slightly in the first quarter of 2021, driven by lower activity within the construction and home building segments. However, while deal volumes declined compared to the fourth quarter of 2020, activity levels in the first half of 2021 were in line with pre-pandemic levels. The decline in deal value in the first quarter of 2021 was driven by fewer billion-dollar-plus deals than in the fourth quarter of 2020.

While deal volumes returned to pre-pandemic levels, there was a shift in the first quarter of 2021 from cross-border, emerging-economy to local advanced-economy transactions. 

Engineering and construction deals outlook

Despite robust pipelines, the infrastructure segment continues to face challenges, with global supply-chain disruptions, rising materials and equipment input costs and labor shortages contributing to project delays and increasing pressure on already tight margins.

However, with the potential for large-scale infrastructure spending on the horizon and a continued favorable interest-rate outlook, deal activity can be expected to continue growing for the remainder of 2021. Companies are expected to place an emphasis on restructuring investments with a focus on technology and optimization as they target operational efficiencies, cost savings, labor gaps and alternate service delivery approaches. 

Key deal drivers

Nature of capital

Despite an improving economic outlook and an uptick in inflation forecasts, the Federal Reserve Board is expected to maintain its approach to keep interest rates anchored near zero percent over the medium-term horizon. Coupled with capital availability and strong balance sheets, companies are expected to drive continued investment and recovery in deal volumes in the sector. However, high valuations and growing competition for assets could result in increasing pressure to find value.

Innovation and transformation

Commodities and building materials prices have increased over the past year, as companies deal with global supply-chain disruptions amid increased demand for new residential and commercial properties. Furthermore, pandemic-related talent shortage challenges persist, resulting in increased labor costs as companies pay more to retain skilled labor. These challenges are likely to continue for the foreseeable future.

With digital transformation and new business models critical to coping with rising costs, protecting margins and remaining competitive, engineering and construction companies are expected to continue to make investments in disruptive technologies and assets that will drive efficiencies.

Geopolitical and regulatory shifts

The US engineering and construction industry is looking forward to the new administration’s recently announced, all-encompassing infrastructure bill intended to boost public spending. The proposed plan includes spending on transport, residential related construction, public schools, water infrastructure and broadband expansion. While there is a consensus on the need for infrastructure spend overall, any such package will likely require broad political support including tax reform to fund the ambitious investment. As a result, the timing and magnitude of the proposed infrastructure plan remains uncertain.

Commitment to purpose and talent

The engineering and construction industry inherently has relatively high exposure to environmental and social risks. Evolving consumer behaviors, accelerated in part due to the pandemic, have elevated societal issues such as social justice, governance equality and climate change. Targeted acquisitions in emerging sustainable technology and supply chain insourcing could drive M&A activity as traditional engineering and construction providers address environmental, social and governance (ESG) concerns.

“As economies recover from the pandemic faster than anticipated, commodity and labor pricing pressures will continue to drive the search for innovative methods and disruptive technologies to protect margins.”

— Eric Cullers, US engineering and construction deals leader

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Eric Cullers

Engineering and Construction Deals Leader, PwC US

Michael Sobolewski

Engineering and Construction Industry Leader, PwC US

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