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Engineering and construction: US Deals 2023 midyear outlook

E&C deal activity expected to recover

Overall engineering and construction (E&C) M&A activity slowed in the first half of 2023 largely due to continued uncertainty in the economy along with recent bank runs, which further pressured a challenging financing market. Conversely, corporate profits are running above historical norms with expectations dependent on continued price increases even as a slower economy contributes to weaker volumes and input costs remain high.

A recovery in the sector’s M&A activity in the second half of 2023 will likely require improved confidence in the economy and more stable financing. There’s also an anticipated increase in divestitures as the sector’s corporates continue to raise capital to fund growth. Private equity is largely dependent upon a debt market recovery and (potentially) lower valuation multiples. Investors needing to deploy dry powder may find and capture take-private opportunities, including those companies that were part of the wave of post-COVID IPOs.

Transact to Transform

Companies face markets being reshaped by technology and disrupted by geopolitical unrest, a global pandemic and economic shocks. As a result, CEOs are turning to transformative acquisitions to reposition and reinvent their businesses for long-term success. Companies are also beginning to crack the code on how to make big, transformative deals successful: leveraging experience, early and sustained investment in integration, and a commitment to creating and implementing new long-term operating models.

Learn more about leading practices and transformational mindsets in PwC’s new M&A integration report.

Key deal drivers

Opportunity amid uncertainty

Despite credit market uncertainty, persistent dealmakers can still find attractive M&A opportunities. As company valuations decline amid rising interest rates and softening demand, companies with healthy balance sheets and financial flexibility are identifying opportunities to acquire strategic assets to help position them as market leaders.

Corporate experience will become an especially important element in deal outcomes, as diligent companies with M&A experience have a proven playbook to navigate uncertainty and complete successful deals. The second half of FY23 may well provide a unique opportunity for E&C investors with great conviction, as financial sponsors with less expertise in the sector remain on the sidelines to avoid perceived risk during the market contraction. With signs of the housing-market bottom already visible, this opportunity window may be short-lived. 

Acquisitions well-aligned with secular construction trends (e.g., energy efficiency, labor-saving solutions and engineered materials) are particularly attractive as they’ll likely continue to see above-market growth through the cycle. 

Necessity for business reinvention

As companies look to the future, many businesses need to reinvent themselves to respond to technological disruption, demographic shifts and corporate tax incentives.

There is a real opportunity for E&C companies to benefit from growing investment in decarbonization. This is particularly true as real estate owners and developers look to reduce the carbon footprint of both the built environment and the construction process — and to benefit from tax incentives tied to doing so. This is creating demand for new building designs, new (or improved) products and new processes. Companies that support initiatives promoting sustainable design, development and construction practices —  such as responsible sourcing, offsite construction and lower carbon technologies — will likely attract higher valuation multiples.

Environmental, social and governance (ESG) considerations will also continue to be an increasingly important priority for investors in the E&C sector. Stakeholder-led emphasis on ESG is being driven by expanding regulatory reporting requirements and a growing focus on sustainability factors beyond typical due diligence and value drivers.

As companies seek to reshape their portfolios to align with market opportunities, doing so quickly and decisively is likely to create the greatest chances for success. A recent PwC study explores how companies can rejuvenate their business, refresh their capital and increase shareholder value through divestitures.  

Capital allocation

Higher interest rates have increased the cost of M&A — and hence required returns. But for companies with a clear strategic vision and value creation strategy, doing the right deals is still an unrivaled path for creating substantial shareholder value. With lower average acquisition values, downturns can also be the most lucrative time to invest. In this time of greater uncertainty, it’s never been more important for E&C companies to understand how an acquisition fits into their portfolios, how the markets in which a target operates will evolve and how synergies may be achieved.

Managing existing portfolios is key to long-term returns. Divestitures continue to play a key role in value creation by offloading businesses that do not fit with a company’s long-term strategy and reinvesting into markets and businesses with greater strategic potential.

“Despite a choppy deals market and continued uncertainty of a recession, focused buyers and sellers with market and industry conviction along with a clear, strategic M&A thesis can expect to be able to execute on accretive Deals.”

— Danny Bitar, US Engineering and Construction Deals Leader

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