Engineering and construction: US Deals 2023 outlook
E&C deals expected to return to growth in second half of 2023 if near-term M&A headwinds subside
M&A activity slowed in 2022, primarily due to emerging economic and geopolitical challenges. Looking ahead, however, deal activity could rebound in the latter half of 2023 if near-term economic headwinds subside and markets grow from a new base. Tailwinds associated with balance sheet strength (both corporate and private equity), lower valuation multiples and upcoming tax changes that will disincentivize allocating capital to share buybacks could also drive deal-activity growth.
While transaction volumes declined relative to record highs in 2021, deal activity was still in line with pre-pandemic levels and historically strong. Deal values declined in the last four quarters due to fewer billion-dollar-plus deals, with companies increasingly cautious of antitrust concerns and government approvals for megamergers.
The decline in engineering and construction (E&C) transaction volumes was in part due to a pullback in local strategic investor deals in North America.
Engineering and construction deals 2023 outlook
Despite slowing economic activity and concerns that tighter Federal Reserve policy might trigger a recession in the first half of 2023, the medium-term deals outlook for the sector is one of cautious optimism. Underlying confidence is fueled by significant amounts of undeployed private equity capital and cash-rich corporates, buoyed by recently passed legislation — new federal spending associated with the Infrastructure Investment and Jobs Act and expanded tax incentives for decarbonization included in the Inflation Reduction Act.
The short-term outlook for the residential sector, which experienced record high building permits and starts in 2021, appears challenging. Housing starts are expected to decline in the 4% to 5% range in 2023. However, given that homeowners have significant equity, interest rates remain historically low, and there is still a substantial housing gap due to underbuilding in the decade following the 2008 recession, the long-term outlook for this segment remains positive.
The nonresidential segment struggled for much of 2021, with spending significantly below pre-pandemic levels. Following a rebound in 2022, the outlook for this segment is stable, though this varies by segment. Transport, health, manufacturing and education are expected to benefit from spending associated with the Infrastructure Investment and Jobs Act, while construction spending on offices, retail and hotels — impacted by continued remote working and reduced business travel post pandemic — is expected to be muted.
Value creation through strategic portfolio review and divestitures
Divestitures come with significant investments in cost and time and operational complexities such as entanglements and tax implications. As a result, companies across all industries are typically more reluctant to embrace them than acquisitions. However, divestitures are an equally critical part of strategic repositioning and are key to driving higher shareholder returns.
An upcoming PwC study on divestitures found that companies that make timely and objective divestitures decisions and strategically manage their portfolios are at an advantage in this dynamic business environment. The length of time between the identification of non-core divestible assets and making the decision to divest can have a direct impact on value creation.
“The medium- to long-term outlook for E&C sector deal activity remains optimistic due to tailwinds associated with recent legislation (Infrastructure Investment and Jobs Act and Inflation Reduction Act) and capital availability from private equity and strategic corporate acquirers, despite near-term macroeconomic and geopolitical challenges, rising interest rates and continued supply-side cost pressures.”
Contact us
Follow us
