Engineering and construction: US Deals 2024 outlook

E&C deal activity expected to continue to recover

The 2024 outlook for the engineering and construction (E&C) sector is cautiously optimistic despite economic headwinds from interest rates and lingering economic uncertainty. Despite these challenging economic conditions, there exists some confidence in the sector, underpinned by substantial dry powder reserves held by private equity and select large corporations, which are searching to deploy their capital to create greater value.

The real estate landscape within E&C is poised for transformation. Notably, a reversal of recent residential and commercial trends is anticipated. The resilient residential sector is poised for growth as the pace of interest rate increases slows. Meanwhile, the commercial sector faces continued challenges, marked by stagnant projects, looming refinances and the impact of continued remote work on office buildings. Additionally, companies heavily exposed to warehousing and manufacturing may encounter sales challenges due to market contractions from recent highs.

Firms with significant infrastructure exposure, particularly those specializing in engineering services, intelligent transportation, and power and telecommunications, continue to be attractive assets in this environment.

Overall, persistent risks linger for the E&C sector, including uncertainties related to interest rates, margin compression and potential defaults in commercial real estate (CRE). However, companies continue to innovate, highlighted by the early adoption of AI for competitive advantages in initial design automation.

Note: The primary M&A data source used in the year-end outlook is S&P Capital IQ. This is a change from our past outlook reports.​

Key deal drivers

Lower valuations provide M&A opportunity amid uncertainty

Persistent challenges such as fluctuating expectations of interest rates going into 2024 and ongoing uncertainty place a significant hurdle in the path of M&A activity.

Successful transactions in the E&C sector are contingent on identifying targets that not only align with, but also enhance, the acquirer’s capabilities. Acting proactively can provide a strategic advantage to dealmakers, allowing them to seize opportunities when others hesitate.

2024 may provide a unique opportunity for players within the E&C sector to capitalize on lower valuation as risk-averse players remain on the sidelines. Market leaders will likely continue to make strategic acquisitions in specific construction trend areas, such as companies with high exposure to critical infrastructure as well as engineering services, intelligent transportation services, and power and telecommunications.

Despite the uncertainties, the E&C market offers opportunities for those who bolster capabilities and invest in attractive targets that both align and enhance the combined entity.

Technology helps propel innovation and sustainability

Resilience and innovation are key themes for 2024, as dealmakers navigate a dynamic landscape shaped by megatrends including technological disruption, demographic shifts, a fracturing world from geopolitical conflicts, climate change and social instability. These forces, while not new, are evolving in scope and impact, creating both challenges and opportunities that vary across industries and geographies.

Within the E&C sector, certain forward-thinking companies are harnessing early adoption of artificial intelligence (AI) to gain a competitive advantage. Companies are using AI to automate initial designs, which can expand capacity in the face of labor shortages and drive down costs. Construction firms are aggressively integrating other state-of the-art technologies including 3D modeling and robots on worksites. 

Traditional construction venues are transforming into technical sites, leveraging advanced technology to augment physical labor as the need to reduce labor and other key input costs is key to the sustainability and expansion of profit margins. Profit margins, impacted by commodity price surges and supply constraints, pose a concern in the E&C market, as uncertainty surrounding margin viability in a less robust demand environment persists. 

Amid these transformative shifts, M&A activities can mitigate risks associated with these megatrends while ensuring operations remain consistent. Dealmakers in the E&C sector can lead the way in fostering growth by embracing innovation, resilience and strategic partnerships.

Creative financing helps address capital allocation challenges

As M&A activity slowed, dealmakers turned to innovative financing solutions to navigate this challenging environment. Private credit funding thrives in the higher interest rate environment, providing alternative avenues for funding deals. Additionally, non-traditional financing structures such as all-equity backstops, sellers’ notes, paid-in-kind (PIK) financing, and convertible notes gain popularity as organizations seek creative ways to facilitate transactions and raise capital.

In this time of greater uncertainty, it’s especially important for E&C companies to understand how an acquisition fits into the portfolio, how the markets in which a target operates will evolve and how synergies may be achieved. 

Investor sentiment has expectations of potentially lower interest rates in 2024. However, key risks remain in the 2024 capital outlook, primarily related to interest rate fluctuations and the possibility of CRE defaults. These uncertainties underscore the importance of making well-informed choices in capital allocation for E&C companies.

“Despite economic headwinds from interest rates and lingering economic uncertainty, attractive M&A opportunities remain within the E&C sector, particularly related to core infrastructure and companies leveraging technology and automation to drive competitive advantage and efficiencies.”

— Danny Bitar, US Engineering and Construction Deals Leader
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