Merger and acquisition (M&A) activity remained steady in the engineering and construction (E&C) industry during the second quarter of 2011. Strategic transactions, local market M&A, and non-U.S.-affiliated deals dominated the quarter’s activity, according to Engineering Growth, a quarterly analysis of M&A activity in the global engineering and construction industry by PwC US.
For announced deals worth $50 million or more, there were 41 transactions totaling $11.6 billion in the second quarter of 2011, compared to 44 deals totaling $11.4 billion in the same period of 2010. For the first half of 2011, deal volume increased to 82 deals for a total value of $32.5 billion, compared to 79 deals with a value of $37 billion in the first half of 2010. According to PwC, a number of factors can be attributed to the decrease in second quarter value when compared to the $20.7 billion seen in the first quarter of 2011, including increased volatility in the equity markets, downward revisions of U.S. and global GDP growth, persistent debt problems in Europe, and inflation and overheating concerns in emerging markets.
“M&A activity in the engineering and construction industry for the first half of this year remains steady and very attractive despite the dip in second quarter value compared to the first quarter of 2011,” said H. Kent Goetjen, U.S. engineering and construction leader with PwC. “We expect that any deceleration will be temporary given that strong fundamental drivers of growth are still in place including, improving macroeconomic conditions, the recovering financial sector and increased capital availability. That, combined with stronger consumer confidence, increasing demand and promising growth in emerging economies, should fuel future deal activity in the engineering and construction sector.”
Strategic investors contributed to the majority of deal activity with 26 deals valued at $8.53 billion, making up 63% of announced deals worth $50 million or more in the second quarter of 2011, compared to 23 deals totaling $6.72 billion during the second quarter of 2010. The three announced mega deals during the second quarter — transactions valued at $1 billion or more — totaled $3.7 billion in deal value and were entirely generated by strategic investors. According to PwC, the main factor for the dominance of strategic investor activity in the second quarter continues to be companies’ desire to generate growth, tap into new markets and invest available cash in an effort to boost earnings.
The nonmetallic minerals manufacturing segment regained its leading position from 2010 as the primary driver of sector deal activity in the second quarter of 2011 with 12 transactions totaling $4.01 billion, or 29% of announced deals worth $50 million or more. While the home building and construction segments decreased from the first quarter of 2011, contributing 20% of activity each, the civil engineering segment realized a significant turnaround, tripling its deals contribution from the first quarter of 2011 at 15%.
Global regional domestic transactions continued to lead M&A activity, making up 70% of announced deals worth $50 million or more during the second quarter of 2011, as firms sought growth and expansion opportunities within their domestic markets. Local deals in the Asia and Oceania region led with 16 transactions totaling $3 billion, followed by Europe with seven local deals totaling $2.9 billion and North America with eight local deals totaling $1.9 billion.
“The complexity of the global business and regulatory environment, combined with the various domestic stimulus packages many countries have passed to stimulate their local economies, help explain the ‘inward’ focus we saw in the second quarter,” continued Goetjen. “The fragmented nature of the Asia and Oceania region combined with growing infrastructure needs, increased capital availability, and strong economic performance in the region, should fuel future deal activity there.”
According to PwC, as regional economies continue to recover, the volume and value of future deals in North America and the U.K. and Eurozone regions should increase incrementally, and outbound deals are also likely to pick up as companies seek greater growth opportunities in emerging markets.
The number of U.S.-affiliated deals (U.S. targets and/or buyers) in the second quarter of 2011 totaled 11 deals, nearly doubling activity from the first quarter of 2011, with a value of $4.78 billion. Deals involving U.S. targets and/or buyers during the second quarter of 2011 increased over the same period in 2010 which saw five deals worth $1.30 billion.
“The growing number of U.S.-affiliated deals could be attributed to the slow but stable recovery of the U.S. economy, improving business climate, and U.S. targets possibly valued more favorably than their foreign peers,” added PwC’s Goetjen. “In the quarters to come, non-U.S.-affiliated deals should increase, driven by the greater growth expected in emerging markets and the relatively sluggish recovery in developed economies.”
Deal activity with targets in Brazil, Russia, India and China (BRIC) decreased in the second quarter of 2011 to 11 deals totaling $2.20 billion, compared to 19 deals worth $3.83 billion in the second quarter of 2010. However, as the global economy continues to recover, BRIC nations are expected to sustain greater growth levels, more market opportunities, and higher capital availability, resulting in rebounding deal activity and significant growth, according to PwC.
“With ever-increasing global M&A activity comes an uptick in reputational and business risks, as more and more business takes place in emerging and expanding markets. Added to that, a dramatic rise in U.S. and international regulatory environment actions have made corruption due diligence a high priority,” said Goetjen. “Dealmakers will need to develop a strong anticorruption program that effectively understands, addresses, and resolves these concerns to embrace important growth and compliance demands.”
According to PwC, the engineering and construction industry continues to view corruption as a significant concern, an issue particularly heightened during a robust period of M&A activity. According to the PwC "Global Economic Crime Survey," which examined data from 226 engineering and construction companies in 43 countries, 24% of respondents contended with economic crime in 2009. The rate of bribery and corruption among engineering and construction companies has increased sharply in recent years, jumping from 38% in 2007 to 47% in 2009 – the largest for any sector and significantly higher than the average across all industries, which was 27% in 2009.
In the latest Engineering Growth, PwC includes a special report entitled, “Does Your Company’s M&A Strategy Mitigate Corruption-Related Risks and costs?” to provide insights into best practices to mitigate corruption risks, including how engineering and construction companies achieve success in anticorruption efforts.
For a copy of Engineering Growth, please visit: www.pwc.com/us/industrialproducts.