This report details some of the biggest trends and movements regarding M&A activity in the AEC industry as of the end of Q1 2024.
Zweig Group tracks every M&A transaction that takes place in the architecture, engineering, and construction industry and reports on them on a weekly basis. This process allows us to stay up to date with the latest M&A trends in the AEC industry and report our findings to you.
After experiencing a decline in deal volume over three consecutive quarters, 2024 witnessed a dramatic rebound, reaching the peak levels observed in the previous year. By March 27, the AEC sector had already reported a robust 172 deals, indicating a significant uptick in activity. This resurgence is attributed to various external factors that have fostered a more optimistic outlook for 2024. The prevailing sentiment suggests an even brighter future, with expectations of increased deal activity as the year progresses. As the number of deals has risen, there has been a corresponding increase in the size of these transactions. The first quarter of last year, the median full-time equivalent (FTE) size of a selling firm was 15; now it has surged to 32. This trend suggests a strategic shift from tuck-in acquisitions to larger bolt-on acquisitions or horizontal integration, targeting firms that offer complementary or auxiliary services.
Key Metrics
In 2024, the landscape of mergers and acquisitions bore resemblance to its predecessor, albeit with minor shifts in strategic focus. A significant trend observed was the inclination toward vertical integration, with a considerable number of firms pursuing upstream service offerings through acquisitions (more than 9 percent). This trend accounted for a quarter of all M&A activities, while the main focus was still on specifically disciplined firms. The diverse growth strategies seen across the AEC industry shows nuance in the way each firm looks at growth and how M&A fits into their overall strategy.
With 49 of the sellers being a single discipline engineering firm this year, 43 percent have been focused on civil engineering as transportation and infrastructure projects continue to be in high demand. MEP firms were the next highest at 16 percent of all single discipline firms being sold this quarter.
In 2023, the private equity sector demonstrated renewed vigor, marking a comeback with PE buyers and backed firms actively seeking growth opportunities. As they continue this trend, 42 percent of all deals in the first quarter featured private equity involvement, predominantly through PE-backed firms. Additionally, there were eight notable instances where private equity buyers directly invested in AEC firms. This trend underscores the pivotal role of private equity in shaping market dynamics and highlights potential strategic avenues for firms looking to engage with or attract PE investment.
In the AEC industry, discerning market trends is crucial for strategic positioning. The persistent saturation in commercial projects indicates a competitive landscape, yet subsectors like water/wastewater (which notably doubled in activity from Q1 last year to 42 projects), transportation, and utilities are emerging as areas of opportunity. Additionally, the sustained interest in higher education and institutional projects suggests these are viable sectors for growth.
Geography
Geographic trends in AEC acquisitions have remained consistent with the previous year, with California, Florida, and Texas retaining their popularity as key markets. While New York continues to follow closely behind, this alignment is reflected in the distribution of funding, as per the latest data from the White House, indicating these states are among the top recipients of investment. The current administration is channeling this capital into vital infrastructure enhancements, including transportation, clean energy, broadband, clean water, and environmental remediation. This influx of investment has transformed these states into attractive hubs for buyers, signaling a sustained interest over the recent years.
Future Outlook
While similar economic and geopolitical tensions continue to be driving factors in every market, sentiment around M&A is optimistic as we continue into 2024. Government spending in bills such as the Infrastructure Investment and Jobs Act (IIJA) continues to keep certain market such as water, transportation, and utilities hot as well as the push for cleaner energy and water as sustainability services emerged as another trend in seller offerings. Private equity involvement is also expected to remain high throughout the year as investors look to deploy their capital efficiently with M&A being a key tool.
Digital transformation remains a pivotal investment area for firms across all sectors, with last year's advancements in AI, particularly generative AI, marking a significant turning point for a wide variety of businesses. In the AEC industry, the integration of technologies like BIM, digital twins, AR/VR, and advanced collaboration tools is not just a trend but a strategic imperative. These innovations are reshaping how firms compete and collaborate, providing a robust foundation for thriving in a technologically driven landscape.
As Q1 concludes, there is a prevailing sentiment that 2024 will mark a robust year for M&A activity. With inflation on a downward trajectory and interest rates holding steady, the market conditions are set to bolster this optimism as we approach a dynamic election year. Despite the anticipation of some turbulence due to increasing geopolitical events, the M&A sector is well-positioned to continue its upward momentum. This resilience underscores a growing confidence among stakeholders, suggesting that M&A will not only withstand potential challenges but also seize the opportunities that this year is poised to offer. As we move forward, the M&A landscape appears ripe for strategic maneuvers, promising a year of significant transformations and opportunities.