The AEC industry is experiencing a resurgence in M&A activity, driven by strategic partnerships, technological integration, and geographic expansion.
The AEC industry has seen a robust resurgence in merger and acquisition activity recently, following a dip in the latter part of last year. The number of closed transactions reflects a strong recovery and an upward trend compared to previous quarters. This renewed activity highlights the industry’s resilience and the strategic importance of acquisitions in the current market landscape.
Here are some more recent trends we’ve been following this year:
- Increasing firm size and strategic partnerships. One notable trend is the increase in the average size of firms involved in transactions. The average firm size has grown to 30 full-time equivalents, up from 25-26 FTEs in previous years. Larger firms are increasingly acquiring specialized boutique firms to enhance their expertise in niche sectors such as sustainability, environmental services, urban planning, and digital design solutions. This trend underscores the importance of strategic partnerships in strengthening market positions and expanding service offerings.
- Geographic expansion and integration of technology. Geographic expansion continues to be a significant driver of M&A activity. Regional firms are consolidating to achieve national or international presence, responding to the rising demand for integrated services across diverse markets. Firms are also focusing on acquiring technological capabilities to enhance project efficiency and client outcomes. Key areas of technological integration include building information modeling, artificial intelligence, and advanced analytics.
- Economic recovery and infrastructure spending. Economic recovery efforts post-pandemic and increased infrastructure spending have significantly influenced M&A activity. The Infrastructure Investment and Jobs Act and the Inflation Reduction Act have created substantial opportunities for firms to position themselves strategically in the market. These legislative measures have spurred demand for engineering services, particularly in sectors such as water/wastewater, transportation, and infrastructure projects.
- High demand for engineering services. The demand for engineering services remains strong, particularly in civil and environmental engineering. Single-discipline engineering firms have been highly sought after, with civil engineering and environmental services accounting for 24 percent and 17 percent of all deals through Q2, respectively. This high demand is driven by ongoing needs in critical infrastructure projects and regulatory initiatives, such as the newly established national drinking water standards for PFAs and the substantial funding allocated for PFA detection and treatment systems.
- Private equity’s growing role. Private equity firms continue to play a crucial role in the AEC industry’s M&A landscape. In Q2 2024, PE-backed firms or buyers accounted for 36 percent of all deals, indicating strong interest in direct investment within the sector. Unlike the traditional view of PE as focused solely on profits, many PE firms now support the growth and management of AEC companies by providing mentorship, resources, and strategic guidance.
- International market expansion. There has been a noticeable increase in international deals, with the proportion rising from 32.4 percent in Q2 2023 to 34.3 percent year-to-date. This shift highlights the growing importance of global market expansion for larger AEC firms as they seek to diversify their portfolios and tap into emerging markets. Expanding internationally helps firms mitigate regional market risks and capitalize on cross-border opportunities.
The outlook for M&A activity in the AEC industry remains positive, despite external challenges such as regulatory shifts, economic policy changes, and political uncertainties. Business leaders must stay current with industry trends and proactively navigate the dynamic landscape. Developing a robust strategic plan that aligns M&A activities with overall business objectives is essential for leveraging acquisitions as a critical tool for growth, especially in turbulent market conditions.
Alec Russell, MBA is a senior analyst within Zweig Group’s mergers and acquisitions advisory group. Contact him at arussell@zweiggroup.com.