This report details some of the biggest trends and movements regarding M&A activity in the AEC industry as of the end of Q3 2023.
Zweig Group tracks every M&A transaction that takes place in the architecture, engineering, and construction (AEC) 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. This report will detail some of the trends and movements regarding M&A activity in the AEC industry as of the end of Q3 2023.
As of October 1, 2023 there have been 440 closed transactions in the industry, which is the exact number of transactions that had taken place as of this time last year. From a year-to-date perspective, deal flow has remained constant in the AEC industry through Q3, though quarterly transaction volume was the lowest that we’ve seen since 2020. Year-to-date 2023 deal volume has been propped up by an abnormally strong Q1, during which the AEC industry saw 172 closings; the most closings during a three-month stretch in history. Q2 remained strong at 145 closings, and Q3 dipped down to a total of 123 transactions.
As has been the case in recent history, civil engineering-focused firms have led the pack with roughly 24 percent of total deal volume, followed by environmental services (20 percent) and architecture (16 percent). The “Other” category consists of sellers that don’t fit perfectly into any of the larger buckets as they provide services such as geotechnical engineering, process engineering, drilling, traffic lighting, information technology, etc.
Of the 440 transactions that have taken place so far this year, 41 percent of sellers have completed projects in the commercial/retail sector. This is followed by higher education, residential development, public infrastructure, and municipal government, for which 24 percent of sellers provided services.
During this year’s M&A Next Symposium in Frisco, TX, our team had a chance to speak with some of the industry's most experienced and active buyers, along with their trusted legal, tax, and transaction advisors. The amount of buyer interest in public infrastructure, transportation, and water/wastewater-focused firms was abundantly clear. Buyers are following the money, and these sectors are set to receive billions of dollars in funding in the coming years. However, deals in these sectors are becoming increasingly competitive and pricey for buyers as the outlook continues to improve. A large portion of firms servicing these sectors that are under 100 FTE also lean on a certification for set-aside work that would be put at risk should they be acquired by a larger firm, adding another level of complexity to acquisitions and keeping transaction volume in check.
The large number of transactions in which the seller provided services in the commercial/retail sector are likely due to the abundance of firms that have capabilities within the sector relative to more regulated and specialized sectors such as public infrastructure and government. There are many firms that will provide services to primarily government clientele with sparse private projects, though the reverse is less common. Healthcare, education, and industrial-focused firms have also been sought after by buyers as industry sentiment remains strong, per ACEC's Q3 Engineering Business Sentiment Report.
Of the 440 closings in the first half of the year, 304 took place in the United States, with transaction volume by state closely correlating to amount of funding that each state is receiving from the IIJA. These were also the most active states for buyers and sellers over the past three years.
Of the 304 domestic transactions that have taken place through Q3, the most active states have been Florida with 42 closings, Texas (29), California (23), and Pennsylvania (16).
So far in 2023, private equity groups have been a part of 39 percent of the deals that have been reported, once again showing an increase over Q2 2023 figures where PE groups represented 37 percent of total deal volume. Note that as of FYE 2022, PE buyers accounted for only 16 percent of transaction volume. The median FTE count of firms acquired by PE buyers was 41 through Q3 2023, while the median FTE count of firms acquired by non-PE buyers was 16. Private equity firms are spending a lot of time courting larger firms and are likely offering highly competitive valuation multiples in many instances. For the sake of our data set, the buyer was considered to be private equity if it was the PE group itself or a private equity backed platform company.
So far in 2023, the most acquisitive U.S. buyers by number of acquisitions are Salas O’Brien, Bowman, and Universal Engineering Sciences (UES), each with six acquisitions through Q3. There were quite a few U.S. firms that were close behind with five acquisitions, including Montrose, NV5, SAM Companies, and RMA Group. The most acquisitive international buyer by number of acquisitions was RSK Group with 21 acquisitions throughout the U.K. and Denmark totaling roughly 2,000 new employees. RSK was followed by Sweco with seven acquisitions around the globe totaling roughly 1,100 new employees, and Egis with five acquisitions around the globe totaling roughly 950 employees.
In conclusion, transaction volume has remained constant year over year, though we’ve seen a slight slowdown in Q3 specifically. Private equity groups continue to increase their market share in terms of transaction volume, and their median transaction size is over double that of strategic buyers by way of headcount. The states and market sectors that are experiencing the most buyer demand are still those that are receiving the largest amount of funding via the IIJA bill, though buyer interest in most sectors still remains relatively steady.
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