This report details some of the biggest trends and movements regarding M&A activity in the AEC industry as of the end of Q2 2024.
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.
Overview of AEC deal activity in 2024
After hitting a low in Q3 of 2023, AEC deal volume has shown a strong resurgence in the first half of 2024. As of June 27, there have been 324 closed transactions, reflecting the momentum seen at the beginning of 2023. The first quarters of both years recorded similar numbers of transactions. However, Q2 2024 experienced a 5 percent increase compared to Q2 2023, with 153 closed deals versus 145. The ideal target size for acquisitions has also grown, with the average size of sellers' firms reaching 30 FTEs year-to-date, slightly higher than the averages of 25 and 26 FTEs in the previous two years.
Some of the most active buyers of 2024 have been Salas O’Brien, NV5, SLR, and Verdantas, each with five transactions to date. Montrose Environmental Group, Atwell, Bowman Consulting Group, The SOCOTEC Group, IMEG, LJA, WSP, and Michael Baker International are all close behind, each completing four transactions thus far. These serial buyers are a good indicator for the AEC M&A market as their continued activity reflects confidence in market conditions and the strategic value of acquisitions. Large firms are leveraging acquisitions to expand their service offerings, geographic reach, and technical capabilities. This trend not only demonstrates the strength and resilience of the AEC sector but also signals robust growth opportunities for firms of all sizes looking to enhance their market position through strategic partnerships and acquisitions.
Key metrics
High demand for engineering services amid regulatory and infrastructure initiatives
To date, 102 sellers have been single-discipline engineering firms, with civil engineering and environmental services emerging as the most sought-after service lines, accounting for 24 percent and 17 percent of all deals through Q2, respectively. This high demand is largely driven by ongoing needs in water/wastewater, transportation, and infrastructure projects, fueled by the Infrastructure Investment and Jobs Act (IIJA) of 2021, which is set to disburse approximately $350 billion through 2026.
Another significant driver is the Biden administration's announcement in April 2024, alongside the EPA, of the first-ever national legally enforceable drinking water standard for PFAs. This initiative includes an additional $1 billion to assist states in funding PFA detection and treatment systems to meet the new standard. This funding is part of the $9 billion allocated through Biden’s Bipartisan Infrastructure Law to address PFAs and other emerging contaminants in drinking water. Additionally, $12 billion supporting general drinking water investments is included in the Justice40 initiative, which ensures that 40 percent of the overall benefits of certain federal investments flow to disadvantaged communities.
Private equity’s continued appetite in AEC firms
Continuing from 2023, the resurgence of private equity in the AEC industry continues to be a notable trend. In Q2, private equity-backed firms or PE buyers accounted for 36 percent of all deals, indicating strong interest in direct investment within the sector. While there is optimism surrounding 2024 M&A activity, expectations have tempered. The year began with robust activity, mirroring the start of 2023. However, Q2 saw a slight pullback in total activity due to ongoing uncertainties around interest rates and geopolitical factors.
Geography
Geography in the AEC industry plays a pivotal role as many buyers seek out firms in key locations. Once again, leading the pack are California, Florida, and Texas, accounting for 21 percent of total deals. Compared to Q2 of 2023, California has overtaken Texas and Florida to retake the top spot as the most popular location. This year, the distribution among the top three states is more balanced, whereas last year, Florida dominated the start of the year with 30 deals, compared to the 19 and 18 transactions in Texas and California, respectively.
Additionally, there has been a slight shift toward a broader geographic focus, with international deals gaining traction. The proportion of international transactions has increased by 1.9 percent, moving from 32.4 percent of all deals through Q2 2023 to 34.3 percent year-to-date. This trend highlights the growing importance of global market expansion for larger AEC firms, as they seek to diversify their portfolios and tap into emerging markets. The increased international activity also underscores the strategic emphasis on building a robust global presence to mitigate regional market risks and capitalize on cross-border opportunities.
Outlook
While staying current with industry trends is crucial, AEC leaders must go beyond mere observation. They need to proactively navigate the dynamic landscape, discerning myriad changes to identify which trends align with their strategic objectives. This ability to filter out the noise and focus on relevant shifts is essential for making informed decisions that will propel their businesses forward. A survey conducted by PwC showed that 82 percent of U.S. CEOs said the average company in their industry will not be in business in 10 years if it fails to change its current business model.
With the U.S. election rapidly approaching, the Supreme Court's recent decision to overturn the Chevron doctrine, thereby weakening federal environmental protections, and the Federal Reserve scaling back to only one planned rate cut in 2024, there is no shortage of externalities for business leaders to monitor. While these developments present challenges, the overall sentiment in the M&A landscape remains positive.
To navigate these complexities, it is essential for business leaders to develop a robust and well-thought-out strategic plan. Ensuring that their M&A strategy aligns with this plan can enable them to leverage acquisitions as a critical tool in their arsenal, particularly in turbulent market conditions. By staying agile and responsive to external changes, firms can identify and capitalize on opportunities that enhance their competitive positioning and drive growth.
Despite the concerns over regulatory shifts, economic policy, and political uncertainties, a strategic approach to M&A can provide a pathway for stability and expansion. Business leaders who prioritize alignment between their M&A activities and overarching strategic goals will be better equipped to manage risks and seize market opportunities, ultimately contributing to a resilient and thriving enterprise.
