Over the past few years, our analysis shows that the engineering and construction (E&C) industry has grown steadily by about 5 percent per annum. This number is expected to accelerate to 6 to 7 percent by 2030 in response to a confluence of tailwinds, including continued growth in emerging markets, such as Asia and the Middle East; government infrastructure programs and megaprojects in Europe and North America; pent-up demand for housing; and the need for critical infrastructure in high-growth areas, such as data centers and renewable energy.
One instrument to capture this growth is M&A, which has surged since the outbreak of COVID-19. In the postpandemic era, the average number of deals per year increased by approximately 60 percent—from approximately 1,100 transactions between 2014 and 2019 to about 1,800 transactions between 2020 and 2024—with more than 80 percent of deal activity concentrated in Europe and North America. Furthermore, reported deal value grew by about 55 percent during the same period, and our projections indicate continued momentum in M&A in E&C.
We conducted a survey with 100 C-level and senior M&A executives in the E&C space around the world to learn more about their expectations, key priorities, and pain points or risks (see sidebar “About the analysis”). Based on the survey results, this article provides a framework to improve methodology and strategy when executing M&A in E&C.
How M&A can help capture growth opportunities
E&C firms have historically used M&A as an instrument to meet specialization and regional expansion needs, and recent data suggest it has become increasingly relevant in the past few years. As in other sectors, market share consolidation and cost-synergy benefits have been major drivers of M&A, but E&C companies have also used M&A to expand their service-offering portfolios and to enter adjacent markets with acquisitions that offer in-house expertise or strong positioning in desired segments. Others have embraced M&A to enter new geographies—both locally and internationally—with acquisition targets that have local operating capabilities, deep customer relationships, attractive assets, know-how, and brand recognition.
This trend will continue over the next decade. M&A will be a critical enabler for E&C firms to transform their business models and capture growth opportunities in regions and end markets where they are concentrated. As the sector benefits from a series of major tailwinds, industry players will leverage M&A to capitalize on them through a variety of investment theses—from entering high-growth markets to gaining new capabilities, technology, expertise, and service offerings that would otherwise be hard to build in-house from scratch. Tailwinds include the following:
- A number of government infrastructure programs and megaprojects are being executed for a variety of reasons, including to stimulate economies, address the climate crisis, and upgrade aging infrastructure. Together, these programs and megaprojects amount to more than $5 trillion. This includes the US Infrastructure Investment and Jobs Act, the European Green Deal, and India’s National Infrastructure Pipeline, among others.
- There is sizable demand for housing. The United Nations estimates that about 1.6 billion people lack adequate housing around the world. Europe and the United States are no exception. The United States alone has an estimated shortage of 3.7 million housing units, while more than 15 percent of people in the eurozone live in overcrowded households.
- Critical infrastructure is required to upgrade essential utilities, support high-growth end markets, and meet the needs of an aging population. In the years to come, the electric grid will need to be hardened—meaning its resilience and resistance to threats and disruptions will need to be increased—and new sources of power for data centers and semiconductor facilities will be needed. Specifically, increased demand for data centers, which McKinsey estimates will grow by about 20 percent per year until 2030 globally, comes primarily from the high computational power and power density required by the increased adoption of generative AI. Demand for renewable energy is rising as companies and governments set carbon emission targets to address climate change; renewables’ share of global power generation is expected to increase from 32 percent in 2023 to about 70 percent in 2040., McKinsey, September 17, 2024. At the same time, aging populations in developed markets are propelling demand for healthcare infrastructure (such as hospitals).
- As a result of supply chain decoupling, warehousing and production capacity needs are on the rise. This is particularly the case in Latin America and the United States, while geopolitical considerations are increasing the need for more resilience in the United States.
- Interest rates are falling, notably in North America and Europe. Beginning in 2021, our analysis has shown that increases in central bank interest rates caused reference rates to reach 4.0 to 5.5 percent in the United States. In response, the Federal Reserve and European Central Bank have initiated a cycle to cut interest rates, which could subsequently boost demand for housing and infrastructure investments.
Our research shows that E&C companies have dedicated approximately 60 percent of investment value to industry consolidation (by acquiring competing firms with overlapping operations), 25 percent to expanding service offerings and capabilities in adjacent or current market segments, and the remaining share to deals that rationalize geographic expansion. Non-consolidation investment has also gained relevance as industry players increasingly focus on acquiring new or enhanced capabilities through inorganic means. From before the pandemic to 2024, our analysis shows the share of M&A deals following a non-consolidation investment thesis increased from 38 to 42 percent (Exhibit 1).
Looking ahead, M&A is expected to continue accelerating. According to our survey of senior M&A executives in the E&C space, increased levels of M&A activity and refocused investments beyond market consolidation will continue to be the norm over the next decade (Exhibit 2). In fact, 82 percent of surveyed executives expect M&A activity to be either higher or significantly higher over the next decade than in the previous decade, which could drive up valuations as executives compete for targets.
In addition, 69 percent of survey respondents reported that the primary thesis of their M&A strategy will center on geographical expansion, capability building, and entry into new segments or adjacent industries. By contrast, only 31 percent of respondents identified consolidating market share in existing segments and protecting the core business as their main priority.
In relation to key industry trends, surveyed executives believe the three most relevant trends shaping their M&A priorities outside of geographical expansion are skilled-labor shortages; decarbonization and the energy transition; and AI, automation, and data analytics (Exhibit 3). Furthermore, modular and prefabricated construction, smart infrastructure and electric-vehicle (EV) charging, and the circular economy and waste reduction are also expected to shape investment themes over the next decade (see sidebar “Overview of industry trends”).
The expectation of higher M&A activity is consistent with declining interest rates and the need for industry players to expand capabilities and presence in high-growth markets to capture upcoming opportunities. This is also consistent with the current financial position of major players in the industry. Over the past ten years, a sample of more than 85 public companies in E&C experienced an expansion in profitability margins and a generalized deleveraging process, particularly in the past five years. The group’s average EBITDA margin is 100 basis points above its ten-year average, while its median net debt to EBITDA ratio is 10 percent less than its ten-year average, signaling an improved debt capacity and cash flow position among large industry players to fund inorganic growth.
M&A doesn’t come without risks—but it can also create significant opportunities
Research suggests that 70 percent of M&A deals fail to meet expectations. Common reasons for these failures include integration and high valuations, but the opportunities created can far outweigh the challenges.
E&C executives widely believe the biggest challenge in M&A is integration risk
Although M&A is an attractive path to capture growth opportunities, companies need to be aware of risks and use best practices throughout the process to maximize their chances of being successful. When asked about challenges throughout their M&A journey, industry executives identified integration risks—such as cultural alignment, talent management, and sales integration—as the primary difficulties, followed by high valuation expectations and the complexity of estimating revenue and cost synergies (Exhibit 4).
As an industry anchored around people rather than specific products, brands, or technologies, E&C presents particular integration challenges. Disruption, culture clashes, and eroded employee value propositions can quickly lead to talent loss, demotivation, and a disconnect between deal strategy and its implementation, ultimately affecting win rates and execution in the field and eroding shareholder value. Accordingly, industry executives identified cultural alignment, talent retention, and operational or sales integration as the top three challenges during the integration phase (Exhibit 5).
Survey respondents identified high valuation expectations as the second-most relevant challenge. This is consistent with two trends: higher valuation multiples for public companies and the increased presence of private equity (PE) in E&C. On the former, average valuation multiples of public E&C companies have expanded well above pre-COVID-19 levels. In fact, average enterprise value over EBITDA multiples in the second quarter of 2024 was approximately 25 percent higher than the historical average of the past decade. And on the latter, the sector’s stable, positive outlook and unprecedented levels of dry powder for PE firms have led private capital to take an increasingly prominent role in M&A activity, driving up competition and valuation expectations during bidding processes. On this point, PE buyouts represented about 20 percent of the total deal count ten years ago but have gradually increased to nearly 35 percent this year.
M&A will continue to gain relevance in the growth strategy for E&C firms
Even though organic growth generally ranks higher in the pecking order for capital allocation, the rapid adoption of new technologies and construction methods, shortages of skilled labor, and concentration of major growth opportunities in particular markets have elevated M&A’s role as a critical growth lever that provides an accelerated path to obtain the required capabilities, expertise, and local presence to capture industry tailwinds. In particular, the following three M&A plays are likely to become more prominent.
Acquire advanced technologies, modularization capabilities, and the ability to self-perform. Amid an environment in which labor shortages, high inflation for building materials, and increasing project complexity have the potential to curb growth, E&C firms with balance sheet capacity will look for targets that utilize automation, standardization, and digital tools. As a result, E&C companies will increasingly self-perform a range of key activities within the construction schedule and transform the way they perform activities via innovative construction methods and technology (such as use of generative AI, automation, analytics, and optimized project management).
A first source of acquisition targets will often include reliable partners and subcontractors that have built the desired capabilities. This can reduce uncertainty and complexity of due diligence and post-acquisition integration given their familiarity.
Acquire specialty expertise needed to serve high-growth end markets, notably renewable energy, data centers, semiconductor fabs, and healthcare. In the lookout to enter or enhance their position to capture growth in these fast-growing end markets, E&C firms can look for specialized targets with strong name recognition and industry relationships, specialized knowledge and technical capabilities, equipment and materials sourcing partnerships, regulatory expertise, and cultural compatibility.
Revenue synergies will be a primary source of value because the combined list of geographies and clients should generate ample revenue growth opportunities. Whether targets are attractive will largely depend on their degree of specialization and geographical coverage; low overlap can maximize opportunities for collaboration and reduce integration risks.
Acquire local firms in high-growth regions to accelerate market entry. Instead of starting from scratch, firms may leverage M&A to fill gaps in coverage around large geographies, such as Canada, Germany, India, Saudi Arabia, South Korea, the United Kingdom, and the United States. This will enable them to draw on existing local expertise and recognition, client relationships, and access to skilled-labor and subcontractor pools.
Acquirers often prioritize franchise models over centralized models when integrating targets into their platforms. This can help maintain local knowledge, culture, and relationships while leveraging shared service centers for non-core operations.
What it takes to compete and win
To maximize their odds of generating economic value through M&A, E&C companies could follow a strategic and methodological approach rather than a merely opportunistic one. To do so, firms could consider including three major components in their M&A playbook: setting their M&A blueprint to proactively define how M&A can accelerate the growth strategy, going beyond traditional due diligence, and executing integrations with a disciplined, systematic approach that accounts for unique people and cultural challenges in E&C.
Setting up the right M&A blueprint
The first step in an E&C firm’s M&A journey should be defining a clear link between the corporate strategy and the M&A blueprint. The former summarizes the organization’s plan to grow and compete, including priority regions, end markets, construction value chain coverage with internal capabilities, and degree of specialization. The M&A blueprint describes the specific themes where M&A can accelerate the higher-level strategy. High-performing E&C firms identify two or three priority themes in their M&A blueprint—for example, expanding geographically, integrating vertically with subcontractors to self-perform, acquiring tech capabilities to become solutions providers, and entering adjacent or specialized project categories.
McKinsey research has shown that programmatic acquirers consistently outperform peers who shun M&A or concentrate on large deals only, as they more quickly pivot toward growth opportunities and divest businesses where they lack a competitive advantage.
Evaluating targets beyond traditional due diligence
Evaluating targets should go beyond traditional due diligence efforts such as covering commercial, financial, tax, legal, and IT matters. To capture the full value from M&A transactions, acquirers should pay particular attention to strategic fit, cultural compatibility, and synergy potential.
Strategic fit. Targets could be evaluated based on their alignment with the acquirer’s corporate strategy and investment themes to ensure discipline and alignment with the long-term vision for the business—for example, priority regions, required end-market expertise, and desired in-house construction and service capabilities.
Cultural compatibility. Due diligence efforts could include an in-depth cultural assessment focused on key values and management practices to identify commonalities and differences between the target and acquirer companies. Interviewing a curated list of employees at all levels and across the organization can facilitate the evaluation of decision-making processes; incentive structures; reporting styles; coordination systems across design, field operations, and back-office and client-facing teams; and on-site safety and risk management procedures.
Synergy assessment. When evaluating deals, E&C companies could look at the combined value of revenue, cost, and capital synergies from a comprehensive perspective to evaluate whether potential synergy value (net of costs to achieve and dis-synergies) exceeds the acquisition premium being paid above the target’s stand-alone market value. This should include an assessment of combinational and transformational synergies.
In terms of combinations, E&C firms typically see cost synergies coming from the consolidation of materials, equipment and service sourcing, improved utilization of the combined base of construction equipment and tools, optimized workforce deployment, and consolidation of overhead and technology infrastructure, eliminating redundancies. On the revenue side, synergy opportunities typically arise from cross-selling complementary services to the combined client-relationship base (such as design and engineering, construction management and execution, and consulting), enhanced capabilities to serve high-growth sectors, and access to complementary geographies.
Transformational synergy opportunities arise from potential gaps between a target’s baseline and optimized operations. Their attainability therefore depends on the acquirer’s capacity to identify and close such gaps. To identify transformational synergy opportunities, firms may assess the following eight points:
- Excellence in project delivery. Analyze elements that affect as-sold margins (such as cost-reimbursable or fixed-price mix, the accuracy of cost estimates, and approval levels) and revenue leakage (such as utilization, write-offs, and claims).
- Office profitability and footprint optimization. Evaluate location and support functions (such as local finance), assess the potential to adopt global hour-delivery models, and benchmark general and administrative costs across offices.
- Portfolio rationalization. Analyze economic value add per client to identify renegotiation needs, and assess margins delivered by size, region, and type of project to adjust commercial targets accordingly.
- Working capital improvement. Review opportunities to enhance accounts receivable and payable performance—for example, end-of-period accumulation, terms harmonization, early payments evaluation, payment runs standardization, and policy adoption enhancements.
- Shared-services implementation. Evaluate opportunities to increase the adoption of centralized models for support services (including local or offshore centers for functions such as human resources, accounts receivable, accounts payable, treasury, and tax) as well as engineering (shift hours to global centers, common design libraries, and design automation).
- Growth and innovation acceleration. In addition to helping reduce costs, new construction modalities, automation, and data generation and analytics can aid in meeting market demand in high-growth verticals by assessing a company’s processes, effectiveness, and track record of adopting new capabilities.
- Organization or operating model optimization. Increase the billability of the organization by adjusting spans and layers, consolidate shadow functions (project accounting and financial planning and analysis, among others), minimize administrative burdens, homogenize reporting, and cross-train employees who may handle multiple project roles to reduce downtime.
- Cost to serve and overhead rationalization. Zero-based budgeting and cost benchmarking assessments can help identify opportunities to streamline cost of goods sold and selling, general, and administrative expenses across the value chain and supporting activities, from pipeline generation to design, procurement, construction, and project handover or maintenance. During the past few years, the industry growth orientation has pushed the historic “optimizing cost to serve” disciplines to the back burner, creating challenges in volatile times ahead. To increase resilience, firms should dig in across the board, improving corporate and general and administrative expenses as well as traditional ways of working.
Integrating targets with a systematic approach
Selecting the right target and identifying synergy opportunities solves only half of the problem of generating economic value in M&A. A systematic approach to integrating E&C targets is key to mitigating risks and maximizing value capture. Delivering on cost and revenue synergies has become increasingly important as the elevated valuation environment is pushing acquirers to bet on higher synergy expectations to make deal economics work, leaving low margins of error for execution. Firms can take the following six steps to integrate targets effectively:
- Create an integration strategy before closing, including planning for day one, day 100, and end state. Set up an integration management office to oversee the process, establish governance, and monitor progress. Short-term planning should focus on avoiding disruptions in undergoing projects, bidding processes for new work, and retaining key talent.
- Develop internal and external communication plans tailored to major stakeholders, including on- and off-site employees, subcontractors, suppliers, clients, and customers, to provide visibility on expected changes and timelines. Implement internal two-way communication channels for continuous feedback and early identification of potential disruptions in field and commercial operations.
- Design a joint-operating model, organizational structure, and talent management plan to support short-term business continuity and execution of the company’s long-term vision. A joint operating model should include a definition of whether the combined entity will operate with a centralized or franchise model, a design of the interaction model between firms and shared service centers, main operating policies and procedures on- and off-site (procurement, client development, and safety and quality management), governance and reporting structures, decision-making processes, and integrated service offerings, particularly if the target and acquirer have meaningful overlaps across service offerings and end markets.
- Plan for culture integration and change management based on the cultural compatibility assessment done during due diligence. Integrating and aligning cultures is crucial to long-term performance, and it shouldn’t hamper meritocracy and accountability. On accountability, many firms’ supportive cultures have been misinterpreted or devolved into a reluctance to challenge or voice dissent. A supportive culture should not mean avoiding tough conversations. In addition, processes for people can be recalibrated. The hybrid work model and rapid growth have dulled the edge of some of these processes. Firms must realign to ensure they reward and encourage genuine impact, distinctiveness, and merit, rather than mere effort to secure tenure.
- Create a bottoms-up synergy value capture plan starting with a baselining exercise of current revenues, cost of goods sold, SG&A, and full-time-equivalent employees by end market, region, and project category, followed by a data-driven analysis to compute synergy potential and design of detailed implementation plans by area, such as design or engineering, field operations, back office, and sales.
- Design a tech blueprint with a mindset of serving the “field” before the “office” by assessing critical IT infrastructure, including applications and data systems, by the construction stage. Select the right tools for project, schedule, and cost management; quality and safety controlling; documentation; and field collaboration before selecting the design, planning, enterprise risk management, and back-office systems. Plan for a gradual phaseout of legacy systems and define a timeline for data migration and integration, focusing on minimizing operational disruptions.
M&A is a crucial part of the executives’ tool kit for driving sustained, profitable growth across E&C subsectors. Many companies have already accelerated their M&A programs over the past few years, yet 82 percent of executives see deal volumes accelerating. With high valuations and increasing competition for targets, the impetus to deliver the full potential from every deal will soon be higher than ever.
