Q3 2010 M&A Deal Activity in Engineering and Construction Sector Continues to Improve With Over $13 Billion in Deal Value, According to PwC

Deal Value of Mega-Deals Increases by More Than 100 Percent in Third Quarter Compared to Q2 2010

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Nov 11, 2010, 08:00 ET

NEW YORK, Nov. 11, 2010 /PRNewswire/ -- The merger and acquisition (M&A) deal activity in the global engineering and construction (E&C) sector saw an increase in deal value in Q3 2010 with 13.03 billion compared to the second quarter's 11.43 billion, according to the PwC US report, Engineering growth: Third-quarter 2010 global engineering & construction mergers and acquisitions analysis. However, deal volume declined in the third quarter of 2010, with 35 deals, compared with the prior quarter's 43 deals. Overall, general recovery in the environment has continued since Q1 2009 and is expected to see additional growth as global economic trends continue to improve.

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Year-over-year, deal value in Q3 2010 ($13.03 billion) experienced an almost 55 percent uptick compared to Q3 2009's $8.43 billion. Additionally, despite a slight year-over-year decline in deal volume with 35 deals this quarter compared to 36 deals in Q3 2009, 2010 looks likely to surpass 2009 in both deal volume and value totals for the E&C sector.

"Although high levels of unemployment and fears of a double-dip recession are still present, a number of indicators show that the deal environment will keep improving," said Kent Goetjen, U.S. engineering and construction industry leader at PwC. "We expect factors such as ongoing access to credit, advancing equity markets and relatively constrained valuations to continue to spur growth."

While volume of mega-deals (deals worth at least $1 billion) remained the same as the second quarter at two deals total, the overall deal value increased by more than 100 percent, from $3.55 billion in the second quarter to $7.2 billion in Q3 2010. Additionally, mega-deal activity by value in the first three quarters of 2010 almost doubled that of 2009 overall, and also exceeds total number of deals compared to full-year 2009. This increased activity of mega-deals over 2009 is, in part, a consequence of reduced capital constraints and low activity in much of 2009. Despite this significant growth in mega-deal value, overall deal activity remains driven by smaller deals and transactions with undisclosed values, which is in line with historical trends.

Strategic investors increased their contribution in the third quarter, accounting for almost two-thirds of all deal volume. This indicates that more strategic investors are turning to acquisitive growth, likely in part due to realizing that organic growth is insufficient during the current recovery. Financial investors' contribution to M&A activity in the E&C sector declined in Q3 but still drove more than 25 percent of total deal volume.

From a regional perspective, the proportion of E&C deals involving North America grew from 11 percent in the first half of the year to 23 percent through September 30. This growth can be contributed, in part, to the fact that deals in the U.S. also increased in volume compared to the second quarter of 2010.

"While some risk avoidance remains as the U.S. economy has not fully recovered, the environment has shown promising improvements," added PwC's Goetjen. "The growth in the U.S. seems indicative of U.S.-based entities' increasing willingness to initiate lower value deals."

Overall, targets in Asia and Oceania accounted for 43 percent of all transactions valued at $50 million or more. A considerable portion of the activity in the region involved local market deals, primarily driven by China. The region is expected to continue to drive deal activity as China continues its rapid infrastructure expansion.

Despite the year's steady growth in overall deal value and volume, the third quarter declined in cross-border E&C deals compared to the first half of 2010. The decrease in the number of cross-border announced deals in Q3 worth $50 million or more is likely a result of renewed concern regarding political, socioeconomic, and currency risks, at least in the short term, as cross-border transactions generally entail greater levels of risk than local market transactions do.

Curate's egg: The changing deal environment

The third quarter Engineering Growth report takes a closer look at a global economy characterized by instability and its impact on the M&A deal environment. Today's global economy is like a curate's egg. Economic expectations are good and bad, positive and negative.

The concept of a mixed bag is especially relevant to the E&C industry's M&A market. On the positive side, the volume of deals closed during the third quarter of 2010 shot up significantly from the previous year, an indication that the global economy is stabilizing. The downside is that worries continue about a protracted economic recovery or another recession, which has many global buyers and sellers taking a wait-and-see approach to deal making.

Due to increased uncertainty, companies are structuring deals in new ways and handling them differently. Specifically, many are avoiding large, staged auctions, except in cases that involve a sizable, high-profile asset. Instead, companies are trending toward one-to-one negotiations in off-market deals, where the buyer proactively identifies and approaches the target. Additionally, E&C companies have become more cautious and diligent about what they are buying. They no longer favor diversification as a global M&A theme but rather are looking for deals that can provide new strategic opportunities.

More than ever, deals today must fit strategically and commercially with existing operations and drive synergistic growth.

For information on Engineering growth and to access the full report, including the special section on the changing deal environment in the E&C sector, visit http://www.pwc.com/us/industrialproducts.

About PwC's Global Engineering & Construction Practice

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© 2010 PwC. All rights reserved. "PwC" and "PwC US" refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate and independent legal entity.

SOURCE PwC