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Mergers market sees decline in ‘megadeals’

28 Apr 16 PwC’s quarterly analysis of mergers and acquisitions (M&A) in engineering and construction has found a decrease in the total value of deals, driven by a substantial decline in transactions worth over $1bn (£686m).

Deal activity grew in the first quarter of the year, as volume and value increased year-on-year. Annual deal activity also grew in terms of volume, but decreased in terms of total value, driven by a substantial decline of 43% compared to the previous period in the ‘megadeals’ worth over $1bn. Average deal value also decreased, declining by almost one-third to $349.7m.

In the first quarter, there were four deals, totalling $10.1bn. However, the value of these deals was almost 47 percent of total deal value for the quarter. The largest deal was the January 2016 announcement by China-based Zoomlion that it intended to launch an unsolicited offer to acquire the entire share capital of US-based Terex for $3.4bn.

Construction and construction machinery deals for the quarter

Local deal activity was a key driver for many of the quarter’s deals, particularly in the emerging and developing markets. This increase is not surprising, given that the majority of developing and emerging region-based E&C firms are smaller and the industry remains fragmented; thus local deals can help them grow at a lower cost, said PwC’s US engineering & construction leader Kent Goetjen and global engineering & construction leader Jonathan Hook. Consolidation also allows local firms to increase market share and achieve economies of scale, they pointed out. For example, in the construction materials segment, there have been a number of announcements as companies look to buy stakes in rival companies, including the recent announcement by India-based UltraTech Cement that it plans to purchase six cement units from Jaiprakash Associates for $2.4bn.

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First-quarter 2016 activity was driven by the construction and construction materials manufacturing industries, which jointly accounted for more than 60% of the overall deal volume. A significant increase in construction deals drove 38% of the first quarter’s volume, compared to 31% in the fourth quarter of 2015. Of the four megadeals in the first quarter, the largest – Terex - was a construction machinery transaction. There were also two construction materials manufacturing related megadeals announced and one in the homebuilding segment.

“Looking forward into the balance of 2016, several indicators lead us to believe that the deal environment will continue to improve,” said Goetjen and Hook. “Equity markets continue to advance; the S&P 500 index increased over 2% in the first quarter of the year, erasing significant declines in February. However, while the official rate of unemployment in the United States hovers around 5%, and the estimate of new jobs created in March is 215,000, concerns remain.

“Many of these jobs are seasonal or part-time and some analysts are stating that the ‘real’ unemployment rate is higher, due to the number of unemployed that are no longer actively seeking a position. Still, oil prices and global economic growth concerns will likely cause companies to pause during 2016.” (link opens in new tab)

The data can be explored at pwc.com/us/engineeringgrowth (link opens in new tab).

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