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Continued resilience in the E&C sector drives M&A activity
Deal activity in the engineering and construction (E&C) sector rebounded in 2024, driven by increased confidence in a modest economic recovery, easing inflation and interest rate cuts. Despite continued economic uncertainties, certain E&C subsectors — including residential construction, infrastructure and grid modernization — are poised for continued growth.
- Energy transition: This continues to drive investments across multiple sectors, including renewable energy generation, energy storage, grid modernization, electric vehicle infrastructure, energy efficiency, and carbon capture and storage. While in recent years government subsidies have been significant drivers of activity and capital investments in the energy transition, the future trajectory of these incentives remains uncertain due to potential policy changes. Despite this uncertainty, there is still momentum in the E&C space driven by market forces and state-level initiatives as the US targets net-zero gas emissions by 2050.
- Shift in construction market dynamics: Residential construction is expected to grow as well as some non-residential segments bolstered by government funding. However, non-residential construction continues to face challenges due to high interest rates (despite recent rate cuts) and other economic pressures, such as margin compression and potential debt defaults.
- Necessity for business reinvention and increased technological integration: E&C firms are adopting AI and digital technologies to enhance productivity, improve customer experience and streamline operations including off-site fabrication. These strategic shifts and reinvention are driving deal activity as companies seek to buy rather than build necessary skills.
- Capital allocation strategies: Companies are allocating capital to high-value areas such as core infrastructure. This is occurring while still navigating interest rate pressures and margin sustainability amid economic uncertainty to bolster balance sheets and improve overall profitability.
Note: The primary M&A data source used in the 2025 outlook is S&P Capital IQ.
Strategic thinking
The E&C deal sector remains resilient due to continued optimism within the sector going into 2025. Residential construction is expected to see growth of about 10% into 2025 as housing supply remains constrained following the COVID-19 pandemic. Additionally, there are still significant levels of dry powder available across investment vehicles as companies invest in areas such as core infrastructure, particularly around the infrastructure grid. Non-residential construction M&A activity will remain muted as there are continued challenges with high interest rates and margin compression resulting in a slower economic recovery in 2025. This could be partially offset by growth in certain non-residential sectors such as data centers, healthcare, lodging and education that may continue to see investment from public funding and further M&A opportunities. M&A activity related to energy transition continues to have strong volumes with a spectrum of deal sizes.
“E&C deals outlook remains positive, with activity focusing on energy transition and grid modernization, scaling capabilities to meet growing infrastructure and renewable energy demands.”
The bottom line
The M&A outlook for E&C deals in 2025 remains positive as deal activity in the second half of 2024 rebounded from reduced levels earlier in the year. Recent US elections may change the regulatory landscape and drive investment focus toward different infrastructure opportunities. Companies will continue to allocate capital to high-value and high-growth areas, such as certain non-residential sectors like data centers, healthcare, lodging and education that offer significant returns despite economic uncertainty. Long-term trends around sustainability, technological adoption and industry consolidation indicate that the sector is adapting to new challenges, positioning itself for future growth in a rapidly changing US and global landscape.
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