The UK construction industry is poised for a potentially huge increase in mergers and acquisitions (M&A) activity over the next 12 months, having already grown 66% YOY to May 2024. This surge is expected to be driven by several factors including economic recovery, government infrastructure projects, the push for sustainable construction, and the need for companies to scale and diversify to remain competitive in an evolving market. For construction firms considering M&A as a growth strategy or exit opportunity in the next couple of years, now is the time to prepare.

M&A in construction: The current landscape

The industry has been resilient in the face of recent economic challenges, but is still grappling with significant pressures like rising material costs, labour shortages, and supply chain disruptions. In response, many construction firms are exploring M&A as a strategic avenue to consolidate resources, expand capabilities, and enhance their market position.

The construction industry remains a vital component of the UK’s economic framework, with the government emphasising the importance of infrastructure development, including a renewed focus on sustainability, social housing, and green energy projects. With the economy stabilizing, there is also renewed confidence in construction in general, leading to increased interest from both investors and acquisitive firms looking to expand. Several key trends are driving this surge in M&A activity, let’s take a look at what they are…

Government infrastructure initiatives

The UK government has laid out a number of plans which, if realised, could have a significant impact on the rise of deal activity in the construction space. Firstly, the aim is to position the UK as a leader in clean energy, with significant investments planned in renewable energy sources like wind, solar, and green hydrogen. All of these would require significant overhauls to existing infrastructure as well as extensive development works, so companies able to operate in this space could become highly valuable.

The government has also committed to a 10-year infrastructure strategy designed to provide certainty and stability for large-scale projects. This strategy is closely aligned with their industrial policies and aims to ensure consistent investment in transport, housing, and digital infrastructure across the UK. The related plans to bring the railways into public ownership, alongside a commitment to a long-term transport strategy that supports not only rail but also the broader integration of transport systems across the country, will further bolster the sector. This level of activity would provide an ongoing pipeline of sizeable construction projects which should provide greater stability to the firms that undertake them, and reassurance as to long-term profitability for acquisitive companies.

Extending devolution is another cornerstone of infrastructure policy. The government plans to empower local authorities with more control over transport, housing, and economic development, along with multi-year funding settlements to support regional infrastructure projects, which should mean that regional construction firms are better able to place themselves for success and demonstrate the benefits of local knowledge, reinvestment in communities, and job creation.

Sustainable solutions

The government’s growing focus on infrastructure development has a particular emphasis on sustainable and social housing, which is likely to increase demand for green construction services and boost the bottom lines of winning bidders. Companies specializing in low-carbon construction methods, energy-efficient buildings, and sustainable materials are becoming attractive acquisition targets as the sector shifts towards meeting net-zero goals.

Firms with strong ESG stances or specialised capabilities in these areas are also expected to attract interest from larger companies looking to secure government contracts and expand their market presence. It’s becoming ever clearer that a lack of ESG credentials can hamper even the most promising deal, so now is the time to ensure you have visible, actionable goals and initiatives around ESG, not just internally, but also across your supply chain ecosystem. Preparing for this ahead of any potential sale or fundraise could make a significant difference to your company’s valuation, as well as ensure interest from the broadest possible range of investors or acquirers.

Consolidation for resilience

The ongoing challenges faced by the sector, including increasing costs, supply chain concerns, resourcing issues, and increased regulation are driving consolidation as firms seek to combine resources, streamline back-office tasks, reduce costs, and improve overall operational efficiency.

As the regulatory landscape becomes more complex, construction firms are more inclined to acquire or merge with Testing, Inspection, Certification & Compliance (TICC) companies to integrate these essential services directly into their operations, ensuring that projects meet all necessary standards from the outset.

Similarly, we’re seeing more companies prioritise working with local contractors for a variety of reasons from region-specific knowledge of regulatory and planning processes, to local-authority job creation and ‘buy local’ type incentives. This means firms in a specific region are suddenly becoming very attractive to large players with gaps in potentially lucrative areas.  

Companies with streamlined processes, effective project management systems, and strong supply chain relationships are more attractive to buyers and investors, so investing in technology and process improvements can make your firm a more compelling M&A target.

Get set for M&A 

If you’re considering a fundraising or exit strategy in the next couple of years, there are some steps you can take right now to set yourself up for success:

• Clarify your strategic objectives – Are you aiming to expand your service offerings, enter new markets, or strengthen your current market position? Understanding these objectives will guide your approach to finding suitable acquisition targets or potential buyers.
• Prep your data – Due diligence is a critical phase in any M&A transaction. Be prepared to provide detailed information on your financials, operations, contracts, and legal matters. A strong team of advisors, including legal, financial, and industry experts, can make navigating this process much easier.
• Prioritize risk management – The construction industry is inherently risky, with potential issues ranging from project delays to regulatory challenges. Firms that demonstrate robust risk management practices are more likely to succeed in M&A. This includes having comprehensive insurance coverage, strong health and safety protocols, and effective contract management systems in place.
• Evaluate cultural fit – Cultural alignment can be a significant factor in the success or failure of a deal. Establish your non-negotiables ahead of time and you’ll be better placed to assess the cultural compatibility of potential partners and consider how the integration process will be managed for the best result.

With the construction sector expected to experience a notable increase in M&A activity over the next 12 months, being well-prepared is essential to navigating this dynamic landscape successfully. By clarifying strategic objectives, strengthening financial health, enhancing operational efficiency, and prioritizing risk management, firms can position themselves to capitalize on the opportunities ahead.

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