Active Construction Market Accelerated Mergers and Acquisitions in 2024

A recent report from Capstone Partners, a US-based investment banking firm, found the active Construction market helped accelerate Construction merger and acquisition (M&A) activity in 2024 as buyers increasingly turned to acquisitions as a way to bolster growth, expand market share, and capitalize on strong demand for construction services.

Interest rate cuts in the latter half of 2024 combined with federal funding for infrastructure, energy, and manufacturing construction projects kept project backlogs elevated throughout 2024 and pushed total construction spending in the U.S. up 6.6% year-over-year (YOY) as of November 2024, according to the US Census Bureau.

Sector growth and strong project backlogs, particularly within the aforementioned verticals, supported increased M&A activity in 2024 as sector players pursued inorganic growth opportunities by deploying ample cash reserves amid healthy revenue gains. However, a volatile and persistently stubborn inflationary environment stalled early and mid-year momentum within Commercial and Multi-Family Residential Construction verticals.

Near-Term Challenges

In the near-term, sector growth will likely also face challenges stemming from rising materials costs due to potential tariff increases as well as worsening labor shortages from proposed immigration policy changes. Despite pressures, contractors’ six-month outlook for sales and margin growth has continued to accelerate, fueled by post-election optimism that favorable policy changes involving deregulation and tax cuts will support increased construction activity into 2025, according to a December article from Associated Builders and Contractors (ABC).

Furthermore, tailwinds propping up residential, energy, and manufacturing construction activity and project backlogs have continued to support long-term sector growth. Capstone anticipates federal funding and long-term tailwinds driving activity for construction services within high-demand verticals to continue supporting M&A momentum into 2025, particularly as project financing conditions continue to improve and revenue and profitability remains elevated across the sector.

Long-Term Tailwinds

Throughout 2024, sector growth was underpinned by nonresidential construction spending within Infrastructure, Manufacturing, Energy, and Datacenter markets, making construction service companies serving these verticals attractive M&A targets in 2024.

A large portion of this verticalized sector growth has stemmed directly from federal funding from the Infrastructure Investment and Jobs Act (IIJA), Inflation Reduction Act (IRA), and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act amid bipartisan support for manufacturing onshore trends, renewable and energy efficiency investments, and infrastructure upgrades. Specifically, construction spending within the Manufacturing, Highway and Street, and Power verticals increased 21.5%, 6.1%, and 10.8% YOY, respectively, as of November according to the US Census Bureau.

Long-term tailwinds related to increasing technology infrastructure requirements also helped support rising construction spending in 2024 amid growing demand for artificial intelligence (AI) and advanced computing. As of November, private nonresidential construction on datacenters surged, with spending up 55.2% YOY, according to the US Census Bureau. As a result, construction services companies with synergistic operations, a strong customer portfolio, and scalable growth potential operating within these high-demand verticals have become attractive acquisition targets for sector buyers looking to leverage the long-term tailwinds driving sustained datacenter growth across the US.

M&A Targeting Sub-Contractors

The sub-contractor segment has been a particular area of M&A interest within the Construction Services space, as buyers aim to bolster growth and target scalable businesses with accretive operational capabilities in high-growth regions and verticals. 

In 2024, the sub-contractor segment captured 266 transactions, comprising the lion’s share (35.2%) of deal activity in the sector. The sub-contractor segment covers a variety of specialized and skilled construction services providers that are typically outsourced by a general contractor to perform a specific task within the broader project. The fragmented, highly scalable, and service-oriented operating model of sub-contractor businesses throughout the US has supported growing M&A interest from private equity buyers looking to acquire or bolster platform investments in the space.

In 2024, the sub-contractor segment accounted for the largest portion (43.8%) of private equity deals in the Construction Services space. Of note, these buyers showcased an interest in sub-contractors servicing Residential Construction markets as long-term tailwinds driving population migrations to southern regions and easing interest rates kept demand elevated amid a widespread shortage of single-family homes across the US. As a result, sub-contractors providing residential services such as HVAC, roofing, electrical, window/door installation, siding, and plumbing served as attractive acquisition targets in 2024.

Read the full report at www.capstonepartners.com/insights/article-construction-ma-update.