We are pleased to present BaseRock Partners’ Q4 2021 Engineering and Construction M&A Outlook. This quarter we address President Biden’s Infrastructure and Jobs Act and the growing threats of inflation, supply chain pressures, and rising interest rates to a red-hot M&A market.
With Infrastructure Legislation Passed, the Outlook for E&C M&A Improves. Government largess and loose monetary policy have created as robust a deal market as we have seen in our lifetimes. U.S. M&A activity is up 40.0% compared to the first nine months of 2020 and up 10.0% compared to the first nine months of 2019. Passage of the infrastructure bill is likely to further accelerate E&C M&A activity in 2022.
Inflation and Supply Chain Issues Present New Risks. Inflation and supply chain pressures are increasing risks to the health of the E&C market. Few executives at the helm of E&C companies today have operated in an inflationary environment, and we expect the dual edged sword of strong market growth and increasing costs will begin to separate the strategically well-positioned from the commodity service providers in 2022.
With Infrastructure Legislation Now Law, Will Capacity Issues Emerge? Federal spending on highways and related infrastructure is set to expand by nearly 40 percent beginning in 2022. In states with strong existing infrastructure funding packages the potential for capacity constraints is as strong as it has ever been. This may provide hard bid contractors with a once-in-a-generation opportunity to improve pricing (and protect against inflationary risks), but the increased demand combined with labor and supply shortages could also be a recipe for slow project releases and a less-than-optimal rollout of the long-awaited infrastructure bill.