Let’s make a deal. Or maybe not?

Growing infrastructure investment, the expanding global middle class, increased housing demand, the need for data servers and falling interest rates: Given all these trends, it’s no surprise that the engineering and construction (E&C) sector is growing at a healthy clip (5% a year). That pace will likely accelerate and could reshape the market for decades.

To meet the moment, and to compensate for the sector’s enduring productivity challenges, one strategy E&C companies have turned to is mergers and acquisitions. From 2014-19, there were around 1,100 M&A deals a year; from 2020-24, there were 1,800; about 80% of them in Europe and North America. Over the same period, deal value rose 55 percent.

More, however, is not always better or smarter. Roughly 70% of M&A deals fall short of expectations. Too often, M&A has created conglomerates with unclear synergies and below-par performance. Making a poor deal is worse than standing pat, constraining a company’s ability to make future investments and hobbling competitiveness in the meantime.

To understand what works, McKinsey surveyed more than 100 senior E&C executives from around the world. These leaders are on the front lines and many have learned from painful experience.

Two simple questions are, or at least should be, the foundation of every transaction: Are we the best owner of this business? And if we are, at what price? Based on the survey, there are three principles companies should keep in mind in order to give themselves the best chance to generate value from M&A.

Go Beyond Traditional Due Diligence

Evaluating the commercial, financial, tax, legal and IT implications of a proposed transaction is routine, necessary — and not enough. Companies also need to take a hard look at whether the proposed synergies will deliver benefits greater than the costs of acquisition. It’s also important to address hard-to-measure topics such as strategic fit and cultural compatibility. In terms of the former, that means ensuring that the target suits the acquirer’s long-term vision, with reference, for example, to service capabilities and geographic compatibility.

Culture is too often undervalued and overlooked; in fact, it is critical. Integration is the single most cited M&A challenge (see chart). Ways to assess cultural fit include doing a detailed cultural assessment and interviewing employees up and down the target company to assess matters such as incentive structures, field operations and risk management.

Have an Integration Plan Ready to Go

Success takes time, but failure can take root early. That is why it is important to know how to integrate an acquisition from day one. Consider: 82% of the executives surveyed believe that the pace of M&A is going to pick up. The industry could be fundamentally reshaped over the next few years; companies will want to invest in high-quality assets with exposure to the best end markets. In this sense, moving first could be a real advantage — but only if the costs and synergies work. That requires smooth integration. 

Setting up an integration office with goals for day one, day 100 and year one can be a useful way to establish goals and then monitor progress on them. Another proven approach is to design an organizational structure and talent plan to ensure continuity even as the combination organization evolves. A third is to create a value capture plan, starting with a rigorous analysis of current revenues, expenses, headcount and cost of goods. With that baseline established, it is possible to do a data-driven analysis to compute synergy potential and to devise implementation plans in areas such as design, engineering, field operations, administration and sales.

Think Small Bangs, Not Big Ones. 

Programmatic M&A is the practice of making regular small- or medium-sized transactions (including divestitures), rather than one or two huge ones or relying on organic growth. Of course, some splashy deals work out just fine, and organic growth is good. But for two decades, the research has been consistent: programmatic M&A delivers better performance, on the order of an additional 2.3% a year in total shareholder returns. It reduces risks and enables companies to build deal-making expertise, so that they are quicker to pivot to growth opportunities. To work well, a programmatic approach needs to be closely connected  to overall strategy, whether that is expanding geographically, integrating vertically with subcontractors or acquiring tech capabilities. And the timing is promising: recent earnings and backloaded guidance have lowered valuations for many companies in the sector, making acquisition a more attractive option.

There is every reason to believe that individuals, businesses, and governments around the world are going to keep building things: the needs for new construction are acute, in areas ranging from transportation to semiconductors and life sciences.  But just because the market is good does not mean that companies will do well. To capture growth and adapt business models to the fast-changing global economy, M&A has to be part of the toolkit. But as E&C companies know from their daily work, a tool is only as good as the skill with which it is used.