BDO Analysis: Construction Tech M&A – A New Frontier But The Same Old Song?
Explosive growth in the number of construction technology start-ups is mirrored by increasing M&A activity. Analysis of data from the BDO M&A database shows that construction companies are increasingly involved, making more, and larger, construction technology acquisitions.
Technology companies are also increasingly active in the space, and their M&A focus seems different than construction companies’; a situation that could potentially relegate construction companies to customers rather than suppliers of construction technology.
Growing Pace Of Acquisitions
BDO M&A data shows how construction companies’ acquisitions of construction technology has been gathering pace since 2014. The data also shows how the number of so-called megadeals (deals worth more than $1 billion) is increasing. There were five such deals in 2017, compared to three between 2010 and 2016.
Looking at the number of acquisitions per country, both on the buy and sell side, shows that USA, China and the United Kingdom are the most active markets, followed by Japan, Germany and France.
The outer circle in the graph above represents the number of acquisitions made by companies based in a given country while the inner circle represents the number of acquisitions made of companies based in said country. 36% of construction companies’ technology M&A from the period has been cross-border deals.
BDO has created a heat map of all construction companies’ technology M&A from the period. It can be found here.
China To The Fore
Looking at deal numbers per year shows that acquisitions of Chinese targets is increasing rapidly.
Only two out of 37 acquisitions of Chinese construction technology companies have been cross-border deals.
Increased activity began in 2014, the year after Chinese authorities announced the Belt and Road Initiative, which is hardly a coincidence. The project involves spending an estimated $4 - $8 trillion on infrastructure projects. Much of the work will be carried out by Chinese construction companies, who are likely leveraging M&A to consolidate, to further take advantage of a booming market and to expand their service portfolios.
China is, along with the US, the most active markets for construction technology acquisitions. In the first half of 2018, Chinese acquirers were outpacing their US counterparts, both in relation to deal numbers and total value. However, it is too early to tell if this is something that will turn into a lasting trend.
Same Old Song?
A breakdown of deal activity shows that construction companies are making the most acquisitions in the following ten technology sub-sectors:
The figures suggest that construction companies are very active buying up technology companies. However, upon closer analysis a more nuanced picture of the activity emerges.
Only about half of the acquisitions in the five most active subcategories (Computer services, Computer software, Industrial products/services, Services technology, and Industrial electronics) can be described as acquisitions of ‘pure’ technology companies. The most active areas for pure technology acquisitions include cloud computing, payments, cybersecurity, software development, and hardware.
The remaining half involves targets where construction technology and/or construction technology R&D is only a part of the company’s portfolio. The category includes conglomerates, large corporations and consultancies with construction technology divisions.
A possible conclusion from the analysis is that while construction companies are indeed looking to make acquisitions in the construction technology space, it is not necessarily the focal point. When buying pure construction technology companies, their focus seems to be on creating efficiencies (payments and cloud computing), ensure compliance (cybersecurity) as they handle increasing amounts of sensitive data and their core business areas (hardware). However, they are also looking at developing new solutions in-house (software development). Interestingly, there seems to be limited interest in acquiring some of the core technologies that are currently disrupting the way that construction projects are carried out. For example, there were only two deals involving Building Information Management companies with construction companies on the buy side.
Coming Pressures From Big Tech
Both M&A activity levels and funding rounds for construction technology companies illustrate that technology companies and technology-focused VCs are also increasingly active in the space. According to a report from Jones Lang LaSalle Inc., VCs have invested $1 billion in construction technology in H1 2018. To date, the biggest funding rounds for construction technology companies include Katerra’s series C, led by Softbank, and Onshape’s series D that included Andreessen Horowitz. Construction companies, including their corporate VC funds, are absent from the list of most active investors in construction technology start-ups, which is led by the two technology accelerators Y-Combinator and 500 Startups.
Big technology companies are also getting involved. Both in building construction technology and making acquisitions in the space. Amazon has invested in prefab construction technology, Google’s venture arm has made several investments in construction technology start-ups, and Microsoft recently applied for a patent on what is essentially organically growing buildings.
At the same time, the construction technology sector itself seems to be undergoing consolidation. Since 2010, Autodesk has made 31 acquisitions to further develop its service portfolio. Trimble has made 44 acquisitions to further expand its capabilities within areas like land survey, construction asset tracking and mobile resource management. Oracle has made several acquisitions to further boost its cloud-based construction and engineering platform.
The M&A analysis and increased activity from VCs and technology companies both point in a similar direction. While construction companies are indeed moving towards the future of construction and using M&A as a strategy to get there, their pace is much slower – and focus different - than that of big technology companies, established construction technology companies and VC-backed start-ups.
A situation that could be exacerbated by the fact that the construction industry invests 0.5% of annual construction value on R&D while computing and electronics companies spend an average 8.8% of revenue on R&D.