Efficiency and performance effects of mergers and acquisitions in the construction industry

A feature of the construction sector for the past five years has been the increase of corporate activity, with mergers and acquisitions at the forefront of most firms’ strategies. Consolidation by mergers and acquisitions in the construction industry is leading to the big firms getting bigger and the small to medium companies finding it increasingly difficult to maintain competitiveness and margins. Mergers may be justified by the extent to which they add value. Adding value requires some synergy that may be obtained by winning access to complementary assets or deriving economies of scale or scope related to the core business. There is a significant incentive for a company to grow if the costs of production decrease as the scale of the operations increased. This paper provides an assessment of the benefits of size, by analysing the relation between measures of costs and firm size. The data was selected from over one hundred companies in the contracting and house building sector, materials sector and plant hire sector for each of the most recent five years. It was found that economies of scale could be achieved by small to medium companies, however larger companies find it increasingly difficult to maintain scale economies. The paper then analyses a small sample of construction companies that were involved in mergers and acquisitions. This analysis is carried out using various financial efficiency ratios. Three out of the four cases were found to be successful.