[Invest&Law] Is Construction Industry Restructuring Finding a Breakthrough Through Rehabilitation M&A?

11 Construction Firms Enter Court Receivership by April
M&A Emerges as Survival Strategy Amid Structural Crisis in Construction
Major Companies Lead the Way... M&A for Small Firms Remains Challenging

The acquisition and merger (M&A) of companies undergoing rehabilitation is emerging as a solution for restructuring in the construction industry. As construction firms that have suffered liquidity crises for several years are increasingly entering court receivership, major construction companies are seeking a breakthrough by acquiring mid-sized and small companies currently undergoing rehabilitation procedures.

According to Samil PwC Management Research Institute and other sources on July 8, a total of 11 domestic construction companies entered court receivership between the beginning of this year and April. This marks a steep increase compared to 7 companies in 2023 and 15 last year. The sense of crisis in the construction industry is intensifying, especially as mid-sized companies ranked within the top 100 in construction capacity, such as ShindongA Construction (58th in construction capacity) and Sambu Construction (71st), have also entered rehabilitation procedures.

The Seoul Bankruptcy Court cited the following as common major causes for the recent construction company rehabilitation cases: an increase in financial costs due to high interest rates after COVID-19, and a rise in unsold inventory and deteriorating profitability resulting from a slump in the construction market. Each of these factors was identified as an independent driver of the current crisis.

Samil PwC Management Research Institute analyzed, "The crisis in the construction industry?such as a decrease in orders, declining profitability and soundness, and an increase in bankruptcies and closures?can be attributed not only to internal and external factors facing the domestic construction sector, but also to structural issues." The institute further explained, "In addition to a shrinking construction market, global inflation, and supply chain disruptions, the construction industry has been particularly vulnerable or slow to respond to global trends such as aging populations, digitalization, and climate change."

Some construction companies are leveraging this situation as an opportunity to enter new markets and reorganize their portfolios. In particular, major construction firms are shifting their business models toward developer-centric approaches that lead planning and investment, moving beyond simple construction through M&A. This is to expand their business scope to areas such as nuclear power, eco-friendly energy, data centers, and modular construction. According to an analysis by the Korea Research Institute for Construction Industry of 21 M&A cases in construction company rehabilitation procedures since 2009, SK Group recorded the highest number of acquisitions with 7 construction companies, followed by Sewoon Construction with 3.

However, the actual success rate of M&A involving small and medium-sized construction companies, even after entering rehabilitation procedures, was found to be extremely low. The biggest obstacle was the lack of on-site and financial information, as well as the abundance of non-standardized data, which made due diligence difficult. Other issues identified as needing improvement included the wide variation in valuation difficulty depending on project status and project financing structure, as well as the current market environment restricting fundraising.

Kim Hwarang, a researcher at the Korea Research Institute for Construction Industry, explained, "While M&A of companies under rehabilitation is conducted under court supervision, ensuring transparent disclosure of information such as acquirers, transaction amounts, and procedures, the transfer and merger transactions of small construction companies involve limited information disclosure." He added, "This lack of information transparency hinders the securing of transparency and efficiency in the restructuring process of the small construction sector and makes it difficult for the government to formulate related policies."

Policy support to promote M&A was also called for. Kim added, "It is necessary to consider building a dedicated information network or platform at the Ministry of Land, Infrastructure and Transport level." He further stated, "Given the recent decline in interest in rehabilitation procedures and the acquisition of small construction companies due to the downturn in the construction market, support measures such as tax incentives for acquiring related companies and succession of employment should be reviewed."