The client M&A landscape and outlook post-Covid
M&A activity for private companies is accelerating, and will likely continue to be strong for the next six to 12 months – if not longer, comment Jason Schneider, managing partner at Schneider Law Group, and Susan V Lewis, communications director at Abacus Worldwide
ven among all the chaos and uncertainty of the pandemic and anemic deal activity in the second quarter of 2020, the year ended with some of the strongest deal volume in years. Significant cash reserves, low borrowing costs, and pent-up demand have fueled the surge that continues into 2021.
According to Bain & Company’s Global M&A Report 2021, businesses expect M&A activity to contribute to 45% of their growth over the next three years. We see many companies taking advantage of the current environment to make deals that help them transform themselves, particularly with tech acquisitions.
Jason Schneider, managing partner, Schneider Law Group
In the first quarter of 2021, private company M&A deal volume was up almost 3% year over year, while globally, the number of deals was up 6% from a year ago.
Further, private equity closed more than 10% more deals in the first quarter of 2021 than in the same period in 2020, driven by access to cheap debt.
While private equity platform investments (the initial investment into a new industry by a private equity company intending to do additional acquisitions in the same industry) declined quite a bit from last year, add-on acquisitions (companies acquired by a private company that are added on or rolled into a prior platform acquisition in the same industry) were up significantly and continue to be the dominant focus of lower middle market PE groups.
The acceleration of technological advancements and digitisation stemming from the pandemic are causing many industries to restructure to stay competitive in the post-Covid environment. This is resulting in increased deal volume from strategic buyers.
Deal values for smaller private companies are up more than 4% year over year, while the global value for all sizes of companies rose 93%. Private equity played a big role here with an increase of more than 115% in deal value.
It appears that EBITDA multiples will likely continue to rise in most industries as a result of this activity, with strategic buyers likely to pay higher multiples than PE firms in the hopes of gaining synergistic value in the long run. As expected, even with these trends, targets lacking strong industry penetration and revenue growth are not seeing the robust EBITDA multiples.
That said, the chaos of the past year will make historical financial data less reliable for forecasting, so financial teams will have to get creative in developing scenarios and projections. The due diligence process will likely need to be longer than normal to allow proper and full assessment of how changes impact valuations, supply chains and other factors.
We can expect to see some of the trends of the past year continue, particularly those related to how M&A teams have adapted to a virtual environment.
Globally, the focus shifted toward local or regional deals, which was a natural extension of how difficult due diligence became. For example, firms spent a lot of time finding ways around not being able to do onsite inventory or a site visit before signing the deal papers.
Virtual due diligence changed what and how much information is being considered in a deal today. It has become more data-intensive, which gives an advantage to firms that can leverage advanced analytics, and brings new data sources to the mix.
Firms using predictive analytics, artificial intelligence, and automation tools will continue to add value by bringing deeper insights to their clients looking for opportunities.
While headwinds remain in the post-Covid environment, the prognosis generally looks good for M&A activity in the near term. For some companies, M&A can be the fastest way to adapt to the new normal and develop resilient supply chains and structures.
Increased competition from buyers, pent-up demand, low interest rates and significant cash reserves should continue to strengthen balance sheets and drive deal volume and deal prices higher in the next 12 months.
As Covid-19 upended many of our assumptions about how business is done, advisors should be aware of how those changes can impact the worth of an acquisition and look for new ways to bring value to the M&A process.