An improved public health environment and the possibility of higher capital gains taxes will likely drive increased merger and acquisition activity in 2021, according to a Citizens survey.
Companies will rely on M&A for growth in 2021, and more sellers will be open to making deals, particularly in the second half, according to Citizens’ Middle Market M&A Outlook 2021, a report drawn from a survey of 700 leaders at U.S. middle market companies and private equity firms.
Typically, the economic outlook is the most significant factor in a company’s consideration of an M&A transaction, Citizens said. However, this year’s findings show that, in 2021, COVID-19 and tax policies of the incoming Biden administration are top drivers, with increased expectations for an M&A spike if the administration passes capital gains tax hikes.
Upbeat expectations for corporate valuations and deal flow in the year ahead also are fueling a decidedly optimistic M&A forecast, the report said.
“Many business leaders expect the continued rollout of vaccines and the prospect of increased taxes to spur a robust year in terms of deal flow, especially in the second half,” said Ralph M. Della Ratta, chair of Citizens M&A Advisory.
Jim Childs, CEO, Citizens M&A Advisory, said, “2020 left a backlog of pent-up demand for M&A. With strong valuations, we think a lot of PE firms and liquidity-seeking owners will be eager to get to the market. The pandemic may have been the last straw for many business owners who are looking to step back or retire.”
Della Ratta added Citizens M&A Advisory had an astonishingly solid year of transactions in 2020, with companies in certain sectors actually benefiting from the pandemic, and buy-side interest in those companies being high.
“If we were representing a restaurant chain or a lodging chain or retail — any kind of business that requires heavy foot traffic — those businesses, you can’t sell those lately, at least not at a price that makes sense, but there are a lot of different businesses, whether they be technology businesses, software businesses, educational services, IT consulting, remote learning, that were really in favor and people were willing to pay out for those types of businesses,” he said.
In Michigan, Della Ratta said automotive aftermarket companies are an “exciting area” of “high demand,” and he also expects to see an appetite for deals in the future in “cranial capital” industries such as health care services, tech-enabled services, software-as-a-service businesses, etc., both on the east and west sides of the state.
Other findings of Citizens’ 10th annual Middle Market M&A Outlook:
- The pandemic seems to have reduced overall economic optimism, with only 47% of middle-market companies anticipating broad improvement in 2021, but business leaders are more confident in their own corporate outlooks, with 55% feeling bullish about the coming year.
- The majority of business leaders (60%) expect corporate growth to continue to come from M&A activity, as strategic growth remains a top priority in 2021.
- Top reasons to sell were to increase focus on strategic growth opportunities (67%) and to take advantage of current valuations (44%). The top reasons to buy were to increase revenue and growth (61%) and to improve operational efficiency (41%).
- Respondents gave the current M&A environment a muted grade, with 49% of corporate and 41% of PE respondents characterizing it as weak. However, they agree a turnaround is ahead. Thirty-six percent of companies and 45% of PE firms expect marked improvement in 2021, with a particular focus on the second half of the year. “I expected it to be a little less optimistic, but I’m happy to see (optimism), and the numbers don’t lie,” Della Ratta said.
- Interest in finding an international deal partner is down among both buyers and sellers, a trend for the past three years. Della Ratta said in 2020 this was probably partly attributable to the inability to travel due to the pandemic, with companies looking to find investors closer to home, and partly due to the trending interest in nearshoring operations with local ownership.
- Confidence in deal completion is down starkly and is an area where teaming with an M&A adviser could help to overcome deal roadblocks, Citizens said. Sellers are looking for a strong partnership to help them find potential offers — a need that didn’t make the list of top priorities last year.
The Middle Market M&A Outlook was conducted among U.S.-based middle market businesses ($50 million to $1 billion in revenue) that are currently engaged in or open to mergers and acquisitions activity, as well as private equity firms with clients in the same revenue range. The latter group being included in the survey was new this year. Core business sectors represented in the report included health care, technology, industrial, consumer services, B2B services and other industries.
Business executives at 470 middle market firms and 230 private equity firms who are directly involved in decision-making related to mergers and acquisitions (owners/partners, CEOs, presidents and other C-level and directors) completed a 15-minute phone or web-based survey in November and December 2020.
The full Middle Market M&A Outlook 2021 is at citizensmna.com.