Why 2021 Could Be a Big Year for M&A
Heading into 2021, M&A activity is brisk and shows no signs of slowing.
After a brief lull in activity at the onset of the COVID-19 pandemic, dealmaking was back in full swing by the third quarter as the dollar volume of global M&A jumped 80% from a year earlier to more than $1 trillion, according to Refinitiv.
With buyers, sellers, and advisors accustomed to digitally oriented deal flow and a business climate reshaped by coronavirus, we believe 2021 could be a historic year for M&A activity.
1. Cash Availability
The federal government injected liquidity into the American financial system within weeks of the onset of the pandemic, and another round of stimulus is set to go out early in 2021. Combined with the Federal Reserve’s plan to keep interest rates near zero for the foreseeable future, this government intervention should keep private markets well capitalized and encourage buyers to put money to work via M&A.
2. Economic Improvement
The economy has come a long way from the depths of March and April, when consumer spending crashed and non-essential businesses were forced to shut down. The latest figures suggest consumers and businesses have learned how to navigate a “new normal” (with a full recovery hinging on the country’s vaccine rollout).
By early 2021, the COVID-19 shutdowns will be about a year behind us and many businesses will be showing six months of strong results, likely leading to activity among buyers and sellers.
3. Valuations Restored
During the early days of the pandemic, buyers and sellers had to rethink their strategies and adjust to a pandemic-era business climate.
Today, valuations are fully restored to pre-pandemic levels in many sectors, prompting more sellers to go to market and seek a buyer. Software, edtech, and warehousing services are proving to be bright spots as consumers, businesses, and schools adjust to shopping, working, and teaching remotely.
4. Capital Gains Change
Dealmakers are watching closely as the incoming Presidential Administration and Congress shape new policy, especially related to capital gains taxes. If lawmakers implement higher capital gains taxes in 2022, we expect to see buyers and sellers push through deals in 2021 to limit their tax liability. This could help fuel an already hot M&A market.
5. Distressed Deals Completed
As much as the business climate has recovered through the course of the pandemic, a wave of distressed deals could materialize in 2021 as certain hard-hit sectors like brick-and-mortar retail, restaurants, and hospitality continue to struggle with coronavirus restrictions.
What Else To Watch
As unpredictable as 2020 happened to be, it could set the table for a new era in dealmaking in 2021 and beyond.
Meetings are being held via video conference, term sheets are being submitted based on those remote meetings, and due diligence is shifting largely from in-person to electronic. Now that these methods have been proven to work, it’s hard to foresee a full return to the level of business travel that occurred before the pandemic.
Under these unusual circumstances, deal participants should be well prepared. Those who are actively executing a disciplined M&A strategy will be rewarded when it comes time to close a deal. By executing plans now and effectively managing what is controllable, buyers and sellers will successfully navigate this new M&A environment in 2021 and beyond.
Now more than ever, an advisor is critical to establishing and executing M&A strategies. Copper Run offers comprehensive buy side and sell side advisory services and has completed numerous deals during all points of the economic cycle, making our firm an experienced partner through any conditions.
Please contact us with questions about navigating the M&A environment in the coming year and beyond.
Andy Hays is President and Co-founder at Copper Run. He oversees firm strategy, operations, client services, and business development.