US dealmaking robust despite COVID-19
US M&A activity fell precipitously in the first half of the year but picked up again in H2, especially at the upper end of the market
After the initial shock of the pandemic, M&A activity rebounded significantly in H2. Nevertheless, challenges remain—despite low interest rates and strong stock prices
The past year has been an exceptionally challenging one for societies and economies globally, and many companies were hit hard by COVID-19 lockdowns and travel restrictions.
The huge uncertainty that gripped capital markets early in the pandemic put equities into sharp decline and dealmaking largely on hold as strategic buyers and private equity (PE) firms turned inwards to support existing portfolios. The challenges posed by remote due diligence and uncertainty around valuations provided further reasons for market participants to hold back from transacting.
After this initial period of disruption, however, deal activity rebounded strongly, with total value in H2 significantly higher than the same period in 2019. Buyers assessed COVID-19 business risks, PE owners provided portfolio companies with the necessary support where required and proceeded to look outwards for opportunities to improve companies through acquisitions.
Low interest rates and extensive government support for the economy have helped to revive deal activity. Resilient companies in industries that fared relatively well through lockdowns—such as TMT, food and beverage, and healthcare—have been able to take advantage of high levels of cash and strong stock prices to execute acquisitions.
The rise in deal activity in the second half obscures a bifurcated market, however. Even as activity at the top end of the market exceeded pre-pandemic levels, M&A in the middle-market remained muted, likely due to greater uncertainty around valuations.
Our overall outlook for the next 12 months is cautiously optimistic. A series of successful clinical trials have led to vaccine rollouts, providing a major boost to close the year. And stock markets have looked beyond the pandemic to crest new highs.
A more stable outlook could spark a resurgence of middle-market deals, as well as continue to encourage deal activity among larger firms.
After a difficult period, there is reason for optimism that conditions in 2021 will support the momentum in M&A markets that started to build in the final quarter of 2020.
US M&A activity fell precipitously in the first half of the year but picked up again in H2, especially at the upper end of the market
US buyout activity at the top end of the market dropped significantly but exit value held up in 2020
The TMT sector was buoyed by global spikes in demand as the world shifted toward virtual interactions in every walk of life
Deal activity in the oil & gas sector was severely impacted by the COVID-19 pandemic, as commodities prices plummeted
Businesses and consumers have relied on technology more than ever through the course of the pandemic, supporting strong dealmaking at the top end of the market
M&A value in the healthcare sector (incorporating pharma, medical and biotech) stayed relatively robust in 2020, even without the kind of blockbuster deals the sector had become accustomed to seeing in recent years
Total M&A value in the consumer sector has dropped only 1 percent year-on-year thanks to several significant transactions in the food industry.
Real estate portfolios exposed to hospitality and retail assets have struggled through COVID-19 lockdown periods, but healthcare and logistics investments have performed strongly
2020 saw several decisions from the Delaware courts that will affect M&A dealmaking. We focus on four that may prove especially consequential
The past year has been tumultuous for M&A activity, but with a COVID-19 vaccine rollout underway and pent-up demand among PE firms, the fundamentals are in place for a busy year in 2021
The past year has been tumultuous for M&A activity, but with a COVID-19 vaccine rollout underway and pent-up demand among PE firms, the fundamentals are in place for a busy year in 2021
Stay current on global M&A activity
After a collapse in the spring, US M&A activity has rebounded strongly in the second half of 2020, and the market is well-positioned to carry this momentum into 2021.
Here are five themes that are likely to drive M&A in 2021:
The US economy is forecast to return to growth in 2021, with economists anticipating GDP to rise by 4.2 percent for the year. Interest rates remain low, at less than 0.25 percent, and stock markets already appear to be looking beyond COVID-19, with the Dow Jones cresting to record highs at the end of 2020.
This stable economic outlook for the coming year stands in stark contrast to the volatility and uncertainty of 2020, and will give dealmakers a more solid backdrop against which to transact.
COVID’s legacy for the economy will extend long after vaccines are rolled out and infection rates have declined.
The pandemic has highlighted how crucial technology has become for service delivery, engaging with customers and business continuity. More companies will have to turn to M&A to strengthen their digital infrastructure and tech capability.
COVID has also sharpened the focus on core business lines, and many companies will consider divesting non-core assets.
Specific sectors that have been directly affected by lockdowns, such as real estate and retail, are also expected to see increased volumes of deal activity. This will involve distressed acquisitions as well as defensive consolidation plays.
PE firms are sitting on more than US$1.7 trillion of dry powder and SPACs have raised more than US$60 billion in 2020 according to Dealogic.
The clock is ticking on this capital for both SPACs and private equity firms. As a result, SPACs and buyout houses will be focused on transacting after a slow year for deal flow over the past 12 months.
The rise of SPACs is also expected to increase competition for assets, and therefore keep multiples high.
The second half of the year was characterized by a frenzy of activity at the upper end of the market. The middle-market, however, saw value and volume drop year-on-year.
Middle-market firms have proved difficult to value in 2020, amidst the high levels of uncertainty and market volatility.
But the mass vaccination campaigns now underway in the US and around the world, as well as a clear election result in November 2020, should help clear the uncertainty plaguing M&A markets, and may encourage mid-market deals to return.
Biden’s tax plan calls for an increase in capital gains tax for high earners from 23.8 percent to 39.6 percent. If this happens, it could take more than a year for this increase to be implemented.
Tax issues are rarely the primary catalyst for deals, but those already contemplating deals could be incentivized to strike before changes come into effect.
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