President Biden unveiled his infrastructure plan on Wednesday in Pittsburgh, but he did not provide the specifics on funding the $2 trillion investment in roads and highways, broadband, affordable housing and research and development.  Tax increases on corporations and wealthy individuals are expected to be one solution, which will receive a negative reception from many in business.

We expect to see a list of proposed tax increases for businesses and business owners, possibly reversing 2017 tax cuts.  The first tax increases are expected to roll out in 2022, but there’s a possibility a capital gains tax increase for the wealthiest Americans could take effect even sooner.  President Biden has also proposed closing the current loophole by taxing capital gains for couples earning more than $1 million at the ordinary income rate.  Tax strategists are expecting the corporate tax rate to increase to 28%.

One accepted reality among business owners is that a business selling on January 1, 2022 is likely to bring a far higher tax bill than the same company selling for the same price on December 31 of this year.

Other considerations under the new administration include climate legislation, public spending, regulatory policy, anti-trust policy, and monetary policy, all of which can create challenges (and opportunities) for business sales and acquisitions.  Many business owners who survived the challenges of COVID are looking to exit in a favorable business sale environment this year.

What else is on the horizon for M&A in 2021?

The pipeline is solid for new deals coming to market.  At ClearRidge, we have multiple new sell-side advisory engagements in the last few weeks, targeting a closing before year-end.  Analysts expect 2021 to be a banner year for M&A activity, with low interest rates and dry powder stacking up needing to be deployed.

In the section below, we consider the M&A outlook in 2021 for seven key industries in our region.

 Aerospace and Defense

Analysts see two diverging paths for the Aerospace and Defense sector in 2021 and beyond.

Commercial aerospace suffered under the pandemic with analysts projecting recovery in terms of years, rather than months. Companies may use this time to position for long term growth and recovery, focusing on liquidity, fleet rationalization, and supply chain stability.

The Defense subsector had a more muted COVID-19 impact with many areas still ready to drive deal activity, including IT modernization, cyber, unmanned assets, and space.  Defense also benefits from the end of the election uncertainty.  While the new administration’s budgets will likely flatten for defense spending, they will remain stable with ongoing necessity and remaining geopolitical tensions.

Well capitalized companies will pursue challenged companies in the aerospace sector, while business owners with a company that is on a return trajectory after COVID are eager to close a sale before year-end.  M&A opportunities will focus on adding value to core competencies, cost-competitiveness, and emerging technologies.  We anticipate an increase in the number of aerospace transactions closing in 2021, even if total value of all aerospace deals does not immediately surpass pre-COVID levels.

Chemicals

Chemical companies still face uncertainty with a post-COVID environment, understanding which sectors and market behaviors will remain in a new normal and which will return to pre-COVID norms.  We expect investment activity will focus on consolidation, technology, and specialty chemicals.  Commodity chemicals have faced lower demand and supply chain disruption, while specialty chemicals focused on pharma, hygiene, agriculture, and nutrition have thrived.

As previously reported, capital availability among larger strategic acquirers and private equity groups is high and cost of financing transactions remains low, enabling strong valuations in consolidation of niche and smaller competitors.

As chemical companies pivot from pandemic disruption with cost management and operational efficiency efforts, analysts encourage strategic and targeted initiatives, particularly in R&D and technology, that will allow for agility and long-term growth in a continually dynamic environment.

Healthcare

Healthcare M&A is a mixed environment with some acquisition targets requiring restructuring for survival, while others are targets for growth and efficiencies.  Primary themes for healthy healthcare transactions will be new technologies, care delivery channels, and organizational efficiencies.

The Healthcare industry, prior to COVID, had recognized the need for automating costly and manually intensive processes.  COVID again highlighted the importance of operational flexibility and resilience.  Even in the pandemic environment, some trends continued, such as Long Term Care, which again led deal volume, a consistent trend since 2014.

Energy: oil and gas

Analysts predict four influences on energy deals for 2021: shifting industry paths, innovation opportunities, future of capital, and the impact of policy.  Predicted upcoming trends are consolidation in upstream, repositioning in midstream, and divestitures in downstream.

Overcapacity in the industry may lead to asset sales given recent recovery in valuations, as well as portfolio rebalancing.  Deals could also be driven by a desire to buy and scale quickly rather than develop and build innovative technologies.

With the new administration, policy changes may have companies looking to add lower carbon emissions technologies to their portfolios, but higher energy prices are fueling optimism in the oil and gas industry again.  Government focus on energy transition could lead to divestments of hydrocarbon assets and infrastructure changes to support renewables, but the oil and gas industry remains a critical component of the US economy.

 Industrial Manufacturing

While broader M&A activity may have slightly rebounded during the last half of 2020, deal making in Industrial Manufacturing remained subdued in late 2020.  There was a lag in the recovery for many industrial manufacturing companies, still feeling the impact of COVID-19, but the outlook for 2021 is improving.

Procuring or enhancing digital capabilities and technological efficiencies will be paramount, as COVID-19 has shown us the operational disruptions possible from human causes.  Digitizing and modernizing areas including sales, marketing, operations and supply chain can help companies gain efficiencies and improve customer experience; two factors that boost competitive advantage.

After a slower than expected 2020, we are anticipating an increase in industrial manufacturing deal as 2021 continues.

Construction and Engineering

Construction and Engineering benefited from a surprising surge in building and construction demand in late 2020, primarily residential and industrial. With pandemic conditions pulling people to the suburbs out of urban areas, as well as adaptive work from home lifestyle changes, home building increased 12.8% in 2020 over 2019.  That trend is expected to continue in 2021.  Shortage of supplies, most notably lumber, has increased the cost of building.

As employers rethink office space, commercial construction may face short term declines.  However, as the country continues to seek recovery and reduce unemployment, infrastructure investment projects become more likely as an economic stimulus.

In addition to M&A opportunities focused on technology, cost saving opportunities found in low cost, high quality construction materials may also capture market share.

 Transportation and Logistics

Disruption from COVID-19 in transportation and logistics has driven adaptation and innovation, attracting the interest of investors.

Logistics was the name of the game for this sector’s M&A activity.  With COVID-19 forcing innovation, analysts expect online shopping habits and trends to continue, creating M&A opportunities for increased capacity, delivery speed, and service levels.

Companies facing the issues of digital storefronts and doorstep delivery will have to decide if they buy or build to survive and compete.  Analysts expect deal activity recovery in this sector, particularly related to logistics or ecommerce, even outpacing the broader economic recovery.

Summary

The M&A market feels like an elastic band stretched tight. Low interest rates remain.  Cash abounds to invest in acquisitions.  The tide can turn quickly and drive a surge in activity.

Plan Today

In order to execute a business sale in 2021, work needs to start today, with diligent planning and preparation critical to maximize the sale price of a company.  Our team at ClearRidge stands ready to clear all pre-emptive due diligence, research, identify and screen prospective buyers, create all confidential marketing materials, data analysis and memoranda, confidentially market the business, lead negotiations on price and terms, and manage the buyer’s diligence teams.

How Can ClearRidge Help You Sell Your Business?
Clients trust ClearRidge to deliver a confidential and discrete preparation and sale process. We remove obstacles to close a transaction and ensure only the most qualified buyers with the capital commitment make it to the closing table.

ClearRidge is the leading M&A advisory firm in our region, closing more transactions than any other firm and recognized for the quality of our work and success at managing and arranging transactions for our clients’ companies. For further information on our team, industry expertise and transactions history, please visit www.ClearRidgeCapital.com.

Sources: This report has been compiled from reports and research including federal data, independent analysis, Reuters, Janes Capital Partners, Kiplinger, PCE-Companies, Mergermarket, PricewaterhouseCoopers, and SDR Ventures.