A prevailing assumption is that a slowdown in mergers and acquisitions (M&A) occurs from October to December of an election year (and the following year depending on the party that is elected), but is that actually the case? Let’s first take a look at the last two previous election cycles.
2016 Election Cycle
In 2016, most experts got it wrong. Prior to the 2016 presidential election with no incumbent in the race, analysts were predicting a slowdown in mergers and acquisitions, but the opposite occurred; in fact, October through December 2016 set an M&A transaction value high record at the time.
2020 Election Cycle
In the fourth quarter of 2020, we were deep into COVID lockdowns. M&A activity had already seized up earlier in the year and the election was barely a blip on the radar of M&A activity. Immediately following the 2020 election cycle, 2021 was a huge year for M&A, with low inflation, low interest rates, strengthening economies, high corporate cash balances for acquisitions and pent-up demand from a year with minimal dealmaking.
2024 Election Cycle
Once again, many owners of private companies believe the election will slow down M&A activity or depress valuations in this 2024 election cycle, but the reality is likely the opposite again. Independent forecasts earlier this year predicted US corporate M&A deal volume would increase approximately 20% in 2024, following a contraction in 2023. The first quarter of 2024 already posted a 36% increase in global dealmaking. There are headwinds that continue to persist in 2024: high inflation that began in March 2022, a higher cost of capital, and ongoing conflicts in Ukraine and the Middle East. Even with these potential obstacles, mergers and acquisitions are still increasing in value and volume in 2024, and midsized private companies are expected to continue to be in high demand throughout the remainder of this election cycle and into 2025.
Unique business characteristics drive valuations and demand
If you’re the owner of a midsized private company with $20 Million to $200 Million in annual revenues, the primary driver of valuation multiples and demand will continue to be closer to home and have little to do with the election. It is more important to consider your unique business characteristics, historical performance and future prospects of your particular company within the context of your broader industry. In reviewing your own business, you will want to consider the growth prospects and current limitations of your business, understanding existing capabilities and excess capacity for growth (people, plant and equipment). Areas to consider include intellectual property, key people, operational efficiencies, systems and processes, scalability, capex, competition, customer outlook, customer concentration, cyclicality, recurring revenue, bonding requirements, and cash flow cycles, as you consider the best to time to sell. If you want an independent assessment of your prospects in the current market, give us a call and we’d be happy to talk through with you.
Extra Diligence
One qualifier for closing a sale transaction in 2024: high valuations are more challenging to clear due diligence. Buyers are bringing in every type of outsourced due diligence professionals to scrub every detail of the business, both historically and as the company will be under new ownership. In recent transactions, we’ve had more than 40 outside due diligence professionals engaged in a single transaction ranging from accounting, quality of earnings, tax and legal to benefits, HR, environmental, operations, margin analysis, information technology and intellectual property.
Plan Ahead
Advanced planning is critical to maximizing the sale price of a company. Our team at ClearRidge stands ready to manage your deal team, clear pre-emptive due diligence, lead negotiations on price and terms and manage the due diligence process, working closely with your tax and legal counsel.
Timing
You should be looking six months out as a reasonable expectation to clear diligence and complete a transaction. If you start sharing information with a buyer in August, you’re likely looking at November or December to close the transaction and you would need to be under Letter of Intent before Thanksgiving. If a 2024 transaction is your goal, work needs to begin today.
Industry-Specific Quarterly M&A Review and Outlook
In the section below, we consider M&A recent activity and the outlook for several key industries in our region.
Aerospace and Defense
Deal activity in Aerospace and Defense is focusing on portfolio optimization and acquisitions to build capabilities and programs in the lower middle market.
Defense spending continues to be on the rise given the geopolitical events around the world. In March, the President signed several spending bills allocating for the Department of Defense budget, including National Guard equipment funding and allocations for military construction across the country. Higher defense spending also fuels innovation and digital infrastructure development with emerging technologies and manufacturing.
Technology remains a catalyst for change in both aerospace and defense with AI, cybersecurity, hypersonics, and space as priorities. The current administration has stressed the need for safe and ethical AI implementation. The Pentagon is also focused on the US advancing technologically with priorities of modernizing IT infrastructure, secure software, and a zero-trust cybersecurity framework.
Business Services
Among a broader positive trend in business services, one standout is the HVAC, plumbing and mechanical services industries which continue to experience high deal activity. Companies are expanding their corporate development teams to handle the activity, which is in turn driving additional activity. These companies are also diversifying, acquiring electrical or mechanical add-ons to improve their platform diversity and increase growth. Due to the essential nature and consistency of the industry, deals will continue in this space, in addition to any service companies with recurring revenue models.
Another high activity sector is landscaping and pest control which are expected to have continued robust deal activity, particularly in the Southern US which normally leads in deal volume. Trends of outdoor living, urbanization, and rising home damage due to pests will drive the demand for these services. High market fragmentation means there are many opportunities to gain market share through M&A.
Chemicals
After a couple years of dampened M&A activity, 86% of chemicals executives surveyed recently by Deloitte said they were at least somewhat to very likely to pursue a merger or acquisition this year, suggesting the industry has turned a corner. In the same survey, 53% of respondents ranked a small strategic acquisition as a top three priority, suggesting bolt-on acquisitions to expand current capacity, add technical capabilities, or expand geographic reach.
Other catalysts for deal activity are capital availability, solutions for environmental challenges, sustainability, and supply chain security. Large players continue to streamline their portfolios and offload non-core assets. Geopolitical concerns remain in Eastern Europe and the Middle East.
Energy
The year started off strong for oil and gas M&A activity with more than $51 billion in deal value. The biggest deal accounted for about half of Q1 deal value with Diamondback Energy acquiring Endeavor Energy Resources. The Permian claimed 60% of deal value this quarter. One major deal outside of the Permian was the Chesapeake Energy acquisition of Southwest Energy, which drew the scrutiny of the FTC much like the ExxonMobil/Pioneer Natural Resources deal from last quarter. Some of these larger companies making significant acquisitions now plan to offload non-core businesses; smaller regional or privately held companies may find attractive targets in these divestitures. For other oil and gas companies, this is a good time to acquire assets that support long term strategies that could be beneficial in a future regulatory environment. ClearRidge’s primary oil and gas focus is service companies and manufacturers that serve the industry.
Engineering and Construction
Higher interest rates and continuing construction material price increases impacted not only the E&C companies, but also created headwinds for their customers. However, the right deals can still create value with new markets or synergies that fit a company’s long-term growth strategy.
Single family housing starts are predicted to increase by 5 percent or more despite the high interest rates and material costs.
In addition to technological advances, engineering and construction companies have real opportunities to benefit from tax incentives tied to decarbonization. Acquirers are looking for targets with lower carbon technologies, offsite construction, and responsible sourcing.
Healthcare
Deal activity continues to increase from pandemic levels. Deal volume in Q1 this year was higher than the first quarters of the last three years and deal values were above historic levels due to four mega deals.
Healthcare saw a continuation of a few trends in M&A activity. Smaller community health systems are looking for larger partners for scale and resources. Larger companies are divesting for portfolio realignment. Academic health systems are looking for opportunities to expand across their communities.
Academic health systems were a major player in deal activity accounting for 30% of announced transactions. As academic health systems acquire other locations it alleviates bed occupancy rates and allows opportunity for residents to work and patients to be treated throughout the community.
Industrial Manufacturing
The US manufacturing Purchasing Managers’ Index (PMI) rose to 50.3% indicating expansion for the first time since Q3 2022. Increased new orders, growth in production, and export/import activities all contributed to the end of the sector’s contraction period.
Higher interest rates have led companies to focus on portfolio alignment to fill strategic gaps or divest non-core assets. Industrial manufacturing remains a high demand sector for acquisition activity and more acquisition opportunities are expected to hit the market in 2024.
Strengthening resilience and efficiency in supply chains and pressure to automate and digitize continue as themes driving industrial manufacturing deal activity.
Transportation and Logistics
Transportation and Logistics deal activity increased slightly during Q1 compared to Q4 and Q1 2023. Smaller deals and tailwinds from director-to-consumer delivery are credited with the increase.
Supply chain disruptions are an ongoing issue for Transportation and Logistics. Companies are looking to keep inventory closer to consumers, while investing in technology to help manage and increase the efficiency, sustainability, and transparency of their supply chains. Reshoring pieces of the supply chain takes time; technology and data science can help companies predict and adjust more quickly in the meantime.
The freight market shows steady demand and load postings, even amongst geopolitical challenges in some of the major shipping routes. Some volatility in fuel pricing could be expected with the middle east reducing oil production. However, supply from domestic wells could counter any price increases related to supply.
Forecasting technology is a focus area as companies look to acquire rather than build. E-commerce has added complexity and unreliability in logistics forecasting. Hiring knowledgeable talent or acquiring technology will help companies analyze trends and improve timely supplier communications and inventory adaptations, all which impact Transportation and Logistics M&A activity.
Sources: This report has been compiled from reports and research including federal data, independent analysis, Bain & Company, EY, Forbes, Federal Reserve, Reuters, Janes Capital, US Chamber of Commerce, Oilprice.com, Kaufman Hall, DC Advisory, Kiplinger, PCE-Companies, Mergermarket, RL Hulett, Bass, Berry, & Sims, Roll Call, PricewaterhouseCoopers, Deloitte, HPC, Charles Aris, Harris Williams and SDR.
