The short story is good news. A rebound is expected in mergers and acquisitions in 2021, gaining momentum throughout the year.
Top of mind in Spring is the COVID-19 recovery, vaccine rollout and return to a new normal. We also have the implications of a new political climate. Without bias to any political party, a divided congress may be the best outcome for a resurgence in M&A activity. With Biden poised to enter the White House and an expected republican controlled senate, there should be checks and balances to moderate new policy initiatives. On the campaign trail, Biden discussed rolling back tax cuts, increasing top corporate and capital gains tax rates, but those proposals take time to implement, and he has numerous pressing distractions in the interim. A divided Congress also makes other initiatives more challenging to overhaul: fiscal stimulus, healthcare reform, climate legislation, public spending, regulatory policy, anti-trust policy, and monetary policy. Company executives prefer stability and predictability and invest in M&A accordingly.
With COVID vaccines on the way, M&A analysts are broadly positive looking into 2021. The pipeline is solid for new deals coming to market.
M&A activity and value has been depressed this year, but M&A activity increased 33% in volume and 140% in value in the third quarter of 2020, according to MergerMarket. 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.
ClearRidge deals that paused in the summer are back on track for closing before year-end and early 2021, in most instances with robust valuations that mitigate COVID losses. The pipeline for 2021 is already strong.
In the following section, we highlight seven key industries in our region, reflecting on data this year and the outlook for 2021.
Aerospace and Defense
While uncertainty prevails in the non-government sector, aerospace is looking to weather the storm and assess acquisition opportunities as the market rebounds in 2021: diversifying outside of depressed sub-sectors to balance the impact of reduced air travel and utilization, opportunities for digitization that reduce costs and increase operational efficiencies and process improvement, shoring up supply chain relationships and building relationships with alternate suppliers. A rising tide in aerospace will encourage executives to open the purse strings and pursue strategic opportunities.
Past financial downturns have been a positive driver for chemical M&A transactions due to attractive company valuations, but chemical M&A demand and valuations have already started to rebound. Some chemical companies have thrived during COVID; in particular those focused on cleaning, solvents and disinfecting products among their product mix, but many have struggled with reduced demand. Chemical analysts expect the current COVID-19 recovery to follow the pattern of the financial crisis in 2009, as companies may seek to streamline their focus on core business in 2021, pick-up market share and improve margins. There are many interested acquirers pursuing the chemical space, with numerous non-core divestitures likely, along with core strategic acquisitions. Companies with a strong balance sheet and cash reserves are going to be pursuing strategic growth.
Analysts expect M&A activity to increase across the healthcare sector. One new focus area is expected to be smaller health systems and independent hospitals that look for new partnerships to achieve future scale and viability.
A Biden administration could also mean increased government investment in healthcare and proposals for increased coverage, Medicaid/Medicare funding, and expanded benefits.
In the past, innovation from the ACA incentivized digitization of medical records; an example of how policy change can influence innovation. Growth and innovation drive M&A activity.
Oil and Gas
Combined with other headwinds, COVID destroyed demand and forced oil and gas companies to conserve cash, reduce spending and rethink their mid-term strategies.
Depressed commodity prices squeezed margins for oil and gas companies, with consolidation and scale in sharp focus leading into 2021. While a divided legislature may limit Biden’s clean energy efforts and protect the oil and gas sector in the short-term, corporate strategists have been hesitant to deploy significant growth capital.
Opportunistic deal making continues, but M&A investments in the sector have tumbled to around 1/10th of what we witnessed in 2018 and 2019. Mid-term prospects for oil and gas M&A activity will improve, but uncertainty remains. There are many companies on the sidelines waiting for an improved outlook before seeking a sale or divestiture. If market conditions improve in 2021, a flurry of deal activity is likely.
Construction and Engineering
Soaring lumber prices, low inventory and favorable interest rates helped boost single family home sales by 14% over the summer. The National Association of Home Builders/Wells Fargo Housing Market Index reported increases in all three of the index’s components; current sales conditions up 4 points, sales expectations in the next six months up 6 points and traffic of prospective buyers up 9 points. Similar to the housing market index, the Commercial Construction Index also noted positive increases.
Many construction projects have resumed after pandemic shutdowns in the spring. During the third quarter, the US House Republicans also introduced the BUILDER Act, created with the goal of eliminating delays and reducing costs in the construction industry.
While construction and engineering dealmaking was impacted by COVID, the outlook in 2021 is strong.
US Industrial production remains muted compared to pre-COVID levels, but the outlook for 2021 is also strong. Moreover, executives are broadly favorable in their outlook for M&A activity in the coming twelve months.
Industrial manufacturing M&A was cut in half earlier this year with the weakest first half deal value since 2014, but with reduced international trade wars on the horizon and increasing confidence in the sector, companies are looking to deploy capital to pursue strategic acquisitions.
Industrial machinery has been the highest contributor to the sector in terms of the deal value and volume year to date. Fabricated metal products declined 18% in transaction volume, but the sub-sector accounted for 15% of the total deal value in the industrial manufacturing sector. Other significant contributors included rubber and plastic products and electronic and electrical equipment.
Within the first three months of 2021, PWC forecasts normalized levels of 200 deals a month in industrial manufacturing. As deal activity picks up behind the scenes in the first quarter, industrial manufacturing deal value and volumes are expected to surge beginning in the second quarter of 2021.
M&A brings transformational growth in an upturn and companies that have the balance sheet, cash and strategic smarts will thrive in the next economic cycle.
Transportation and Logistics
While transportation and logistics companies were broadly depressed from reduced demand during COVID, there have been sector highlights and strong growth expectations for 2021. Certain logistics companies have been preparing for vaccine transportation, as well as constructing cold-storage facilities, anticipating the challenges moving the vaccine from warehouses, storage points, and cargo terminals to medical teams.
In broader terms, the trucking industry recently experienced increased freight demand as retailers, manufacturers and distributors seek to replenish inventories. Air cargo has been disrupted with passenger flights grounded due to decreased demand and closed borders, but that is expected to recover in 2021. Overall, 2021 should see a strong pick up in M&A activity.
Distributors should see margin improvement in 2021 across most industries. Distribution acquirers seeking scale and consolidation opportunities will drive strong M&A activity.
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.
Albert Einstein said, “In the midst of every crisis lies great opportunity.”
With only two full work weeks remaining in 2020, it’s time to get to planning, which is critical to maximize the sale price of a company. We need to make prompt progress if we expect to close a transaction by summer 2021. Our team at ClearRidge stands ready to clear all pre-emptive due diligence, research, identify and screen prospective buyers, create all requisite materials, data analysis and memoranda, confidentially market the business, lead negotiations on price and terms, and manage the buyer’s diligence teams.