This time last year the world reeled from the impact of the pandemic and the lockdown strategies that followed. The winter of the pandemic is starting to give way to the spring of recovery, with this year offering some promising developments on a wide variety of fronts. All of this newfound enthusiasm has triggered a great deal of merger and acquisition (M&A) interest, with a pace faster than in any year since 1980. There has already been $1.3 trillion in global deals announced and the first quarter just ended. The number of deals in the US are up by over 160% from Q1 of 2020.
There are at least three major motivations for this remarkable development, and none of the three are expected to fade anytime soon.
A Sharp Recession
This downturn is turning out to be the classic “V” shape as opposed to the long and drawn-out recovery that took place after the 2008 recession. There was no organic reason for a recession in 2020. It was an imposed downturn triggered by the pandemic. As pandemic protocols have been relaxed or removed, the underlying economy has been able to rebound. These short and sweet recessions trigger the process of “creative destruction”. Weaker companies that were not able to weather the recession become targets for the companies that were able to navigate the crisis. Stronger rivals see opportunities to expand market share through acquisition or merger as opposed to trying to grow organically. There has been a great deal of this kind of activity in those service sectors that were hit hard during the shutdown phase of the pandemic. Retailers have been seeing significant consolidation due to the onslaught from the online community as well.
Fixing the Supply Chain
The challenges of the supply chain breakdown in 2020 have created a strong desire to gain control of downstream activity. It is more important than ever to have full visibility into the supply chain. That has motivated companies to invest in and buy those key suppliers. If there is not an actual acquisition, there are moves to lock down inventory with advance orders. Even the government has been discussing ways to protect key supply chains with restrictions on what can be exported and attempts to bring key manufacturing back to the US. This has become a high priority as far as the semiconductor industry is concerned as shortages have made the national news. That same kind of interest in controlling the downstream supply chain has been seen in the healthcare industry. There is no desire to be as vulnerable as the US has been to the supply of protective gear and treatment options.
The issue of succession has become paramount for thousands of small to medium sized business. A surge in entrepreneurial activity took place in the 1980s and early 1990s, and the 40-something founders are now the 70-something owners looking for exit strategies that don’t destroy their legacies. Many of these small and medium sized operations are the lifeblood of the community they are in, and the owners are vested in the welfare of those communities. They intended to leave the businesses in the hands of their sons or daughters or some other family members, but too often these would-be heirs have gone off on their own paths and do not want to enter the family business. The existing employees may be great operators and skilled tradespeople, but they may not be prepared to take over management responsibilities. This puts the existing owners in a tough position as they seek a buyer or merger partner that will maintain the relationships the company has developed with its community, employees, and customers.
The M&A market is hot right now, but opportunities may start to narrow as the year goes on. The best deals will get made relatively early but more importantly, there are hints that the era of easy money may be starting to end. If the inflation concerns that have started to build convince the Federal Reserve that action needs to be taken sooner rather than later, there will be less cheap money available to finance acquisitions.
MarksNelson can help guide you through the M&A process, from valuation and financial due diligence to succession planning to fit your goals. It’s an exciting time right now for M&A. If you are considering making a change, reach out to us today to discuss your options.