The next two years should include a good deal of positive economic news, according to the results of a recent M&A Survey conducted by Detroit’s Dykema and the Association for Corporate Growth.
The survey of more than 100 professionals involved in mergers and acquisitions was designed to understand how the COVID-19 pandemic has affected the M&A market and how the industry will adjust to the “new normal.”
Among the key findings:
- 76 percent of respondents have a positive economic outlook over the next 24 months.
- 51 percent of respondents believe the U.S. M&A market will strengthen over the next 12 months.
- 58 percent of respondents say COVID-19 has delayed M&A activity, but only 12 percent have terminated deals.
“When looking out 24 months, respondents are overwhelmingly positive about the U.S. economic outlook,” says the survey’s executive summary. “This bodes well for the U.S. M&A market, as the economic health of the U.S. economy is once again cited by respondents as the number one driver of U.S. M&A deal activity. The majority of respondents believe their company or portfolio companies will be involved in an M&A transaction in the next 12 months.”
The survey also indicated that health care, technology, food and beverage, and retail are the industries to watch in terms of merger and acquisition activity in the next year.
“In light of the significant impact of COVID-19 across our health care system, from increased hospitalizations to the expansion of telemedicine and accelerated vaccine/treatment research, we aren’t surprised to see that health care is the industry sector that comes out on top with regards to predicted M&A activity over the next 12 months,” the results analysis says.
“After months of lock downs, shelter-in-place orders, and virtual meetings, it also is not a big surprise that respondents selected technology, food and beverage, and retail as the next three sectors likely to see increased M&A activity over the next 12 months,” the analysis continues. “Just under 20 percent of all U.S. private equity deals in the first half of 2020 have been technology deals, according to Pitchbook figures.”
Last year, automotive, health care, and energy were identified as the industries to watch, but the COVID -19 recession has had a negative impact on the automotive and energy sectors.
“Based on our experience in past crises, we are planning for M&A activity to start picking up in the back half of the year as more businesses come back online and economic conditions improve,” says Brian Demkowicz, co-founder and managing partner of Huron Capital. “Barring any COVID-related setbacks, based on what we know today we would expect the market to continue improving through June 30, 2021.”
According to the survey, the most significant impact of the COVID-19 pandemic on M&A has been delay, whether that relates to negotiations, due diligence, or closing. Approximately one third of respondents terminated a deal because of COVID-19, while only a small percentage of dealmakers have increased their activities during this period.
The main COVID-19-related impact on deals include:
- Delayed negotiations: 58.1 percent
- Delayed due diligence: 47.62 percent
- Delayed transaction closing: 37.24 percent
- Terminated negotiations: 35.24 percent
- Reduced transaction valuation: 33.33 percent
- Terminated executed purchase agreement: 12.38 percent
A majority of respondents (82 percent) believe there will be a decline in M&A valuations over the next 12 months. Dykema analysts expect that will have a positive impact on M&A activity, as the expectation of lower valuations could lead to an increase in deal volume.
“We have seen a significant drop in values in the market,” says Cyrus Nikou, founder and managing partner of Atar Capital. “There are sellers with a high sense of urgency to move assets. They have come to the realization that they need to act now. There is another part of the market in a sit-and-wait mode, waiting to see what happens — if we get a vaccine.”
To review the full results of the Dykema/Association for Corporate Growth survey, visit here.
