When the pandemic started and continued on, many areas of the economy were under stress. Businesses were struggling just to open, much less sell anything, with waves of bankruptcies predicted. However, an interesting occurrence in the pandemic has been the effect on M&A Activity, which has surged to levels unseen in the past. In part there’s many complexities which has caused this phenomenon.
Overview of Current Status
Looking at the current trends in M&A, one just has to observe the last 4 quarters for global activity. Each quarter has exceeded $1T in aggregate transaction value. Just to point out how significant this is; we have never exceeded $1T in aggregate transaction value in any quarter, and now we’ve just achieved that level 4 quarters in a row. Adding to this, US M&A activity has exceeded 5,000 transactions each of the last 4 quarters and has exceeded $500B in aggregate in each quarter. The US has never exceeded $500B in any quarter and now the US as well has exceeded that level for four straight quarters.
SPACs are Back
SPACs, or Special Purpose Acquisition Companies, are a great way for companies to raise funds without going thru a traditional IPO. Not that I’m into SPACs as an investment, but its just another data point to demonstrate the level of activity. SPACs have been around as an investment and as a method to gain capital for the last 20 years, but weren’t that active, until the pandemic. SPACs averaged 10-15 transactions per quarter for many years, and in the 3rd quarter of 2020, 75 transactions. One might think just an aberration, but then 4th quarter hit 120, and Q1 2021 hit 275. The numbers have dropped significantly, but still between 50-75 for the last two quarters which is above historical levels.
Catalysts
What’s causing all this activity? There are a few different reasons why there’s so much activity. One is PPP loans and SBA loans have provided a significant amount of liquidity in the marketplace. This is allowing companies to shore up their balance sheets and to look strong from a valuation standpoint, and also has driven down volatility. From a company leadership standpoint, if a CEO knows her company would like to merge or be purchased, now is the time with its value so high. Further, Private Equity is sitting on a lot of funds. It is estimated that PE has over $2T waiting to deploy when appropriate. Next is tax laws. With the possibility of an increase in capital gains taxes, cash and stock deal count has doubled year to date. PE firms understand that cash and stock deals are more beneficial now with taxes low and are pulling ahead transactions. Finally, the pandemic has changed the world including acceptance of the digital trends. Many companies see the reality of the world changing and now is the time to acquire a company or a technology that moves them forward in this space.
Most Active Sectors
Right now, IT remains the sector of choice for M&A activity. In 2021, IT total gross transaction value nearly equals the entire transaction value of all the other sectors combined. The second most is healthcare. The key with both sectors is the pandemic, with the trend towards digital many IT companies are being purchased and added to healthcare and other companies because they have the funds, and because it makes sense with where the economy is trending.
2021 Has Accelerated
Just looking at where 2021 is, and where it is expected to finish, the year is already achieving record M&A activity thru September, and there’s still 3 months to go. The record before 2021 for leveraged financial issuance was 2017 at $780B. 2021 already exceeds $1T. The same trend goes for loans, high yield bonds, and Refi’s. Also just looking at the M&A engine, it continues to roar. Of total US institutional loan volume over 60% of all loans is for M&A. Further, the buyout cost of capital is at a record low. Yield to maturity is below 5%, also at an all-time low.
Risks Remain
However, with all this activity there are risks. In 2021, the number of loans ‘B-‘ and lower exceeded 20%, and in total almost $200B of US leveraged loans issuance came from ‘B-‘ and below. A lot of this is because of the added liquidity. These companies see this as an opportunity to acquire new technology or growth markets to improve their businesses. Other risks in our sights are tax policy, regulatory changes, inflation and of course supply chain affects and labor shortage.
Future is Bright
But overall, even given the risks, M&A activity is looking very strong for the rest of 2021 and into 2022.
Maybury Partners, LLC 