In what may be a surprise to business owners and entrepreneurs, merger and acquisition (M&A) activity in 2020 didn’t ultimately prove to be as weak as what many might have predicted at the start of the COVID-19 pandemic. Instead, activity eventually rebounded and the 2021 outlook remains positive. What happened? And what does it mean for business owners?  

The years directly preceding 2020 consisted of strong M&A activity and premium valuations as a result of a demographic shift led by Baby Boomer business owners entering retirement and strong demand for high quality middle-market businesses from private equity and strategic buyers looking to deploy seemingly bountiful amounts of capital, often times referred to as “dry powder.”

2020 Review

Activity started out elevated before a significant reduction with the onset of the pandemic. Businesses looked to shore-up capital and entered survival mode for the stormy weather ahead. But glimmers of sunlight did eventually appear for industries such as technology and healthcare, which in general proved to be the least negatively impacted by COVID-19.

For strong businesses that were positively impacted by a changing world, opportunities arose for dealmaking. In the end, US M&A activity decreased by more than 20%, according to Mergermarket, but with two very different stories as activity in the second half of the year saw an increase of more than 200% vis-à-vis the first six months.[1] GF Data, which tracks private equity-sponsored M&A transactions between $10 and $250m, saw 170 transactions in 2H20, a 26% year over year increase.[2]

2020 also saw more than a 4x increase in the number of Special Purpose Acquisition Companies (SPACs), companies that launched IPOs with the intention to eventually purchase private companies. More than 200 active SPACs currently have $80bn of dry powder and will seek an acqusition candidate in the coming months.[3]   

“Early on, businesses were focused on maintaining liquidity, operations, and safety. However, as volatility subsided with time, the M&A and IPO market rebounded. With public market valuations at near all-time highs and significant liquidity in the system, many companies opportunistically sought to raise capital or sell,” says Alan Felder, from UBS’s OneBank Partnership, an initiative between UBS Global Wealth Management and UBS Investment Bank, and Americas Head of both Private Financing Markets and Real Estate, Lodging & Leisure for UBS Investment Bank.

2021 Outlook

Will the momentum continue? According to Felder, there are several tailwinds that should point to robust activity this year:

  • Low interest rates and government stimulus
  • Record levels of dry powder from private and public markets, including SPACs
  • Pent-up supply and demand from both sellers and buyers
  • The feeling that the worst may be behind us as it relates to the pandemic
  • Possibly speeding up exit planning due to uncertainty related to capital gains and corporate taxes

UBS believes that corporates and sponsors will continue to utilize M&A to evolve and drive growth as the economy recovers, with value being placed on digital, technology-enabled and disruptive businesses that are well-positioned in the post-Covid world.

“Companies that performed well over the Covid period are trading at attractive valuation levels and are in demand by buyers. We continue to focus our practice on advising clients on the strategic alternatives available to them. We expect robust M&A and capital markets activity to continue and are focused on helping our clients create long-term value,” says Felder.

Steven Young is a Senior Vice President of Wealth Management for UBS Financial Services. He is the team lead for the Young Business Transition Consultants based in Indianapolis, IN. 

[1] Mergermarket Global and Regional M&A Report 2020

[2] GF Data M&A Report, February 2021

[3] Deal logic as of 12/31/2020

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