M&A outlook shows ‘surprising level of optimism’ for 2021

M&A deal flow that was dampened during the pandemic could soar in 2021, according to an annual outlook of executives and M&A professionals.

In law firm Dykema Gossett PLLC’s 2020 outlook survey, a record 87 percent of respondents said they expect M&A activity involving privately owned companies to increase in 2021. That’s the most optimistic year-ahead view ever in the 16 years that Chicago-based Dykema has conducted an annual survey of executives and M&A advisors.

More than seven out of 10 respondents expect to close a deal during the next year and 71 percent believe the market will strengthen.

Whether a buyer is strategic or acquiring for financial reasons, or a seller hopes to cash out, “there are opportunities in the M&A market for the right deal,” said Thomas Vaughn, co-leader of Dykema’s Mergers & Acquisitions practice who’s based in the law firm’s Detroit office.

“Despite COVID-19 and current economic uncertainties, deal-makers see increasing opportunities for completing deals in the next 12 months,” Vaughn said. “The pandemic will continue to influence the deal market over the coming year, but there is a surprising level of optimism among deal-makers that its impact on M&A will wane over time.”

Dykema each fall surveys executives and M&A advisers across economic sectors nationwide to gauge their expectations for M&A in the coming year. In this year’s edition, 11 percent of the 225 respondents from 39 states were from Michigan.

Survey results also indicate that respondents are optimistic about the economy after the U.S. fell into recession earlier this year. Six in 10 said they hold a positive view of the economy over the next 12 months, 17 percent hold a negative view, and the remaining 23 percent held a neutral view.

“We believe the rise in optimism reflects deal-makers’ feelings that the worst is behind them. It also reflects actual market conditions: Deal activity has picked up noticeably in the months since U.S. states began reopening for business,” a report on Dykema’s survey results states. “Both financial and strategic buyers see opportunities in a hobbled economy, and with significant uncertainty ahead, business owners may view this as an opportune time to cash out.”

Despite the optimism, survey respondents still “clearly don’t believe M&A activity is in the clear” in 2021. More than half expect COVID-19 “to have at least a somewhat negative impact on the M&A market in the next 12 months,” according to Dykema.

Twenty-eight percent expect the pandemic to have a positive effect. Those respondents may represent sectors such as health care “where the impact of the shutdown has created pockets of consolidation … or deal-makers looking to acquire distressed businesses,” Dykema said.

Nearly two-thirds of respondents identified further spread of the coronavirus as the top threat to deal flow in 2021, followed by Democrat Joe Biden winning the presidency, Democrats winning full control of Congress, President Trump’s re-election, and increased protectionism and political intervention.

“Our respondents expect the outcome (of next week’s election) to have a significant impact,” Cynde Munzer, a corporate finance attorney in Dykema’s Chicago office, said Tuesday during a webinar on survey results.

The most common obstacles to deal flow next year are the availability of quality acquisition targets, economic uncertainty, financing, buyer competition and valuations.

The top sectors for deals in the next year are automotive, health care, technology, consumer products, and financial services, according to survey respondents who see a resurgence in strategic buyers in the market.

“That’s likely a reflection of our unique economic conditions,” Dykema’s report said.

“In typical recessionary conditions, private equity and other financial buyers increase their activity, feeding on lower valuations. But amid the swirling uncertainty stirred up by COVID-19, many private equity funds have hit the brakes on acquisitions, turning their attention instead to helping their portfolio companies stay afloat,” according to Dykema.

The law firm noted that private equity firms in the U.S. “are sitting on record amounts of capital. At some point in the near future, these funds will have to turn their attention to deploying all that capital.”

Top drivers for M&A in 2021 are U.S. economic conditions, favorable interest rates and the availability of capital.