2021 Middle Market M&A Outlook

Expect an interesting, exciting, and historically active 2021 with ultra-favorable financial market conditions and rapid COVID-related changes across industries.  Dislocation creates opportunity.  This is a time for strategic M&A to take a front row seat.

Phil SeefriedVice Chairman, Capstone Partners

In the 1940’s, the economist Joseph Schumpeter wrote about the concept of “creative destruction.” Creative destruction is described as the “process of industrial mutation that continuously revolutionizes the economic structure… incessantly destroying the old one, incessantly creating a new one.”  The concept is historically popular as a theory of economic innovation and business cycles. In 2020, we experienced the shock of the COVID pandemic, revolutionizing many industries and destroying others. Creative destruction was upon us in full force. Consumer preferences/habits changed significantly and abruptly. The disruption that we have lived through is dramatic in scope and speed, rearranging business models, supply chains, and competitive dynamics.

Policymakers attempted to offset the economic shock with unprecedented fiscal stimulus and monetary support. These large forces left the deal world in unchartered territory: volatile business conditions and ultra-friendly financial markets coexisting at the same time.

M&A Volume

We can expect dealmakers to accelerate activity in this time of opportunity – look for 2021 to be a record year in M&A. We got our first taste of the activity spike in Q4 2020 with closed transactions reaching a historical high, increasing 39% from the prior quarter and recording the highest quarterly volume since Q1 2017.  All indications show that the increased volume will continue, as deals delayed from 2020 return and sellers seek to take advantage of strong market conditions and get ahead of potential tax changes. With business models in flux and capital readily available, we expect to see a spike in strategic M&A, including restructuring M&A.

Transaction Multiples

Transaction multiples should remain strong and perhaps even increase in 2021, reflecting a more robust growth outlook during the post-COVID recovery. M&A multiples have lagged S&P 500 multiples, reaching the widest gap in recent history.  This may explain the recent growth in the SPAC market, which simply uses a public company buyer to take advantage of more favorable multiples for sellers. In any case, multiples are strong across the board and should remain so, barring another unexpected shock to the system.

Entire sectors are being reorganized in the wake of COVID. Expect M&A to play a large role in the re-emergence of the Restaurant and Media/Entertainment sectors as well as traditional and online Retail. Companies will use M&A as a tool to adjust and reinforce their supply chains after recent disruptions. Healthcare deals are also expected to increase with recent breakthroughs in pharmaceuticals and testing; many home health businesses have prospered which should drive deal activity and consolidation. We expect continued high activity levels in Software, Cybersecurity, and Fintech as the speed of technological change in these industries has accelerated.

Whether deals are driven by re-emergence, new growth opportunities, business model changes, competitive changes, or purely by cheap and abundant capital, we expect a year for the ages.  Hold on to your hats!

Over the past two decades, thousands of owners, investors, and creditors have trusted Capstone Partners to advise with their strategic decision-making in order to maximize financial outcomes at every stage of the business lifecycle. We have developed a fully integrated range of investment banking and financial advisory services uniquely tailored to meet the needs of middle market companies. To explore our breadth of services, click here.