Will 2021 be an unprecedented year for M&A activity?
In this feature, Business Leader speaks to sector leaders to find out what you can expect in relation to mergers and acquisition activity in 2021; whilst also reviewing the year just gone.
It is always helpful to start at the beginning and we will initially look at how 2020 compared to 2019, regarding M&A activity – before we look ahead to 2021 and beyond.
DC Advisory is a global corporate finance advisor that, at the start of 2021, published a report assessing global levels of activity.
According to the report, 2020 began much as 2019 ended – an active M&A market but with the looming sense that we were due a downturn.
Little did anybody know the predicted downturn would be influenced by a global pandemic.
So what happened in 2020?
Richard Madden, who is CEO of DC Advisory UK, explains: “The nine months since March show a 20% decline in transaction volumes and a 13% decline in transaction value as compared to the same period in 2019, with these declines spread relatively consistently across the world.
“After a very slow start, this is a much stronger performance than many of us had feared. To put it into context, the year after the Lehman Brothers’ collapse showed a 36% decline in volume and a 53% decline in value. Although, in both cases, the transaction values are only indicative because 55% of values are ‘undisclosed’.”
When compared to the 2008/09 financial crisis, Richard says that there are positives to be seen.
He explains: “The first positive and most compelling difference between now and 08/09 is that there remains a plentiful supply of corporate and private equity capital seeking opportunities – and both groups are currently similarly active acquirers.
“This enthusiasm to invest remains heightened because organic growth can be challenging in straightened economic circumstances. In addition, the credit markets are open and debt remains inexpensive. Essentially, the machinery of M&A stopped working in 2008. Now, in this case of after-shock, it is running smoothly.”
Some key observations
Richard also says that it’s worth looking at some of the key data. For example, there were 12,250 deals in the nine months since March 2020 versus 15,274 in 2019 under £1bn.
He expands: “Of most note, and perhaps unsurprisingly, no sector reached the levels of 2019, except for the low volume Pharma, Aerospace and Defence sectors.
“Technology finished strongly and almost reached 2019 levels, with 2,545 deals vs. 2,554 deals. Interestingly, technology also almost surpassed automotive & manufacturing as the most active sector.”
Looking at 2021
Richard and his team say that to look ahead to this year it’s important to categorise those in the market. There are the businesses that had significant momentum prior to March 2020 – ‘the momentum transactions’ – ‘the safe haven transactions’ – those that are in core resilient sectors such as infrastructure; the ‘Light Sleepers’ – businesses that enjoyed surging demand due to the circumstances; ‘the gently stirring’, which represent the bulk of the market that have seen their businesses impacted by the pandemic and the ‘deep sleepers’ – those that have been adversely affected by the last year.
Richard continues: “Activity levels in 2021 should be underpinned by ‘Safe Haven’ and ‘Light Sleeper’ transactions. We estimate that these should deliver equivalent deal levels to 2019, with some prospect of outperformance. The impediment to material outperformance is that buyers are very discerning, diligent and risk averse.
“We have already seen that businesses that fall short of very high standards are much less likely to transact. Consequently, for 2021 we predict the same number of deals as in 2019 – 7,500. The ‘Deep Sleep’ sectors, which represented c.2,500 deals in 2019, are likely to remain substantially inactive, so we estimate that deals in this category will reach only 40% of that level.
“And so it all depends on the ‘Gently Stirring’. We contend that these businesses will need an extended period of time to reach new and satisfactory levels of trading. If that period is six months or so, they are unlikely to contemplate launching a transaction before the Autumn – with only a possibility that they complete in 2021 – for many it will be longer.
“In a period of depressed economic activity, and with the burden of proof firmly on the vendor, it feels optimistic to suggest that levels will reach 70% of 2019 levels. Consequently, we estimate deal activity at 60% of 2019 levels, that would suggest approximately 6,200 deals in 2021.”
UK activity and 2021
To look at UK activity in more detail and what trends are impacting the M&A sector BL spoke to Asma Bashir – CEO of Centuro Global – a business which supports companies looking to buy and sell, and an experienced traveller when it comes to M&A; and Ewan McKinnon, Partner at Maven Capital Partners – who also support the sector.
We asked them:
From your perspective – do you expect to see M&A activity increase or decrease in 2021, compared to 2020?
Asma Bashir: “Looking at the figures from the Office for National Statistics (ONS), there was an eleven-fold increase in the value of M&A transactions in the last two quarters of 2020; surprisingly, the last six weeks of the year saw a much higher activity than 2019, suggesting the outlook for 2021 to be positive – especially now that there is confidence in the market of a vaccine being rolled out rapidly. With attractive interest rates and the availability of capital, M&A activity will continue to grow in 2021.”
Ewan McKinnon: “I definitely expect to see an increase in M&A activity this year for two main reasons. Firstly, we could be looking at an increase in Capital Gains Tax soon. This is already fuelling an increase in M&A activity this quarter, as entrepreneurs try to complete deals before the budget in case there is any increase to either Capital Gains Tax or Entrepreneurs’ Relief. Secondly, notwithstanding the above, as the economy recovers post COVID-19 we should see a return to a normal M&A market – 2020 was very subdued for obvious reasons.”
What trends do you expect to see that will impact activity?
Asma Bashir: “Many companies have shown resilience during the pandemic despite the challenges, particularly in the hygiene and cleaning products sector where acquisitions are strong. It is understood that private equity firm Bain and Company is acquiring the cleaning company Diversey for £6bn and Singapore-based Everstone will acquire another chemical cleaning company for an undisclosed sum. There is clearly an appetite for M&A activity.”
Ewan McKinnon: “In terms of trends, I expect to see more exits due to tax changes, with Q1 being particularly busy. We may also still see forced M&A as businesses struggle during extended lockdowns, or even when the recovery commences when working capital challenges bite.”
What advice do you have for business leaders thinking about selling or exiting in 2021?
Asma Bashir: “There is a possibility of more exits due to the impact of the pandemic on some sectors such as travel, retail and hospitality and anyone wishing to sell their business should consider tax hikes and cost implications of a sale after the budget, thus reducing the value of any sales proceeds.”
Ewan McKinnon: “My advice to business leaders thinking about selling or exiting in 2021 is to not think too much about potential tax changes now, it is too late. Instead, they should focus on getting their houses in order and look to experienced advisers to help them navigate what will be a challenging Q1 and Q2.”
The business perspective
Carrying out an M&A transaction in the teeth of a pandemic is no mean feat, so to gain an insight into what the process is like we spoke to Chris Holland – MD and co-founder of Waste Source – a £6m business that was acquired by Reconomy at the end of 2020.
Why now, considering the tough climate?
“I can honestly say this time last year I had no intention of selling Waste Source. Jon (the other founder) and I had considered some options in terms of restructuring it but becoming part of a bigger group had not made its way on to the ideas board. We were all set for our 10th year and gearing up for a year to remember.
“When Covid struck they were scary times and I genuinely thought the whole thing could disappear before my eyes. Once the furlough scheme got announced I was far more settled and still very much focusing on the year ahead. Once we had got to grips with lockdown life, I had some space to think strategically. I got approached and for the first time ever, opened up dialogue in relation to potentially selling the business.
“I was looking for a partner that could bolster our offering to existing customers, accelerate our growth and open new doors of opportunity for my wasters. In Reconomy, I believe we found the perfect fit.”
What was it like going through the process – how stressful was it, if at all?
“The first part of the process was exciting, at one point we had four offers on the table, and it was a proud and humbling moment to take a step back to see what the £200 I started the business with in 2010 had become. Having an offer that meant I could continue running Waste Source, with a waste juggernaut like Reconomy supporting me felt right.
“The due diligence process was stressful as every stone gets turned over, the level of detail at times was surprising to me. It took way longer than I thought it would (over three months) as well, but some of this was down to Covid-19 pressures on people’s workloads. I am not known for my patience and at times it was certainly tested.
“The thing I found most stressful was not being able to tell people, especially within the team at Waste Source.”
What did you learn during the process?
“That when you get to a Friday thinking you have provided all the documents needed for the due diligence process, you almost certainly have not and there will be a new list on the Monday! I was naive thinking that as we were a simple business model we would whizz through the process. That said, as we were not really looking to sell there was naturally preparation we hadn’t done before reaching the due diligence process.
“Most importantly though I have learned how the whole process works, I have completed a 10-year cycle from business creation, growth then sale, which has been great for my own professional development. I am extremely excited with this new relationship and the opportunities it will bring. I am a naturally competitive person and now pretty set on making Waste Source the best subsidiary within the Reconomy Group.”