The below article was originally published on 11/5/21 in the Triad Business Journal with contributions by Smith Leonard partner Darlene Leonard and Lee Lloyd, founder of J. Lee Lloyd LLC, an M&A and corporate finance consulting firm based in Greensboro.
If you were trying to buy, sell or invest in a company in March 2020, you could almost hear those deals grinding to a standstill, like almost every aspect of business and life.
In April 2020, Forbes reported that in the first quarter of 2020, merger and acquisition activity in the U.S. dropped 50% from 2019 levels, to $253 billion, and most of those deals had already been completed or were in progress before the pandemic had been officially termed as such by the World Health Organization on March 11.
“By late March, everyone knew that there was a major disruption—the question was how much and for how long,” says Darlene Leonard, partner and member of High Point accounting firm Smith Leonard PLLC, who specializes in helping companies navigate mergers and acquisitions.
Many deals that hadn’t made it far enough along in the pipeline were delayed or derailed. Travel restrictions meant exploratory meetings between buyers and sellers, as well as due diligence, had to be conducted virtually, if they were to happen at all.
From free fall to free for all
“Second quarter 2020, it was all quiet – pencils down,” Leonard says. “But by fourth quarter, it was fast and furious, and it hasn’t really stopped.”
Just as quickly as the bottom fell out of merger and acquisition deals in second quarter 2020 came the subsequent rise in the third quarter, driven by several factors – historically low interest rates, with rates on short-term government obligations close to 0.0%; an abundance of private equity funding available; and world markets rallying, with an overall 9.2% growth in the U.S. stock market.
In the fourth quarter of 2020, M&A activity soared to $544.2 billion, which amounted to a 77% rise in value over 12 months earlier, according to an analysis published by the global White + Case law firm. It was the highest quarterly value total since the fourth quarter of 2015. Most recently, research firm Refinitiv published a report putting global deal volume at $4.4 trillion through the third quarter of 2021, a figure topping the previous full-year record of $4.3 million set in 2015.
So despite global uncertainties, including oil price wars, severe and continuing supply chain disruption and initially shaken investors, conditions have been perfect for the buying and selling of companies.
“With the concern about capital gains tax increases, coupled with relatively cheap financing and the $1.4 trillion of private equity money that needs to go somewhere, purchase multiples are going higher and higher,” Leonard says.
Timing is also a factor for baby boomer business owners.
“Boomers have been through three down-market cycles – the technology bubble in the early 2000’s, the Great Recession of 2007-2009, and then the pandemic,” Leonard says. “Many boomers are tired and if they were thinking about an exit, they are ready to make a move before something else happens.”
That said, the frenzy won’t last forever. As CNN reported recently, there’s growing consensus that central banks will start raising interest rates and that the Federal Reserve will slow down on asset purchases. Those factors, combined with rising energy prices and a splintered supply chain, could potentially slow down deal-making.
In the meantime, however, legal, accounting and financial services professionals are staying plenty busy managing the flow of deals due to a number of factors driving deals. In the Triad, smaller service-related businesses were sought after, and, in selling, could gain more security in the marketplace within a larger entity (such as becoming one of a “family of brands”) as well as improved economies of scale in operational overhead, for example in HR, insurance, and employee investment. The newly acquired Scott Stone and the aggressive acquirer Cook & Boardman, both featured in this section, are each examples.
Leonard lists several major value drivers for business owners to consider when looking to sell:
- An e-commerce process that supports fulfillment direct to consumer.
- Subscription-based services that deliver ongoing income.
- Long-term contracts that provide visibility into the future.
- And — a huge consideration — having the workers and the ability to manage temporary labor as needed without being at total capacity.
“Winners were firms that have been developing technologies around virtual and remote work, media streaming and e-commerce,” says Lee Lloyd, founder of J. Lee Lloyd LLC, an M&A and corporate finance consulting firm based in Greensboro.
Losers included many businesses in travel, tourism, in-person fitness and entertainment, and many non-essential retail or service businesses.
But more than 11.7 million PPP loans to U.S. businesses, 5.2 million of which were forgivable, helped pandemic “losers” stay viable. Federal stimulus rallied the stock market and kept banks and investors flush with cash, even as there was criticism that more than 50% of stimulus funds went to just 5% of businesses.
In the Triad, with a business base dominated by smaller, privately owned firms, there was a high rate of application and acceptance of PPP loans – a total of 11,903 loans in Guilford and Forsyth counties alone safeguarded more than 137,000 jobs in the two counties.
An unprecedented confluence of trends
Phrases used to describe this past year in mergers and acquisitions tend toward the aquatic and catastrophic, as in “perfect storm,” “tsunami,” and “tidal wave” to describe the extreme buyer and seller motivators that have come out of the pandemic.
In third and fourth quarter 2021, private equity firms have found themselves scrambling to push surging capital through deal pipelines that would not — could not — expand due to the timeline realities of buyer due diligence and the bandwidth of the many players involved in evaluating and advancing a deal.
Added to this pressure is the fact that the Federal Trade Commission has recently begun notifying parties in larger deals that, due to a shortage of resources to respond to a “tidal wave of merger filings,” the FTC might require additional review time beyond the normal Hart-Scott-Rodino Antitrust Improvements Act waiting period.
That “shortage of resources” translates into people.
“M&A firms remember how badly they were hit when everything came to a halt in early 2020, so they are careful about hiring right now. Even if they are hiring, they are not putting people fresh out of business programs into working major deals,” Lloyd says.
This constricted bandwidth extends beyond law firms, CPA firms and lenders to include real estate appraisers and other participants in the due diligence process who only have so many hours in the day, too.
Videoconferencing, adopted by necessity, has provided some efficiencies.
“There is now a ‘qualifying step’ that is possible between buyers and sellers in the form of a virtual introductory meeting that didn’t exist before,” Lloyd says.
Of all converging influences on M&A deals, whether or not they were created or exacerbated by the pandemic, one of the strongest is SPACs – or Special Purpose Acquisition Companies.
These public companies are set up with the sole purpose of raising capital to buy companies – and they have two years to do so or they have to return the capital to investors.
“That’s a lot of dry powder,” Lloyd says. “Whether you struggled as a business owner to survive the pandemic and want or need to sell, or whether your business did well during the pandemic, there has been a confluence of motivating factors in 2021 driving the decision for many to consider selling in this environment.”
M&A trends in Triad, beyond
Mergers and acquisitions experts cite a host of factors converging to drive “fast and furious” deal-making that’s occurred since the fourth quarter of 2020.
Buy/Sell Timing Factors
- Private equity piles up
- Capital gains create sell-side urgency
- Boomers retiring
- SPACS – two-year window for return on investment means time and deal making is of the essence.
- FTC forces longer antitrust review for larger deals.
Deal Valuation Factors
- PPP pulls valuation gaps — count PPP as income or not? Buyers and sellers disagree.
- Zoomification facilitates some remote due diligence.
- Pipeline — so many deals, and only so many M&A pros to shepherd them.
- Stimulus funds stoke stocks
- E-commerce equals value
- Infrastructure drives investments particularly in rural broadband, including hardware, construction, 5G
- Supply chain suffering drives “insourcing” – buyers looking to acquire companies that can guarantee essential supplies and services
Contact Darlene Leonard if you would like to explore transaction advisory services for your company.