M&A Trends Since COVID-19

M&A has been a hot topic the last 18+ months since the start of the COVID-19 pandemic. At the Alliance of Mergers and Acquisition Advisors (AM&AA) summer conference, “Connect 2021,” which EisnerAmper colleagues from Dallas attended, a quartet of panelists discussed some of the trends. 

Panelists included:

• Graeme Frazier, Partner, GF Data
• Anthony Giordano, President, BKD Corporate Finance, LLC
• Christopher T. Godwin, Managing Director, Gen Cap America
• Bill McCalpin, CEO, DealWare

Some of the key takeaways from this panel included:

• “Where we’ve been” – A discussion of deals in 2020
  • At the onset of the pandemic (Q2 2020), the volume of deals dropped but multiples stayed high, reflecting the fact that deals that had momentum were still going to close.
  • A quarter later in Q3 2020, volume returned but multiples dropped. This reflected some lower quality deals.
  • In Q4 2020 there was a quick rebound, volume remained high and multiples came back, though not to the same levels as pre-pandemic.
• “Where we are” – 2021
  • In looking at the data for early 2021, multiples on average were not as high as many expected. This reflects:
    • The highest gap between high quality and low quality deals. Higher quality deals were demanding a significant premium.
    • The percentage of deals that had earnouts was over 40%, contributing to average lower multiples.
    • Spreads becoming more competitive.
  • Appetites changed between 2020 and 2021.
    • The appetite for institutional capital has been significantly higher in 2021 than it was in 2020.
    • The desire for smaller deals is lower in 2021 than it was in 2020.
      • 2020 had more add-ons than 2021.
    • Changing valuation expectations – pre-pandemic, many deals with lower EBITDA margins closed vs. 2021 where there have been higher EBITDA margins.
  • The market now is a more active market but also a more “choosy” market.
  • The current pipeline is very strong relative to 2020 and 2019.
  • Key activity drivers now:
    • Potential tax law changes
    • Strength of the current market (and drop off of hesitation created by the pandemic).
  • Quality-of-earnings providers are currently tapped out with the number of deals closing in 2021.
  • There is expected to be a continued gap in high quality and low quality deals.
  • There is an expectation of finding fewer and fewer deals closing for less than 7x. Key questions driving multiples include:
    • Is the business growing?
    • Strength of current management team and will they stick around?
    • Customer concentration?
    • Industry?
    • Above average financials?
    • Size?
  • The tax environment is expected to heavily impact deals.
    • A change will happen in Q4 though it’s uncertain what that change will be. It could potentially mean that you need to have a significant premium on a deal to make the after-tax proceeds that make sense for sellers.
    • Tax change likely will not be retroactive to 2021.
    • This is creating a deadline in the minds of many for end-of-2021 and may lead to individuals hitting the pause button on selling going into 2022.
    • There is still a significant amount of businesses owned by baby boomers and, in the short-term, tax drivers could be the start of a major turnover of these businesses.
  • Deal structuring and process.
    • While there has been an increase in Zoom-type meetings, being in the room is still preferred in closing deals.
    • Whether management teams are expected to stay on board or leave are driving decisions about who investors will talk to.
    • Trailing twelve months (“TTM”) performance.
      • In many cases, this has been difficult to normalize with the impact of the pandemic, but we are now entering a time where TTM is mostly all post-shutdown.
      • Panelists are seeing some “creative” add backs for company EBITDA.
    • “Where we’re going” – A look into the deal market for 2022
      • Especially given the proposed tax changes, investors will be questioning where they can make their carry given the already high multiples and potential premiums required.
      • There is questioning of whether there will be a return to a buyer’s market, though the panelists felt this was unlikely as the market is currently flooded with cash.
      • The current capacity of service providers in support roles (quality of earnings, etc.) is limited. There could be more deals closing now if there was more capacity which may delay deals in 2022.