January 2022

Written By Jason Kania

We hope you enjoyed the holidays and happy new year!

Most analysts predict a continuation of the M&A trends from the previous year. And, based upon the deals that have closed in December, there are plenty of attractive investments that remain.

For context, Pitchbook’s 2021Q3 M&A report presented 2,847 PE transactions for a combined value of $438.6B which was largely driven by economic growth, continued low interest rates, and dry powder. PE firms exited 761 investments with a total combined enterprise value of $183.9B. Middle-market fundraising remained steady with 121 fund closings by Q3 2021 which is consistent with 2021. Pitchbook suggests the median time to close a transaction is just over six (6) months and consistent with 2021.

Following are a number of resources to help you reflect on the year and in your pursuit of an acquisition. Contact us if and when we can be of help. In the meantime, please find a selection of resources below to support your efforts. 

REMINDER. TAXES

In August, the Tax Court determined that an entity searching for target acquisition is not an active trade or business because no business had been started yet. Therefore, related search expenses are Section 195 “Start-Up Expenses,” and not Section 162 expenses which allow the deduction of expenses paid or incurred on any trade or business. Future expenses during the search phase may need to be capitalized and amortized once a fund acquires a business. This matter is developing and will likely impact your investors and the your fund’s K1s. Contact your accountant for further guidance. To help, following is a summary of the case and a summary from Mowery & Schoenfeld.

INTERESTING

LIGHTER FARE

M&A, PRIVATE EQUITY & INDUSTRY UPDATES

AEROSPACE, DEFENSE, GOVERNMENT, CIVIC & SOCIAL SECTOR

YTD H2 2021 M&A deal volume rose by ~140% YoY with a post-pandemic recovery will likely remain a key driver for M&A in commercial aerospace, geopolitical tensions could continue to support deal-making in defense. Companies are expected to continue focus on digital thread and factory automation; decarbonization and improved commercial customer experience; advanced military capabilities like: cybersecurity, fighter aircraft, space resilience, small-satellite telecommunications; and electric vertical takeoff and landing (eVTOL) aircraft.

AGRICULTURE & FOOD

Q3 2021 M&A volume rose 86% YoY with financial buyers accounting for ~14% of all M&A. Upstream/farm and downstream/table investing broke records and larger deals occurred throughout most sub-segments. Agtech, indoor farming companies raised ~$1B of new investment. Downstream Foodtech saw $31B of new capital invested with segments including online delivery/logistics, cultured protein, and food waste segments all seeing 80-150%+ year over year funding. AgTech saw ~$20B+ of exits in 2021. Low to mid-market opportunities remain in “midstream” between the farm (or the lab) and consumer and specifically; automation, logistics and transport, food processing, cold chain storage, food waste mitigation, and food safety.

AUTOMOTIVE & ASSEMBLY

H2 2021 M&A deal volume fell by 15% YoY but deal value increased 190% YoY. Manufacturers comprised the largest segment with $27B of total deal value, primarily due eight (8) SPAC deals in electric vehicle (EV) manufacturers and charging solutions. According to the International Energy Agency’s Global EV Outlook, EV car sales increased ~3M units to a ~10M despite the auto industry contracting by 16%. Expect these trends to drive further M&A with EV manufacturers. last-mile commercial vehicles and battery producers.

B2B, MANAGED SERVICES & CONSULTING

YTD H2 2021 M&A remained steady at ~400 transactions yet transaction value fell by 51% YoY. Median revenue multiple remained steady at 1.3x YoY and the median EBITDA multiple rose dramatically to 18x from 7.2x YoY. Many companies have taken advantage of the slowdown to develop new and transition to cloud technologies. CxOs see cloud as “critical” to achieving their company’s growth and operational goals yet, few companies are well positioned. See PwC’s US Cloud Business Survey. Vertically aligned management consultancies and value-added resellers should benefit from relatively complex implementation of digital tools and processes. Nearshore business and financial services BPOs continue to garner attention due to the uncertainties related to COVID-19.  Labor supply pressure, the rise of remote work and company review sites (i.e., Glassdoor) is motivating companies to increase focus on recruitment candidate screening, mental health benefits (e.g., apps and wellness coaches) and talent development.

EDUCATION

Q3 2021 M&A volume is up 4% YoY, with value up 200% YoY. Revenue multiples are to 4.2x from 2.6x YoY. K-12 Media and online learning is enjoying renewed focus and investments in learning experience platforms (LEP) that offer better personalization and continued investment in continuing education, health and safety, technical education, and reskilling.

ENERGY, ENVIRONMENT & RELATED

Energy is seeing optimism following the downturn in 2020, an optimistic outlook also marked by caution, as labor shortages, supply chain disruptions, and high costs continue.  Oil prices have recovered to around $80/bbl however, upstream M&A remains well below pre-pandemic levels. A strong oil price enables investment which many companies are using to transform business models with capital discipline. With a broadening decarbonization goals, companies are expected to redesign traditional “oilfield” services to provide integrated decarbonization for upstream projects that are likely to include subscription-based revenue models and diversification into low-carbon services. Expect continued attention in companies that generate a measurable, beneficial social or environmental impact alongside a healthy financial return in addition to investment in green energy solutions, such as carbon capture, utilization, and storage (CCUS). 

The US Energy Information Administration expects more electricity consumption from the commercial and industrial sectors as people start heading back to the office. As people return to work, shortages and growing skills gap as new technologies are incorporated into the workplace, remain a challenge. In oil and gas, over 100,000 jobs were lost in 2020, and 50% of those positions remain open. Greener jobs and differentiated benefits can help secure return and retention of workforce. The commitment to decarbonization could be the best recruiting pitch, but more than 75% of our survey respondents believe that flexible and agile workforce structures that empower remote, hybrid, and cross-border teams would help companies compete and retain talent in today’s tight labor market.

FINANCE & INSURANCE  

Q3 2021 M&A volume is up 8% YoY, with value down ~40% YoY. Eight of the top ten highest value deals YTD were completed by strategics with three deals that reached the $10B. Median revenue multiples rose 10% YoY, from 3.0x to 3.3x. Low-fee, index funds continue to impose downward pressure on fees for wealth management and RIAs has surged with 200+ transactions (up 45% YoY) and multiples exceeding 18x EBITDA. Tech firms are also starting to develop financial services arms, providing credit and debit cards, bill payment, and crypto services. Usage-based, on-demand, and “all-in-one” insurance products are gaining attention as companies aim to mitigate the loss of premiums to distribution costs.

HEALTH CARE & LIFE SCIENCES

Q3 2021 M&A volume fell 1% YoY, with value up 14% YoY. Revenue multiples are up to 4.0 from 2.7x YoY. Median EBITDA multiples fell to 11.5x from 14.7x YoY. COVID has been traumatic on hospital-based care organizations but will continue to drive rapid transitions and growth within the HealthTech fueled by ~$32B in 2021 venture investment, strategic acquisitions and the $3.0 billion SPAC of LumiraDX. Key growth sub-sectors include: home-based care enablers; diagnostic tools; clinical-grade wearables; remote patient monitoring; and AI-based predictive analytics.

HOSPITALITY, TRAVEL & TOURISM

INDUSTRIALS & MANUFACTURING

Q3 2021 M&A transactions up ~90% YoY. The Institute for Supply Management (“ISM”) New Orders Index decreased to 66.0 in June 2021. The ISM Purchasing Managers’ Index decreased to 60.6, down from 64.7 in March 2021. The ISM Production Index decreased to 60.8 in June 2021. The Industrial Production Index, which measures the real production output of manufacturing, mining, and utilities, increased to 100.1 in June 2021. Companies are expected to increase investments in digital initiatives to improve agility and resilience to potential production and supply disruptions. 

MARKETING & ADVERTISING

YTD H1 2021 M&A deal volume fell by 25% YoY and deal value increased 40% YoY. Median revenue multiple remained constant at 3.2x YoY and the median EBITDA multiple remaining constant at 16.2x.

MEDIA & TELECOMMUNICATIONS

Q3 2021 M&A deal volume fell by 15% YoY but deal value increased 55% YoY. Median revenue multiple rose to 2.9x from 2.2x YoY and the median EBITDA multiple remaining constant at 11x from 10.8x YoY.

REAL ESTATE, ENGINEERING & CONSTRUCTION

Q3 2021 M&A deal volume increased by 6% YoY but deal value increased 70% YoY.  Median EBITDA multiples rose to 19.3x from 10.4x YoY. Construction Spending and the Infrastructure Bill has created optimism against rapidly rising labor and material costs. Expect opportunities in companies who provide near-shoring and on-shoring of the supply chain solutions, unified thermal moisture wrapping solutions, pre-insulated wall components, and modular and pre-fabricated construction components.

RETAIL, WHOLESALE & CONSUMER SERVICES

Online spending was $114B, up ~14% YoY. Supply remains an issue, yet price changes vary. The biggest price increases are in apparel ~17%; flowers and related gifts, up 15.5%; sporting goods, up ~7%; and medical equipment and supplies, up 5.7%. The biggest price declines were in computers, down 5.6%; jewelry, down 3.7%; and books, down 2.3% YoY. Online Prices Hit Record Levels as Shortages Bite Holiday Shoppers

TECHNOLOGY

Q3 2021 M&A deal volume rose by 128% YoY with deal value increasing ~230% YoY to ~$337B.  Median revenue multiples rose to 4.5x from 2.75x YoY and the median EBITDA multiples increasing to 16.4x from 13x YoY. Approximately 25% of transactions and ~50% of transaction value was created by deals from financial sponsors.

TRANSPORTATION, LOGISTICS & PACKAGING 

WASTE MANAGEMENT & RECYCLING

Jason Kania
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February 2022

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December 2021