December 2021

Written By Jason Kania

Hanukkah Sameach, Merry Christmas, Heri Za Kwanzaa and Happy New Year! As 2021 year comes to a close, we would like to congratulate all of the newly appointed CEOs and all of you who have added to their families with newborns, new pets, wedding engagements and nuptials!

This has been the an unusual and difficult year for all of us. Adapting to change is never easy, no matter what it is. We’ve all had to adapt to a “new normal,” which is especially unique in the world of search funds and M&A. Despite the challenge of searching and the new normal, we are continually impressed by your resilience and optimism. THANK YOU! You are an inspiration and are the reason we devote so much time and effort to search funds and entrepreneurs like yourself!

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. 

KNOWLEDGE-BASE REMINDERS Available from redforest.com/welcome for a list of resources for each phase of your search. Available to Red Forest Capital Funds Only.

FUND SPOTLIGHT. Selection of Topics and Deals that correspond with industries of interest to Red Forest Capital funds.

WATCH ITEM. SEARCH FUND EXPENSES & 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.

HIGHLIGHTS OF THE INFRASTRUCTURE BILL

In November, the US Senate passed a $1T infrastructure bill focused on infrastructure and climate-related projects that may have a direct impact on the power & utilities sector. Following are the highlights and for more, visit the White House website;

  • $110B Road and Bridge repair

  • $73B Electric Grid Modernization. carbon capture. nuclear and FERC

  • $65B High Speed Internet expansion

  • $55B Clean Water and Sewage infrastructure repairs

  • $50B Weather and Cyber Resiliency

  • $39B Public Transportation repairs and upgrades

  • $25B Airport and Port infrastructure and waterways repair

  • $12B Superfund and Brownfield site remediation

  • $12.5B for 500,000 Electric Vehicle chargers and hybrid school buses

INTERESTING

LIGHTER FARE

M&A, PRIVATE EQUITY & INDUSTRY UPDATES

YTD 2021 North American M&A continued its steady climb with ~4,000 transactions, valued at ~$700B. H2 2021 PE M&A deal volume fell by 11% YoY and deal value fell by 8% YoY. Median revenue multiple rose to 4.9x YoY and the median EBITDA multiple rose slightly to 22.3x. M&A has benefited from continued economic recovery, strong stock prices, and ample capital. Labor shortages, supply chain concerns, and increasing inflation may slow a recovery and M&A. Industries with the most M&A activity are; information technology, healthcare, and financial services, specifically cryptocurrencies. Energy, mining and resource companies have seen commodity prices rise and are using mergers and acquisitions to achieve environmental, social, and governance transformations.

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. Investor interest has increased due to the industry’s size, scale, fragmentation in the industry, aging company ownership, recession resilience and recent increases in automation. Producers attribute input cost increases to labor, packaging, chemicals and storage. 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.

CONSUMER

Consumers continue to focus on health and wellness and are beginning to return to local gyms while maintaining at-home exercise routines as well. Demand for apparel, at-home fitness equipment, and personalized exercise programs has persisted. As a result, clothing, footwear, and outdoor gear EBITDA multiples climbed to 30x in Q2 2021 (from 15x YoY). However, active lifestyle M&A is expected to slow in 2022 due to significant supply chain constraints and normalization in participation. COVID also created record levels of outdoor recreation participation as consumers have gravitated towards healthier lifestyles. According to the Outdoor Foundation’s 2021 Participation Report, ~160MM consumers age 6+ participated in at least one outdoor activity, with running, jogging, and trail running being the most popular.

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. MedTech thrives while biopharma R&D faces mounting pressure for its prolonged inability to yield returns greater than the industry cost of capital.

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, TRADE & WHOLESALE

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 

Jason Kania
Previous

January 2022
Next

November 2021