As we start the New Year, there is more than enough uncertainty for business owners, management teams, advisors, and others to ponder. Issues about the longevity of the current prosperous economic cycle (for most industries), the upcoming election, which Democratic candidate will win the nomination in July (conservative or moderate), trade wars, impeachment outcomes, rising geopolitical instability, and more combine to leave even the most clear-headed person uncertain regarding what to expect this year and beyond. As we wait for the final 2019 M&A market data to be revealed, we are able to make the following assumption – despite VonLehman M&A gaining market share locally, which has propelled our group’s 2019 M&A activity beyond our 2018 performance, 2019 macro M&A statistics throughout the U.S. may eventually point to a slight year-over-year slowdown relative to 2018 (the data is ‘noisy’ as we will describe in a future article). Despite this, it is still a better time to be a seller than it was throughout the majority of the last decade; volume is up, and valuations are still at a premium.
Moreover, it is VonLehman’s view that the M&A related momentum that was observed throughout the industry, particularly during Q4 2019, coupled with the mounting uncertainty, should actually boost M&A activity and related statistics in the first half or three-quarters of 2020, leading up to the U.S. Presidential election. This is certainly evident in our firm’s active sell-side engagement pipeline, as well as in the informal conversations we regularly have with institutional and strategic buyers and other reputable advisors.
The 2020 Election’s Impact on M&A
According to the historical data, election years usually dampen M&A activity (we’ll publish an article explaining this trend in the coming weeks). However, we believe this election cycle could differ from those previous. Despite this historical data, even in times of strong economic health, there are several unique facts about this particular election year that give us a slightly more optimistic view: (1) credit markets are as open as ever, (2) strategic acquirers remain flush with capital and eager to differentiate themselves, and (3) private equity sponsors remain aggressive in deploying capital. In addition, the vast majority of privately held businesses in the U.S. are still operated by owners born before 1964 which translates to a large base of aging business owners eyeing retirement. In summary, supply is strong, demand is strong, and the necessary ingredients (cash, credit, and desire) are all present to bolster activity beyond normal election-year levels.
We feel strongly that this election year will not hamper early 2020 M&A trends like past election years, though we do expect a strong push or rush to complete deals before the end of Q3 2020. This could erode Q4 2020 activity in terms of both closings and new engagements. Hence, it is our view that the election could have a greater impact on 2021’s results, as business owners could pull back later in the year to wait for greater political clarity, which will affect next year’s (2021) results.
The State of the Economy and Its Impact on M&A
Despite widespread paranoia and obsessive talk of a looming recession, VonLehman believes there will still be strength in the U.S. economy throughout 2020, and this should support higher confidence from acquirers and lenders. Growth is slowing, but it hasn’t ceased. There are a few isolated sectors that may currently be cycling (transportation and a few pockets of manufacturing), but it isn’t widespread. Moreover, data being released points to a bright environment– consumer spending remains vibrant, unemployment is extremely low, and corporate profits are very strong. That said, caution will be prevalent in 2020 as it pertains to M&A, and we suspect that sectors that are less exposed to economic cyclicality and political party change risk will attract the most M&A activity in 2020. Even in the event that the economy does dip into a recession, our view remains somewhat bullish, as we believe both buyers and sellers will be forced to adjust their expectations regarding valuations. A very large number of investors and buyers have been sitting idle on the sidelines waiting for a catalyst to depress valuations; these value buyers are likely to emerge in roaring fashion should the economy show signs of even slight erosion.
Conclusion
Despite uncertainty, VonLehman believes there are a number of positive secular trends that should support a robust 2020 M&A environment which will once again favor sellers. Our view is that 2020 M&A transaction volume should be higher than that of 2019 totals; in a worst case scenario, we expect 2020 to be on par with 2019. Between the momentum obtained throughout Q4 2019 and the desire of many business owners to rush their deals through closing in 2020, we believe activity will be strong with valuations continuing their premium trends. As we look out beyond 2020, we expect a less robust environment in terms of both volume and valuations (relative to that of 2017, 2018 and 2019).
For any questions relating to this article, or to discuss your company’s positioning in the M&A market, contact Keith Carlson with VonLehman’s specialized M&A Group today at kcarlson@vlcpa.com or 800.887.0437.
