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2021 Could Be a Huge Year in M&A – Here’s Why

By Ryan Binkley

2021 Record M&A

“M&A is a confidence game. With political certainty, the end of the pandemic in sight, and strong capital markets, the confidence levels in the C-suite and board rooms are high. That bodes well for M&A.” – Anu Aiyengar, Global Co-Head of M&A, JP Morgan

When the COVID-19 pandemic brought economies across the globe to a standstill in the early months of 2020, M&A professionals could have been forgiven for fearing the worst.

But, the resilience of the industry has been tested time and time again and has consistently persevered to come out even stronger. 2020 proved to be no different – after a few tense months, dealmaking activity bounced back with real gusto in the second half of the year, setting new records along the way.

Out of the $3.6 trillion in recorded global M&A activity across last year, an astonishing $2.3 trillion came from the beginning of July through the end of the year. That was an 88% increase over dealmaking in the first half of the year, as confidence among investors continued to surge in the final stretch towards 2021 – and I expect it to maintain throughout this year as well.

Backed by the insights of many M&A experts and our own specialists at Generational Group, I will outline in this article why there is plenty of reason for dealmakers – and consequently, business owners considering their exit plans – to be optimistic this year.

Why is confidence high for M&A in 2021?

At a time of uncertainty in many areas of our lives right now, dealmakers have never been more certain or assured about the future. Don’t take my word for it – that is the conclusion of Dykema in their annual M&A Outlook Survey, where respondents are the most optimistic than they’ve been in its 16-year history:

“71% of respondents expect the M&A market to strengthen over the next 12 months, up from 33% in 2019, and 87% believe M&A activity will increase in the same timeframe.”

Canvassing a wide range of CEOs, CFOs and other M&A professionals, Dykema’s survey is a strong indicator of the positivity surrounding deal activity following its massive revival in the latter half of 2020, and the belief that COVID’s influence will continue to wane over time.

It is particularly positive for activity in the lower-middle market. In the first three quarters of last year, 68.7% of all M&A activity involved deals under $100 million – the highest proportion since 2016. This boom in buyers scouring for smaller, more agile deals should persist throughout 2021, presenting incredible opportunities to lower-middle market business owners to attract more interest.

We’ve actually seen this first-hand at Generational. Last year saw us close more transactions than at any other point in our history – a record we intend to build on in the coming 12 months.

But what is driving this strong, growing confidence in the M&A landscape? Well, I believe it is driven by four key factors:

  1. Private equity firms and dry powder
  2. The rise of SPACs
  3. A new administration
  4. Digitization

Private equity firms and dry powder

Firstly, private equity firms are in as strong a position as ever before to invest in companies across all industries and geographies. A survey conducted by ACG in the closing months of 2020 found that 75% of private equity professionals surveyed have a positive outlook heading into 2021, while only 6% held a negative perspective.

This optimism largely surrounds the $1.7 trillion in dry powder that PE firms have at their disposal – money that can only be used to invest into companies to help them grow and develop until they can deliver an even greater return for their investors. This resource means that PE firms are likely to be incredibly active in pursuing opportunities this year and beyond.

The ambitions of PE firms carry even more benefits for lower-middle market owners considering their exit strategies, due to the relentless rise of add-on acquisitions. In 2020, add-on acquisitions accounted for the largest percentage of buyouts by far, an astonishing 72.5% (significantly ahead of the 68.5% in 2019).

The uncertain nature of the pandemic pushed the popularity of add-ons even further, and that trend will likely persist throughout 2021 as we work towards the “new normal”.

This again puts smaller businesses in the spotlight of PE firms looking to expand and enhance their platform companies, with these investors more willing than ever to pay a premium for opportunities that harmonize well with their existing portfolios.

The rise of SPACs

While PE firms represent a consistent, tried-and-tested acquirer in the M&A landscape, a burgeoning buyer is expected to play a growing role in activity across 2021 and beyond.

The number of special purpose acquisition companies (SPACs) has grown substantially the last 12 months, with 242 of these organizations created by mid-December, four times more than those created in 2019. Furthermore, they accounted for approximately 25.3% of global IPO proceeds raised in 2020.

As these companies, with no commercial operations outside of the raising of capital through IPOs, continue to expand and thrive, they will drive activity and represent another potential avenue for owners looking to maximize their exit plans.

A new administration

The inauguration of Joe Biden as President comes with a lot of speculation and expectations, one of the most notable surrounding potential tax changes. While details remain unclear for now, it is widely believed that taxes could increase in 2022:

  • The top bracket for ordinary income could rise from 37.0% to 39.6% (the rate during Joe Biden’s terms as Vice President)
  • There are proposals to nearly double the capital gains tax rate from 20.0% to 39.6% for income over $1 million

What does this mean in relation to M&A activity in 2021? Well, in order to minimize any negative repercussions of these expected tax changes, it encourages business owners considering their futures to really look into cementing their exit strategies.

Remember – the year you sell your business is likely going to push your earnings past $1 million, as you cash in on your years of running and growing the business, and you’d be required to pay a greater share of tax.

So, there is as much (if not more) emphasis on people looking to sell before 2022 than those actively searching for acquisition targets, and this combination should result in a significant amount of M&A of activity. This is why I’d highly encourage anyone stalling on their exit strategy to move quickly and talk to their wealth manager, CPA, or an M&A advisor to explore their options and next steps.


Finally, we can’t ignore the impact that digitization has had on numerous facets of M&A activity as we headed into 2021, much of it influenced by the events of the pandemic.

Chiefly, virtual dealmaking is now firmly established and here to stay, even when the grips of COVID-19 finally start to loosen. Although there is no substitute for face-to-face consultations and negotiations, the flexibility that the use of video calls and similar technology offers may go a long way in helping deals over the finish line faster and easier.

With less dependence on arranging in-person meetings and appointments, this allows deals from further afield to be completed more successfully, and allows dealmakers, buyers, and sellers to be more agile in their approaches.

Meanwhile, the importance of digital technology across the whole spectrum of industries in the current environment will inspire companies to pursue acquisitions to fill any technology void in their repertoire. It is no shock that the technology sector logged 3,171 US deals valued at $447 billion in 2020 – 32% of total deal value.

But it’s not just technology companies that need to keep their heads up. Any business with a product, service or team that can help to diversify another organization and make it more sustainable will be more highly sought-after this year.

The pandemic has made people more aware of the fragility of businesses than anything since the Great Recession in 2009. Now, more than ever before, companies will be looking around for targets that can make them more secure in the most testing times.

Could 2021 be a record year for M&A?

Confidence is high in the world of M&A, and the momentum gathered in the closing months of 2020 shows no sign of dissipating in the early weeks of this new year.

As dealmakers become more comfortable in this challenging environment, and the reasons I’ve delved into above influence increasing amounts of deal activity, I don’t believe it is outside the realms of possibility that 2021 could set new records for our industry.

However, in order for the owners of privately held companies to fully capitalize on these encouraging conditions, you must be in the process of building a buyer ready business. And this will depend on how much you know about what buyers are looking for.

To enrich your understanding and put you in the best possible position to secure an optimal return on the investment made into your company, get in touch with our team at Generational Equity, or book your attendance at an upcoming Growth and Exit Planning Conference.

Ryan Binkley
President & CEO, Generational Group