M&A activity was modest in 2020 while 2021 portends growth

Leaders from various industries generally reported a modest picture of growth and M&A activity according to a new survey by Capstone Strategic, a leading strategic M&A advisory firm for the middle market. The survey was conducted in January and February 2021 and is the eighth annual survey of the market.

Capstone Strategic’s annual survey on middle market M&A activity reveals that 2020 was a modest year for mergers and acquisitions activity as COVID-19 did have a moderate impact on most industries. 65% of respondents stated that COVID-19 had a medium effect on their business in 2020. 59% respondents reported modest growth in 2020 as compared to 72% in 2019. However, the percentage of those who engaged in M&A or external growth activities in 2020 (43%) is similar to 2019 levels (41%).

Given the responses from our survey participants and our own observations of the marketplace, we predict robust M&A activity for 2021. In February alone, deals totaling $405.3 billion were announced globally, an increase of 45% compared with the same month last year, according to data from Refinitiv.

When it came to type of deal structure, outright acquisition continues to be the most popular form of external growth (61%) followed by strategic alliances or joint ventures.

It may be surprising to some, but cost is not the highest barrier to pursuing external growth. The time and attention demanded by the process is the strongest reason respondents did not consider external growth. For middle market companies, finding the right resources internally can be a challenge.

After the uncertainty caused by the COVID-19 pandemic, the market began to settle, and businesses regained confidence towards the second half of 2020. Most of our survey respondents noted a modest environment for growth and were increasingly optimistic about future growth. Undoubtedly the strong performance of the stock market and the vaccine roll-out under the new administration of President Biden played a key role in boosting optimism.

Looking forward to 2021, M&A activity will be strong. Strategic acquirers still have an advantage over financial buyers when it comes to acquiring privately-held companies. In addition to financial consideration, shared vision, strategic fit, and company culture remain critical factors for sellers. As we move into 2021, all of these dynamics will contribute to a robust mergers and acquisitions pipeline for both financial and strategic acquirers.

“As anticipated from our last survey results, the acquisition activity in 2020 did not reach the 2019 levels,” said David Braun, CEO of Capstone Strategic. “The 2020 survey and our own observations indicate that we will see a renewed interest in M&A activity due to pent up demand and supply in the marketplace. 2021 presents a unique opportunity for companies that decide to execute strategic acquisitions. M&A remains a proactive tool for middle market companies looking to augment their competitive advantage and accelerate growth.”

The full survey, State of Middle Market M&A 2021, can be viewed by clicking here.