ClearRidge Acquisition Outlook for Spring 2020: Q4 Transaction Report

We are in the first quarter of 2020 and deal data is now available through the end of the fourth quarter 2019. In this report, we review our region’s most active industry sectors and offer an outlook for Spring 2020.

Overall, deal valuations remain high, even though 2019 had been a weaker year for volume and value of transactions. Founder-owned, privately held companies in active industries continue to be in high demand for acquisitions. Furthermore, we have the election which may accelerate deal making through November.

How does this Presidential Election cycle affect the sale of a business?

In most prior election years with an incumbent president, there had been a slowdown in mergers and acquisition (M&A) activity from October into mid-November, but how about 2016?

In 2016, most experts got it wrong. Prior to the 2016 presidential election, commentators were predicting a slowdown in mergers and acquisitions after Labor Day, which was expected when there was no incumbent in the race, but the opposite occurred — 2016 was an exception and may be the new rule.

According to Dealogic, U.S. companies struck $248.9 billion of merger and acquisitions in October 2016, the month prior to the presidential election, topping the previous record from July 2015. In fact, in the week before the election there was a single-week deal value record of $177 billion in mergers and acquisitions.

At ClearRidge, we have a sense the same may be true in 2020, as we have experienced a significant pickup in January with businesses preparing to sell in 2020. Companies are benefiting from a low-cost credit market, solid economic growth and a promising outlook.

For business owners looking to exit, many have concerns of a slowdown under a new administration. If they are looking to sell in the next five years and have had a strong 2019, there may be no better time to sell in the foreseeable future. This is especially true for founder-owned companies in the middle market, with revenue from $10 million to $100 million. There is potential to miss out on this window and to hold out for the next positive cycle three to five years out. None of us can accurately predict the future and closing a transaction before November 2020 would lock in recent valuation gains and eliminate future risk.

How about after the election in 2021?

Analysts were also wrong in 2016 about the deal environment after the election. In April 2016, there was a survey among M&A transaction professionals by Intralinks Global that predicted a 45% slowdown in U.S. deal-making in the event of a Trump administration. The opposite occurred, with a buoyant economy and increased deal making through the end of 2016 and 2017. We don’t yet have 2020 survey data, but we know there is uncertainty leading into the 2020 presidential race, which is challenging for the deal market and for CFOs.

Executives need to understand both scenarios; the re-election of the Republican administration or a possible new Democrat administration and the impact on the business environment.

We are currently in a favorable tax, regulatory and business climate. Steering clear of political party affiliation, another four years of an incumbent administration is mostly understood by company executives, while a new administration would bring uncertainty in regulatory policy, anti-trust policy, monetary policy, and tax policy, all of which can create challenges or opportunities for business and business acquisitions.

M&A Transaction Report by Sector

I. Aerospace

Solid trends in commercial air travel and defense spending support continued deal making activity in 2020.

Highlights:

• Deal value increase year over year is largely impacted by the Q2 UTC/Raytheon deal.
• Analysts do not predict significant headwinds in 2020, although we are watching the recent Middle East situations and the upcoming election as factors that could impact the sector.
• Activity driver: The US Department of Defense implemented new cybersecurity contractor standards in January 2020 (Cybersecurity Maturity Model Certification). Hackers target smaller contractors with typically weaker cyber defense, but valuable data from larger companies. Small companies must meet the new requirements to win Pentagon contracts.

II. Chemicals 

Chemicals sector survey of the Phase I US-China trade agreement was inconclusive; deal activity remains muted with this uncertainty, in addition to ongoing geopolitical tension and the future possibility of a slowing economy.

Highlights: 

• Due to a couple of megadeals in Q3 2019, deal value finished strong for the year, but analysts expect the headwinds of trade tensions, economic concerns, and an uncertain geopolitical environment to continue in 2020.
• Specialty Chemicals remains the most attractive sub-sector with high interest and valuations.
• As companies seek to scale core businesses and spin-off non-core businesses, and cash continues to be available for both corporate and private equity buyers, analysts expect the Chemical sector to be active, but relatively flat in the coming quarter.

III. Construction and Engineering

The strength of Q4 2019 was not enough to overcome sector headwinds and a decreasing in total deal value in 2019 for the third consecutive year. On a regional level, there were significant differences in C&E performance and M&A activity.

Highlights:

• Single-family housing permits increased 0.8% to 918,000 units in November, the highest number since July 2007. Single-family homebuilding increased 2.4% in November. This is a positive indicator for homebuilding and related industries.
• The US construction market is expected to growth 1.7% in 2020. Continued urbanization will demand upgraded infrastructure, in addition to increased housing needs.
• The trade friction and geopolitical tensions which contributed to the decline in deal making have softened, leading analysts toward optimism for 2020.

IV. Energy: Oil and Gas

Analysts attribute muted Q4 2019 M&A activity to investor skepticism and limited access to capital. Capital availability, continuing pressure for shareholder returns, and disciplined spending within cashflows are expected to influence deal making in 2020.

Highlights:

• Investors remain concerned about low returns on invested capital due to oversupply and a resulting long-term ceiling on commodity prices.
• The upstream segment led in deal value and volume for 2019 with 52% of deal value and 49% of deal volume. Midstream followed with 40% of value and 41% of volume. Shale activity dominated the sub-sectors with 50% of volume and 67% of value.
• Oil Field Services faced significant headwinds during 2019, which analysts expect to continue in 2020, although there are certain sub-sectors in high demand.
• Increased deal activity in the future could result from production cuts by OPEC, progress in trade relations between the US and China, and more interest in US energy assets due to geopolitical tension.

V. Healthcare

Excluding megadeals from 2018 and 2019, the sector saw a 77% increase in deal value and Q4 2019 was the highest single quarter deal value in five years.

Highlights:

• Long Term Care continues in the top spot for deal volume, followed by Physician Medical Groups. The Other Services and Managed Care sub-sectors led deal value.
• Analysts expect the following trends to continue: i) interest in new technologies that improve workflow and productivity; ii) cross-industry and vertical integration deals; and iii) horizontal integration within sub-sectors to increase competitiveness and combat volume pressure.
• The 2020 election may impact healthcare deal activity later in the year, with the ACA and other proposed alternatives being a defining topic of the election.

VI. Industrial Manufacturing  

As analysts watch trade tensions and lower GDP as indicators of a possible economic downturn, they believe some deal makers will be cautious, while others will be opportunistic and move swiftly to acquire value through M&A activity. Within industrial manufacturing, the end-market is a key driver of sub-sector M&A activity, which may differ from broader sector trends.

Highlights:

• As reported previously, high capital availability from private equity and corporate players could allow for an attractive deal environment, even during an economic downturn.
• Declining deal volume in 2019 was attributed largely to high valuations, in addition to trade and economic uncertainties.
• Three megadeals account for nearly a quarter of total deal value for 2019. Analysts expect megadeals to account for an even larger part of deal value in 2020, but deal volume will be flat or decrease below 2019.

VII. Transportation, Logistics, Distribution

Transportation and Logistics finished strong in 2019 with the highest deal value since 2015.

 Highlights:

• Analysts attribute the 20% year-over-year deal value increase to increased cross border investing, financial investor participation, and emerging markets activity.
• Passenger Ground and Logistics together accounted for 52% of deal volume in 2019.
• Passenger Ground had four of the top ten value transactions and 35% of total deal value in 2019.

What should you do about selling a business in 2020?

If you would like to remove the uncertainty of a Presidential election, you should complete the sale of your business before October 2020, which is eight months away. Most founder-owned companies need deep pre-emptive due diligence to clear hurdles in a successful transaction. Current high valuations and a late stage economic cycle make it more challenging to clear due diligence in a transaction, as buyers are bringing in every type of outsourced due diligence to scrub every detail of the business, both historically and as an integrated entity under new ownership. In recent transactions, we've had more than 35 outside due diligence professionals engaged on the other side of a single transaction - ranging from benefits, HR, accounting, tax and legal to environmental, operations, pricing and margin analysis, information technology and intellectual property. Diligent preparation is critical, and it takes time. You would need to start the process today.  

How Can ClearRidge Help You Sell Your Business?

Clients trust ClearRidge to deliver a confidential and discrete preparation and sale process. We remove obstacles to close a transaction and ensure only the most qualified buyers with the capital commitment make it to the closing table. 

ClearRidge is the leading M&A advisory firm in our region, closing more transactions than any other firm and recognized for the quality of our work and success at managing and arranging transactions for our clients’ companies. For further information on our team, industry expertise and transactions history, please visit www.ClearRidgeCapital.com. 

Sources: This report has been compiled from reports and research including federal data, independent analysis, Reuters, Janes Capital Partners, Kiplinger, PCE-Companies, Mergermarket, PricewaterhouseCoopers, and SDR Ventures.

Note: In the report, you will see that some of the deal data is for larger public companies. The most reliable and timely data tends to be for the larger companies in each industry; however, deal activity of the largest corporations is also a good barometer for M&A activity among midsized companies in the same industry.

For further information, please visit www.ClearRidgeCapital.com

Recent Transactions

For information on the above ClearRidge deals: 

www.clearridgecapital.com/recent-transactions/.

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