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After a collapse in the spring, US M&A activity has rebounded strongly in the second half of 2020, and the market is well-positioned to carry this momentum into 2021.
Here are five themes that are likely to drive M&A in 2021:
1. Sound fundamentals will support activity
The US economy is forecast to return to growth in 2021, with economists anticipating GDP to rise by 4.2 percent for the year. Interest rates remain low, at less than 0.25 percent, and stock markets already appear to be looking beyond COVID-19, with the Dow Jones cresting to record highs at the end of 2020.
This stable economic outlook for the coming year stands in stark contrast to the volatility and uncertainty of 2020, and will give dealmakers a more solid backdrop against which to transact.
2. COVID brought lasting change— M&A will help companies adjust
COVID’s legacy for the economy will extend long after vaccines are rolled out and infection rates have declined.
The pandemic has highlighted how crucial technology has become for service delivery, engaging with customers and business continuity. More companies will have to turn to M&A to strengthen their digital infrastructure and tech capability.
COVID has also sharpened the focus on core business lines, and many companies will consider divesting non-core assets.
Specific sectors that have been directly affected by lockdowns, such as real estate and retail, are also expected to see increased volumes of deal activity. This will involve distressed acquisitions as well as defensive consolidation plays.
3. PE and SPACs will have to deploy
PE firms are sitting on more than US$1.7 trillion of dry powder and SPACs have raised more than US$60 billion in 2020 according to Dealogic.
The clock is ticking on this capital for both SPACs and private equity firms. As a result, SPACs and buyout houses will be focused on transacting after a slow year for deal flow over the past 12 months.
The rise of SPACs is also expected to increase competition for assets, and therefore keep multiples high.
4. Stability will reinvigorate the middle-market
The second half of the year was characterized by a frenzy of activity at the upper end of the market. The middle-market, however, saw value and volume drop year-on-year.
Middle-market firms have proved difficult to value in 2020, amidst the high levels of uncertainty and market volatility.
But the mass vaccination campaigns now underway in the US and around the world, as well as a clear election result in November 2020, should help clear the uncertainty plaguing M&A markets, and may encourage mid-market deals to return.
5. A Biden tax increase could nudge more deals to market
Biden’s tax plan calls for an increase in capital gains tax for high earners from 23.8 percent to 39.6 percent. If this happens, it could take more than a year for this increase to be implemented.
Tax issues are rarely the primary catalyst for deals, but those already contemplating deals could be incentivized to strike before changes come into effect.
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