M&A Quarterly Review — 3rd Quarter 2020
Middle Market M&A volume and value contracted but top performers hung on to high valuations
- Deal volume and value have been trending downward during 2020, a development exacerbated by COVID-19
- Total value contracted sharply in 2Q20, reaching only $98.9 billion, or less than half of the previous quarter’s value
- Valuation multiples remained unchanged in 1Q20 and 2Q20 at 7.4x EBITDA on average
Buyers are awash in capital but focused on preserving liquidity
- Leveraged loan volume set a record in August, driven by a desire for liquidity as the pandemic unfolds
- Corporations increased their cash holdings to a record $1.8 billion in 1Q20 to shore up their balance sheets
- Global private equity dry powder reached a high of $1.5 trillion at the end of 2019
Economic indicators continue to change and send mixed signals
- The negative trend in GDP that began in 1Q20 accelerated in 2Q20 as the U.S. reacted to the coronavirus
- The Leading Economic Index® (LEI) has been improving since its recent bottom in April 2020
- After a bounce in June, consumer confidence has been waning, which will likely dampen consumer spending
After a brief pause, investors are restarting their deal sourcing efforts
- Volume will likely stop its slide but remain muted through year end 2020
- Valuation multiples are expected to hold up in strategic acquisitions and for sellers who are performing post-COVID
- Eager to put capital to work, financial buyers are apt to outpace strategic buyers who are preoccupied with liquidity
Risks to our view
- A resurgence of COVID-19 ahead of therapies and a vaccine or in combination with the seasonal flu
- Further deterioration of consumer confidence and consumer spending, which was powering the economy
- As the PPP, FPUC and other economic stimuli run out, businesses and consumers start to feel more pain
