By Sydney Halleman in Charlottesville, Virginia, and Yiqin Shen in New York with analytics by Philip Segal
High multiples and increased M&A activity are expected to continue in the US after a strong performance in 1Q21, industry experts said during Mergermarket’s M&A Momentum: USA Webinar last week.
Corporates have over USD 2trn in cash on their balance sheets to execute deals, along with over USD 2trn in dry powder at private equity firms, said Rick Lacher, a managing director at Houlihan Lokey [NYSE:HLI], adding that he expects US deal-making to remain strong through this year and potentially into 2022.
He added that leveraged loans and high-yield issuances are at record high levels while loan pricing is well below the last three quarters of 2020, providing plenty of financing options for dealmakers.
Brent Steele, a partner at Sidley Austin, noted that deal activity is expected to continue its “exceedingly busy” pace in the first quarter throughout the year. Other than dry powder and cheap financing options, he saw special purpose acquisition company (SPAC)-related transactions as another driving force in the M&A market.
“We’re seeing unprecedented levels of activity on our platform in all categories,” said Mark Williams, chief revenue officer at Datasite Americas. Private equity firms have also accessed Datasite in record numbers from 4Q20 to 1Q21 to perform deal due diligence, he added.
US M&A activity remained strong in 1Q21, breaking records set in 4Q20, according to Mergermarket data. There were at least 1,595 deals worth USD 563bn recorded in 1Q21, up slightly by value compared to the previous quarter’s 1,708 deals worth USD 554bn. Combined deal value in 1Q21 was the highest since 2001 and data shows that the momentum continued into April.
TMT, healthcare, and industrials are the sectors with the highest M&A growth seen on Datasite, said Williams, adding that the platform has seen record activity across all sectors. Assets on the block are having no trouble attracting interest either, he said.
In the technology sector alone, there were 565 deals worth USD 223.16bn completed in the first four months of this year, worth 29.5% of all US M&A by value, according to Mergermarket data. Industrials and financial services are also among the top three sectors by deal value year to date.
Multiples and pricing are at record highs with no end in sight, said Lacher. "On the ground, we are seeing meaningful increases in multiples, as there is just way too much money chasing too few deals,” he explained.
For example, the veterinary industry has seen its EBITDA multiples exceed 20x, while ventilation and air conditioning (HVAC) services and pest control services saw multiples in the mid and high teens respectively, he added. These multiples are driven by their substantial market consolidation opportunities, even they are not necessarily technology-driven, he said.
“There has been a lot of multiple expansions and all of our competitors, including us, we're very aggressive in terms of what we're advising clients,” said Lacher. “And for those of us who've been around the M&A business a long time, these levels at these valuations are just so very surprising.”
Steele said that M&A multiples are as high as he’s seen in his career, adding that companies have increasingly been using earnouts and creative deal structures in recent transactions to bridge valuation gaps.
Panelists also forecasted a slowdown in distressed M&A as the US economy shows no signs of stopping growth. Lacher cited 37 reported bankruptcies in 1Q21, down significantly from 97 in 3Q20, paired with the US GDP’s 6.4% annualized Q1 growth as signs of the stabling economic climate.
“We've seen more restructurings than distressed asset sales,” Lacher said. “There will always be some, but I don't believe it'll be a major factor in the overall M&A market.”