M&A Activity in 2021: Opportunities Ahead for Business Transactions

The tone for M&A activity in 2021 was set by 2020’s theme: acceleration driven by necessity and opportunity. Industries forced to pivot rapidly, coupled with favorable market conditions and access to affordable capital, set the stage for strong M&A activity in 2021.

To understand how business owners can position themselves for favorable M&A transactions in a competitive market, we’ve analyzed 2020’s trends to forecast 2021’s activity. We also share what what business leaders need to do now to strategically bolster their company’s valuation during deal negotiations.

What 2020’s M&A Activity Means for 2021’s Deal Potential

Compared to 2021’s flurry of early-year activity, 2020 saw a slower start. Global M&A activity was sluggish, but on a more regional level, the KO team saw a strong start to 2020 among tech companies that had positioned themselves as innovators. Then the pandemic hit. The uncertainty created by the COVID-19 crisis slowed everything down. The market does not like uncertainty. This temporary freeze, however, didn’t last long.

By third quarter, M&A activity began to make a comeback; one of the quickest turnarounds we’ve seen. Based on KO’s client activity, and headlines in the national media, all indications point toward a very robust 2021. This has been driven by an environment that’s favorable for both buyers and sellers and an appetite to invest in technology and innovation. These trends are spearheading opportunities for M&A transactions.

Market Watch indicates that in August 2020 alone, tech sector M&A deals totaled $69.3 billion, which was 27% of all activity globally. Six of the largest 10 deals were related to technology. The pandemic accelerated trends that had already started – for example, how consumers buy goods and services. With everything moving to mobile and online in both B2C and B2B environments, investment activity shifted toward technology and innovation. Companies that have adapted have and should continue to do well in M&A transactions.

In September of 2020, we busted the myth that M&A deals weren’t getting done. My colleague Jennifer Rosenthal shared how we saw a shift from a seller-favorable market to a more buyer-favorable market. It wasn’t just opportunistic buyers snapping up distressed assets. 2020’s second half laid the framework for a strong 2021 across a diverse subset of buyers and sellers. A trend we also saw in 2020 was strategic buyers being more active and able to move quicker than financial buyers that needed to obtain third-party bank financing rather than relying on reserved capital.

A rush to get deals done led to a particularly robust end to 2020, building momentum for 2021. With the markets doing well, and a COVID-19 vaccine distribution underway, companies looking at potential M&A opportunities should try to better position themselves as eager buyers look to capitalize on favorable conditions. We advise having legal counsel involved in the early stages of this process.

M&A Activity: Negotiating Favorable Business Deals

The bright spot for 2021’s M&A activity is that both buyers and sellers are getting favorable deals. Of course, if 2020 taught us anything, market conditions can shift quickly. Bringing experienced M&A legal counsel to the table before negotiations begin is key to securing a successful deal. This ensures that you can achieve your short and long-term objectives through effective and efficient M&A transactions.

The macro trend we’re seeing is low interest rates that are making financing attractive for acquisitions. The low cost to obtain capital, and the fact that the Fed has pushed interest rates aggressively lower, has made it easier for acquirers to obtain necessary financing. This is particularly true for private equity buyers due to their increased accessibility to capital.

Sellers looking to maximize their position in M&A deals should engage with counsel early to formulate a strategy to get the best price possible.  Bringing in counsel after the M&A process has started can hinder your ability to adequately leverage all your assets.

From a seller’s perspective, leverage is the selling company’s greatest asset. Leverage is greatest right up until the seller signs a letter of intent. The letter of intent will in all likelihood include an exclusivity provision, such that the selling company cannot talk to other potential buyers for a period of time. Therefore, negotiating as many legal terms as possible, particularly indemnification-related terms, while negotiating the letter of intent makes sense from the seller’s perspective.

New dynamics playing out in 2021 on a macro level are worth watching from a business perspective. A new presidential administration, coupled with new regulations, potential changes to the tax code, and potential changes to the healthcare system could impact M&A activity in 2021. Even with these changes, 2021 is poised to be a robust year, which means businesses should position themselves to adapt fast and properly examine all opportunities ahead of them. Having M&A transaction legal experts gives business leaders a better chance to achieve these goals.

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John Gaddis is a corporate partner at Koenig, Oelsner, Taylor, Schoenfeld & Gaddis PC (KO Law Firm), an innovative corporate and commercial law firm with a team of experienced lawyers and a practical, efficient, business-focused approach. Founded in 2003 on the philosophy that a different approach delivers better value, our business-first legal and industry expertise helps established brands and emerging companies achieve meaningful business outcomes. Reach John at [email protected].