M&A activity that declined sharply in the second quarter as the COVID-19 pandemic took hold and slammed the economy appears to have started rebounding after mid-year.
Private equity activity in particular picked up in the third quarter as firms resumed investing after a temporary halt because of the pandemic, said Tracy Larsen, co-chair of the Mergers and Acquisitions practice group at Detroit-based Honigman LLP and managing partner of the Grand Rapids office.
Private equity “certainly tapped its brakes and went on pause in most all transactions” when the pandemic hit so firms could focus on supporting existing portfolio companies, Larsen said. Firms began returning to the market this summer.
“We’ve seen significant activity in private equity deals that have picked up in the third quarter,” said Larsen, who expects a “very full Q3 and an even more full 4Q” for PE deals.
Automotive-related manufacturers “are attracting quite significant interest from private equity shops across the country,” he said. PE firms are also looking for strong platform companies “that have a solid base and either have technology or human capital that would allow it to be leveraged with the infusion of additional capital,” Larsen said.
PE-backed platform companies also are in the market for bolt-on acquisitions, he said.
In Grand Rapids, PE firm Auxo Investment Partners joined with the management team to acquire Paramount Tube — which makes spiral-wound tubes — and medical and pharmaceutical packaging maker Euclid Medical Products, both in Fort Wayne, Ind., from Indianapolis-based Precision Products Group Inc.
In Paramount Tube and Euclid Medical, Auxo acquired businesses with strong management teams that have potential to further grow organically and through bolt-on acquisition, Managing Partner Jeff Helminski said.
Most of the competitors for Paramount Tube and Euclid Medical are “small, mom-and-pop-type companies, and so there’s an opportunity to bolt on or roll up some of those as the time becomes right for them to transition,” Helminski said.
“Then there’s a series of opportunities that would be acquisitive from our perspective to expand our capabilities horizontally within some of the end markets that we serve,” he said.
Auxo presently has one small add-on deal in the pipeline that may close soon, and letters of intent for two more prospective acquisitions that were in process prior to the COVID-19 outbreak in the spring, Helminski said.
Since Labor Day, Auxo has seen an uptick in deal prospects. The firm internally targets 20 calls on deals a week. Through September, deal calls have averaged 23 to 24 a week, Helminski said.
“Deal flow has been really strong of late,” he said, although “the quality of the deals is hit and miss.”
Shifting deal flow
The pickup in PE activity comes after deal value nationally declined by 20 percent in the first half of 2020 to $326.7 billion across 2,173 deals, according to a recent report by PitchBook Data. Deal value declined by one-third in the second quarter alone.
In 2019, PE investments totaled $795.2 billion across 5,428 deals, according to PitchBook’s first-half report.
Present PE deal flow comes in part from deals that were delayed amid the pandemic.
Among middle-market advisors answering a mid-year survey conducted by the International Business Brokers Association, 37 percent said they had deals delayed in the second quarter and another 10 percent had deals canceled.
The increased activity by PE and other buyers of late occurred as more sellers were “coming back to the market” in July, driven in part by tax motivations and a desire to exit the business by the end of the year, Larsen said. He expects M&A to continue picking up through the rest of the year.
Barring “some type of substantial rebound in COVID,” combined with new government restrictions, M&A is “going to be really big in the third and fourth quarters of this year” for Honigman, said Larsen, who works primarily in the middle market.
“I signed up numerous sell-side engagements in the last six weeks or so. Sellers are coming back to the market and the buyers are there and competitively bidding, and the valuations are still there and strong,” he said. “Just from the activity I see within the group, everyone’s busy. We’re going to have a very big finish to the year.”
Honigman a leader
Still, given the depths of the decline in the second quarter, Larsen expects a little lower deal flow overall for all of 2020 than 2019, he said.
Among the recent deals Larsen led was the August sale of Aviation American Gin, previously owned by actor Ryan Reynolds, and other brands by New York City-based Davos Brands LLC to U.K.-based Diageo, the world’s largest spirits company, for $610 million.
PitchBook recently ranked Honigman sixth for most active law firms in M&A deals in the U.S. for the second quarter, and eighth globally. The law firm ranked second nationally as most active in PE deals and fourth globally, according to PitchBook.
Larsen calls the rankings “unprecedented” among Midwest-based law firms that are competing against national law firms.
Helminski at Auxo Investment Partners also reports more sellers in the market.
“There was a gap in the middle of the year when COVID hit and the investment banking community I think put a number of things on hold that they were planning to come to market with, and post-Labor Day we’ve seen more deals shake loose and come into market,” he said. “I think you’ve got this natural ambient level of deal flow of sellers who reached a point where it’s time to transact.”
Some sellers want to close by the end of the year because they’re concerned about what may occur to the capital gains tax if Joe Biden wins the presidency. Others are looking ahead and wondering about what the economy may do in the next year or two.
“The reality is it’s going to be a more turbulent economic market going forward than it has been the last few years,” Helminski said, and sellers that were perhaps a few years away from a transaction may accelerate the decision. “I suspect we’re going to see a ramp up in deal activity, both through the rest of the year and that’s going to continue into ’21.”
Even with increased activity and sellers, PE deal flow may not return to pre-COVID levels until next year, according to the IIBA. Nearly half of the advisors who work with small businesses and the lower end of the middle market said they do not expect activity to return to pre-March 2020 levels in the first or second quarters of 2021, according to the IBBA’s most recent quarterly Market Pulse report.
Matt Miller, managing director at Grand Rapids investment bank and M&A firm BlueWater Partners LLC, also said they “are restarting their deal-sourcing efforts.” BlueWater expects deal volume “to stop its slide, but remain muted through 2020,” Miller wrote in an email to MiBiz.
“Valuation multiples should hold up, especially for strategic acquisitions and sellers who are performing well during COVID-19,” Miller said. “Financial buyers are likely to be more active than strategic buyers as the former are eager to put capital to work and the latter are focused on their own balance sheets and liquidity.”