M&A Market Monitor – April 2020

ArkMalibu’s M&A Market Monitors are now available.

COVID-19: The Black Swan Appears

The sudden stop of so many businesses due to government mandated lockdowns has materially affected the M&A market. Large deals came to a virtual halt while the middle market held on to most of its activity. Average pricing for those successful transactions was down a modest 10%. Considering the massive losses in the stock and high yield bond markets, the M&A market was relatively stable. That said, many transactions have been postponed or cancelled. The banks and capital markets are not as accommodating as they have been for most of the last 5 years.

The U.S. Federal Reserve moved quickly to provide massive liquidity to markets by cutting rates a full percentage point, opening new lending facilities, and launching a $1 trillion quantitative easing program. U.S. lawmakers worked quickly to pass a $2 trillion relief package aimed at providing a lifeline to individuals and small businesses. The swift deployment and vast scope of these measures is unprecedented and has resulted in a sharp rebound in markets from the lows of March 23rd.

As we enter the 2nd quarter, more than 90% of the U.S. population is under social distancing mandates, forcing individuals to adopt new technologies more rapidly. Industries ripe for opportunity include virtual reality, cybersecurity, cloud kitchens, education, hygiene and telemedicine. We also expect massive new investments in our supply chains in order to lower risk going forward.

Our clients have responded positively and we are working with a record number who want to be prepared for a strategic transaction in the second half of this year and next year.

U.S. & Canada M&A Overview

Median deal pricing in Q1 2020 came in at 10.5x EBITDA, down from 11.7x in 2019 and down from 11.3x in 2018.

Disclosed activity slowed dramatically. The middle market was one of the sole bright spots in the space as it ended the quarter at only 25% down from its 4Q 2019 marks in deal volumes and 34% in deal value while large market deals notched staggering declines of 60% in deal volume and 75% in deal value. We expect middle market deals to accelerate in the second half of 2020 as acquirers continue to seek inorganic growth opportunities, platform companies, and bolt-on acquisitions.

Strategic buyers accounted for a steady 71% of M&A transactions in Q1 and financial buyers made up the remaining 29% of deals as they seek opportunities to deploy record amounts of dry powder ($1.45 trillion).

U.S. Equity Market Overview

The longest bull market in U.S. history likely came to an end this quarter having lasted nearly 11 years with the S&P 500, Russell 1000, and Dow Jones posting negative quarterly returns of  -19.6%, -20.2%, and -22.7%.

All industry sectors were negatively affected by the COVID-19 market shock, albeit some much more than others. Energy led all S&P 500 sectors down as equity values fell 51% due to massive supply concerns (Russia and Saudi Arabia fail to cut production) and a substantial drop in demand (jets, autos and industries). Information technology (-11.9%), Consumer Staples (-12.7%), Healthcare (-12.8%), and Utilities (-13.5%) were relatively insulated as constituent companies largely benefited from a flight to quality and the nearly instantaneous shift in consumer habits, behaviors, and preferences.

ArkMalibu Industry Snapshots

We invite you to access the M&A Market Monitor links below where you may download detailed reports containing M&A trends and data from 17 industries. Please feel free to contact us at 513-583-5413 to discuss how the information presented in each report relates to your business and its own unique set of value drivers.

Our team at ArkMalibu is proud of our conflict-free business model, M&A expertise and value-added processes, which continues to deliver results that far exceed the expectations of our clients, the one-time sellers. We would be delighted to listen and then help you navigate the M&A market in achieving your goals.