M&A Activity May Heat Up With Stimulus Package, Covid-19 Vaccinations

The landscape for mergers and acquisitions is constantly changing, with new trends emerging every year. If anything, this dynamic has been accelerated by 2020’s dual drivers of the Covid-19 pandemic and the U.S. election cycle.

Looking forward in 2021, the following are possible drivers of change and their potential impact.

New Administration, New Priorities

The Biden administration is forging ahead full steam on a $1.9 trillion stimulus. This is, by virtually every measure, the single largest proposed spending package in U.S. history.

The classic understanding of the impact on the economy of supply-side stimulus like this is that, by injecting more money into the overall economy, it will likely create inflation. The Federal Reserve has, in the past, taken an aggressive stance on accelerating inflation, using interest rate-based tools available to it to mitigate its impacts.

If these trends hold, one would expect a rising interest rate environment in 2021, which will increase the cost of borrowing and in turn the cost of capital for acquisitions, especially in the middle market, potentially dampening activity.

But that might not hold this time. First, rates are at historically low levels. Second, with historic levels of unemployment (including the number of persons not even participating in the labor market) and general dislocation in the economy, it may take much longer for increased liquidity to have a real impact on inflation, and thus rates. Finally, the Fed has recently signaled a more nuanced approach toward inflation.

For these reasons, one might be well advised to discount conventional wisdom and expect continuing strength in M&A finance markets.

Accelerating Vaccinations—Accelerating Deals?

Vaccinations against Covid-19 are generally expected to be a big driver of economic recovery in Western economies; more people out, traveling, and consuming means more service jobs and economic development generally. But how might accelerating vaccination rates impact M&A markets in 2021?

While the U.S. financial economy, including M&A markets, successfully adapted to a remote work environment, there has undoubtedly been a drag from the inability to “kick the tires” in person and in real time. Being able to get on a plane and go visit with targets, financing partners, and deal intermediaries should cause M&A in stickier assets to accelerate.

What areas might see the biggest impacts? Likely the industrial sector generally, as it becomes safer and easier to do site visits, and food and hospitality as a general economic recovery takes hold.

#InfrastuctureWeek: Is It Finally Time?

Most economic commentators seem to agree that the stimulus noted above is only the first in a series of likely spending initiatives. During the Trump administration the number of false starts on infrastructure was so large that “infrastructure week” became a Twitter meme, and the Biden administration may have a real chance at passing meaningful infrastructure legislation.

Interestingly, a number of transactions closed in 2015 and 2016 by private equity investors that were based on the expectation of a Clinton administration that would have been focused on infrastructure reform. Those bets have, as a group, underperformed other investments of that vintage, and many have become lender-owned.

However, this year might be a great environment for turn-around investing in infrastructure, especially acquisitions of troubled investments from lenders that are more interested in cleaning up balance sheets than realizing a high level of equity returns.

Restructuring: Is This the Year Bankruptcy Comes Back?

One notable trend from—and since—the Great Recession of 2008 was a general absence in large bankruptcy restructurings. As financing markets have become more sophisticated, and more dispersed, many restructurings are handled out of court through negotiated settlements with lenders, many of which are non-bank lenders that are less reluctant (and more able) to hold distressed assets on their own balance sheets.

These kinds of deals have been referred to in the past as “amend and pretend” restructurings, and 2021 may see these deals continue to get done.

However, one might also reasonably expect to see a resurgence of Chapter 11 filings, for one simple reason: bandwidth. The number of distressed assets working their way through the system all at once in 2021 may force lenders to push for sales on a faster timeline, and a sale through a Section 363 auction process might drive faster execution than a “hold until the market turns” approach.

No crystal ball is perfect, especially after the cracks caused by Covid-19 and the 2020 election cycle. All that can be said with any certainty is that some people holding assets are going to want to sell them, and most of them will find buyers. When and how, on what terms, and with what kind of financing will become apparent only with time.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Brooks Giles is a partner and deputy general counsel at Katten in the firm’s Corporate Department in Chicago. He helps equity investors and business owners buy and sell operating businesses, and many of his transactions involve the purchase of private companies by private equity firms.