Editor’s note: Allan Maurer is a cofounder of WRAL TechWire and a frequent contributor, focusing on startups as well as life science and emerging technologies. Startup Focus is a regular part of TechWire’s Startup Monday lineup.
RESEARCH TRIANGLE PARK – Startups and emerging entrepreneurial companies looking for “exits” other than IPOs faced a lot of challenges due to COVID. Will a new year be better? Looks that way.
While private equity merger and acquisition activity in 2020 was challenging due to the pandemic, it is recovering and dealmakers are optimistic about 2021, according to the Akin Gump Global Private Equity M&A Survey, 2021.
The major takeaway from the survey is that activity centered on resilient industries such as technology, health care, and consumer goods as the top three sectors. Retail and real estate dragged the bottom. The bifurcation trend is expected to continue through 2021.
Sectors adversely affected by the pandemic, restaurants, health clubs, venues, were also low on the M&A activity scale, but the report notes some affected sectors may offer attractive targets at bargain prices in the future.
“Certain companies currently have sky-high valuations – the Covid Premium – because they continued to do well despite the pandemic,” said Partner Tom McCaffrey. “That includes health care and tech-based companies. There are also companies in other sectors that have received a valuation bump based simply on the fact that their business stood strong through the pandemic.”
Even so, 2020 slowed M&A activity even in those sectors.
According to PitchBook, technology M&A activity decreased at a relatively slow rate through the course of 2020, falling from 4,708 deals worth $635.9 billion in 2019 to 4,052 deals (-17 percent) worth $526.5 billion in 2020 (-14 percent).
Health care M&A volume and value also declined at similar rates, from 2,544 deals valued at $516.3 billion in 2019 to 2,129 transactions (-16 percent) worth $447.5 billion in 2020
The report offers a primarily optimistic picture going forward. The vast majority of its respondents, 75 percent, were optimistic about M&A activity and were positive or very positive about the outlook for deals in the next 12 to 18 months.
Akin Partner Gavin Weir noted “optimism about M&A is well-founded. There’s a lot of dry powder and pent-up demand.” Private equity firms are sitting on a whooping 1.5 trillion of dry powder, according to Pitchbook.
A majority of those surveyed expect future valuations to be higher or near the same, narrowing the gap between buyer and seller expectations, facilitating deals.
It notes many companies postponed planned exits due to pandemic conditions, but the delays are not expected to last more than six months to a year. In North Carolina, as elsewhere, some companies have already chosen acquisition exits rather than IPOs or fund raising.
One obvious consequence of COVID-19 on business strategy, the survey reports, has been the acceleration of digitalization across all sectors, prompting corporates to turn to M&A to accelerate digital capability. In the retail space, for example, U.S. retailer Target acquired the technology assets of same-day delivery platform Deliv to boost online capability5.
This bodes well for the Triangle’s many startups and established companies digitizing, automating, or enabling everything from senior living communications to exercise and music lessons.