M&A Market Monitor – April 2021

ArkMalibu Industry Snapshots, First Quarter 2021

We invite you to read our M&A analysis and access the 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.

U.S. & Canada M&A Overview

• 1Q21 deal count in the U.S. and Canada maintained its strength with 5,620 transactions closed during the quarter (110% of the 5-year Q1 average)
  • Marks the highest quarterly deal count during this fourth M&A wave
• All major Global Industry Classification Standard sectors experienced positive growth in deal size and count during the quarter on a year-over-year basis
  • Despite being down 25% from the Oct-Dec 2020 quarter, aggregate deal value during 1Q21 finished at 187% of 1Q20 and 114% of the 5-year Q1 average
• Median deal pricing ended 1Q21 at 11.6x EBITDA
  • Up 9.4% from 10.6x across 2020 and in line with the previous 4-year (2017-2020) average
• Above average software M&A appetite extends into 1Q21 driven by companies forced to adapt to software solutions due to the COVID-19 shutdowns
  • Excluding real estate operating entities, the application software industry increased its share of total transactions to 9% (120% of five-year average Q1 transaction count)
• Strong global M&A backdrop supports continued strength in the U.S. & Canada market
  • Global mergers and acquisitions activity totaled $1.3 trillion in deal value during 1Q21; Up 94% compared to last year and represents the highest year-to-date figure since 1980
    • The United States accounted for roughly 50% of total deal value globally
  • Massive “dry powder” supports continued acquisition activity in 2021
    • $262 billion in implied buying power from the SPAC community (assuming a 2.7x leverage multiple)
    • $693 billion in cash and equivalents on strategic acquirers balance sheets
    • $1.9 trillion in “dry powder” from global private equity
  • 80% of IPO’s in the first quarter were SPACs, signaling continued momentum after a record 2020
    • 1Q21 saw 301 total SPAC IPO transactions netting $98 billion in gross proceeds
    • This outpaces all of 2020’s count and value (in only 1 quarter); annualized 2021 count and value would represent a YoY increase of 4.9x and 4.7x respectively
    • Year-to-date, 295 SPACs are actively searching for takeover targets
    • While growth has been impressive, cracks are beginning to emerge as evidenced by the 3x increase in dollar value of short shares for SPACs; $724 million in short shares as of March 2021. Also, the PIPE market has stumbled recently.

U.S. Equity Market Overview

• U.S. equity markets continue to surge higher on the heels of new stimulus and falling COVID-19 cases
  • As of March 2021, the 7-day moving average of new cases in the U.S. is 34% of that in Dec 2020
• After a short-lived dip in January, all major U.S. indices posted strong gains during 1Q21 led by performance in small cap stocks:
  • Russell 2000 (+12.7%), DJIA (+8.3%), Russell Mid Cap (+8.1%%), S&P 500 (+6.2%), and Nasdaq Composite (+3.0%)
• Similar to last quarter, cyclical and economically sensitive stocks outperformed during 1Q21, reinforcing investor belief in a broad economic recovery
  • Technology (+1.9%) was the worst performing Morningstar sector index during the quarter while energy (+30.7%), financial services (+13.0%), basic materials (+11.3%), and industrials (+11.2%) were the top performers
  • All major value indices outperformed their growth counterparts during the quarter
• Analysts estimate +23.3% earnings growth for S&P 500 companies during 1Q21 and expect double digit earnings growth for the remaining 3 quarters of the year
• Investors appear to be immune to market valuation concerns as the NTM P/E ratio for the S&P 500 ended the quarter at 22.7
  • 27.5% higher than the 5-year average and 42.8% higher than the 10-year average

COVID-19: Stimulus and Improving Economic Indicators

• Fiscal stimulus, continued vaccination roll-out, and rebounding investor optimism support the projected 7% U.S. GDP growth rate in 2021 (would mark the largest annual growth rate since 1984)
  • During the quarter, a third COVID relief package was passed totaling $1.9 trillion (~14% of GDP)
    • $1,400 stimulus checks for qualifying individuals; $300 of additional unemployment benefits per week through early September; $1000 increase in the child tax credit to $3,000 per child
    • $160 billion in funding for vaccine and covid testing program; $360 billion for state, local, and territorial governments; $170 billion for school reopening efforts
    • $29.9 billion in grant money targeted at the restaurant and live entertainment industry
  • Renewed optimism of the U.S. consumer marked by the Conference Board’s Consumer Confidence Index increasing 21% in March to 109.7
    • Although TSA traveler throughput data remains at 59% of 2019 levels, many major airlines are seeing rising demand and one (United Airlines) believes that it is possible to hit 2019 levels by the end of 2021
    • With a majority of states now opening up vaccines to all adults, 37% of adults have received at least one dose (16% of the total population are fully vaccinated)
  • 916,000 additional jobs were added during March, representing the biggest monthly gain since August 2020 and 2x increase from February
    • The unemployment rate continued its descent from the start of the pandemic ending the quarter at 6%; Goldman Sachs is estimating 4.1% unemployment by the end of 2021
    • 43% of jobs added were leisure, hospitality, and construction end markets
  • The average speculative-grade bond spread over U.S. Treasury bonds hit a record low during February of 3.89%
    • Marks the lowest spread since 2007 and indicates an increased risk appetite by investors as the economic conditions continue to improve

ArkMalibu Approach

Our team at ArkMalibu is proud of our conflict-free business model, M&A expertise and value-added processes, which continue 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.