The forbes m+a group 2021 ma market outlook v final
1. F i r m O v e r v i e w
CONFIDENTIAL
December, 2020
2021M&AMarketOutlook
2. Introduction& Today’sAgenda
2
Speaker Introductions
2020 M&A Market Review and Outlook for
2021
Panel Discussion
Question & Answers from Webinar
Participants
Agenda
2021 Outlook Panelists
Troy Keller
Dorsey & Whitney LLP
James Morgan
The Forbes M+A Group
Webinar Agenda
We are pleased to host today’s webinar and have assembled a panel of industry leaders across the M&A advisory,
law, corporate banking and financial sponsor industries. We look forward to your questions as we discuss the
outlook for the M&A transaction environment over the coming year.
Brett Stohlton
Peterson Partners
David Stahl
Hillcrest Bank
Please Direct Any Questions for the Panel to:
James.Morgan@forbesma.com
Participant Questions & Answers
3. WhyForbes?
3
In managing the ownership transition of a closely-held company, the old adage that
“the devil is in the details” is widely underestimated.
At THE FORBES M+A GROUP, we are hyper vigilant about details – not only based on
the merits of the phrase above but because, as our tagline reveals, we recognize the
“deals” are also in those details. The best deals. The ones that offer the most
strategic and financial value to all of the key stakeholders involved in the
transaction.
We find ideal targets,
not just the easy ones,
and compel them to
compete.
We fully grasp and
internalize clients’
goals.
We understand
clients’ businesses
exhaustively and tell
their stories
meticulously.
We design a
comprehensive
blueprint of each
client’s best future.
We advocate fiercely
for our clients,
creating extraordinary
outcomes.
5. The first quarter of 2020 exhibited a level of momentum underpinned by business confidence, strong capital markets
and favorable economic policy. The global pandemic caused a deep contraction with no clarity as to timing
nor shape of recovery.
5
Pre-Covid Valuations Elevated but Activity Remained Strong.. ..Dire Outlook & Predictions
Sources: The Forbes M+A Group, market data.
Prelude– February, 2020, the Calm Before the Storm..
“7 is the new 5”: ..multiples
remain elevated.., .. reflecting
increased process competition
and significantly greater capital
..”
Widescale
unemployment
Bankruptcy, especially
within small &
medium enterprises
Dislocation in global
trade flows and supply
chains
Multiplicative knock-on
impact from lowered
consumer spending
Lowered public sector
tax revenues
Questions Surrounding
Economic Outlook and
Corporate Activity
“Access to capital and scarcity
of ..targets have increased
process competition and
resulting valuations
”
“..a comparison of public
trading levels ..would imply
difficulty in the ability to
execute on M&A strategy in the
current environment
”
80
100
120
140
160
Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20
S&P500Index(Jan.2017=100)
6. The “once in one hundred year” event triggered a co-ordinated response from multiple levels of government that
hadn’t been seen for twelve years. This level of support aided a gradual rebound in capital markets and business
confidence, mitigating most downside risks.
6
Rebound, Stabilization in Public Market ValuationsStrong Government Support...
Sources: American Action Forum, U.S. Federal Reserve, Trading Economics and American Bankruptcy Institute.
..Only a Partial Dumpster Fire?
PPP Loan Issuance
Assets Purchased, Fed. Res.
..Confidence, Ch. 11 “No-Show”?
Monthly ISM PMI
Av. Monthly Ch. 11 Filings
60
75
90
105
120
Jan-20 Jul-20
S&P500Index(Jan.2020=100)
$0
$200
$400
$600
1-Apr 1-Jun 1-Aug
$Billions
$0
$10
$20
$30
Apr-20 Jul-20 Oct-20
$Billions
250
500
750
2017 2018 2019 YTD 2020
000sISMPMIIndex
30
50
70
Apr-20 Jul-20 Oct-20
7. 7
U.S. Mid-Market M&A – “Down, but Not Out” Heading into the End of 2020
Source: GF Capital, Pitchbook.
Lowered TransactionLevels, Stable Valuations
Levels of deal activity softened but remained resilient. By Q3, valuation levels for closed transactions were largely in-
line with historical levels. Elements of uncertainty remain, but transactions in the right sector, structures and stories
are being completed.
Middle-Market Deal Activity Average EV/ EBITDA Trans. Multiples Private Equity Participation
Activity in Q2, 2020 softened as the number of suspended or terminated transactions rose. Estimated 0.3 – 0.4x “Covid Effect”
reduction in deal multiples while average equity financing components rose to 56.1%
Q3 multiples and deal activity levels have stabilized, with sub-$100mm EV transactions dominating the landscape (68.7%)
Private equity participation (39.0%) has reverted to historical levels, contributing to the high level of add-on deals (73.4%)
Sentiment from market commentators reflects an element of relief, but optimism is tempered in coming months by issues related to
vaccination program implementation, as well as timing for federal government stimulus
0
30
60
90
Q3 Q4 Q1 Q2 Q3
NumberofClosedTransactions
6.3x
6.5x
6.8x
7.0x
2017 2018 2019 YTD 2020
EV/EBITDA,$10–100mmTV
20%
30%
40%
50%
Q3 Q4 Q1 Q2 Q3
%Sponsor-BackedTransactions
2019 Average: 76
2019 2020 2019 2020
6.8x
6.9x
6.7x
6.8x
39%
50
3-Yr. Av.: 6.8x
8. 8
Source: Alliance of Merger & Acquisition Advisors, Pitchbook, Deloitte.
Mixed Impact in Certain Sectors, Shift in Activity
Recent industry surveys reflect levels of dislocation confined to a known universe of sectors, while buyers have
re-focused toward established, recurring revenue models.
54% of pre-Covid transactions suspended or terminated,
citing uncertainty surrounding revenues, declining financial
performance and/ or lower buyer interest
Valuations for closed transactions declined on average 14%
New deal activity improved selectively in Q3, 2020, focused
on recurring revenue business models, and mature
companies with a visible path toward normalization in
financial performance
63% of buyers actively seeking growth transactions, but
expect a 1 - 2 year period before a return to normal
Negative Impact in Some Sectors, Shift in Market Activity to Stable, Recurring Revenues
..Improved Process Demand in Select IndustriesSectors with Process Disruption, Lowered Valuation..
Motivations Behind Corporate Decision Markers
Sector
% On-Hold/
Susp.
In-Progress,
Drop in Val.
Entertainment and Events 80% 7%
Hospitality 78 20
Retail 58 15
Transportation and Warehousing 48 15
Food and Beverage 46 14 0.0%
10.0%
20.0%
30.0%
Mfg. H'care Food/ Bev. Bus. Svc. Data/
Content
%TotalNewDeals
24%
18%
11%
10%
5%
Increased Activity Defensive Focus
Accelerate long-term
business model
transformation
Opportunistic capture of
market share/ leadership
Pursuit of rapid turnaround
situations
Acquisition of new,
adjacent capabilities
Uncertain operating
conditions - focus on core
business and liquidity
Waiting for credit markets
and issuance to improve
Alternatives to M&A,
including JVs/ alliances
Uncertainty in valuation
9. Resilience in M&A market conditions continues to be supported by access to transaction leverage, record levels
of financial sponsor equity capital for deployment, as well as new sources of both debt and equity. Lending
conditions have favored existing capital structures and bank groups.
9
Transaction Leverage Support for Right Situation/ Sector.. ..Debt and Equity Capital Supporting Deal Competition
Sources: GF Capital, Pitchbook, The Forbes M+A Group.
Continued Strengthin Capital Availability
Aggregate Private Equity “Dry Powder”Consistent Leverage Levels, Mixed Availability..
New Sources for Both Debt and Equity Capital..Pricing Stability, Widening Spreads for Junior Debt
2.5x
3.5x
4.5x
2017 2018 2019 YTD 2020
Debt/EBITDA,$10–
100mmTV
EffectiveInterestRate
$0.5
$1.0
$1.5
2015 2016 2017 2018 2019 YTD 2020
$Trillion$Billions
5.0%
10.0%
15.0%
2018 2019 YTD 2020
Subordinated Debt
Senior Debt
$0.0
$60.0
$120.0
$180.0
2015 2016 2017 2018 2019 YTD 2020
Private Debt Fundraising
SPAC Issuance
4.0x
3.6x
3.9x
3.5x
$1.3tn
$85.8bn
c.$60.0bn
12.1%
6.0%
2017 - 2019 Average: 3.8x
10. The transaction landscape in 2021 is defined by a “known set of unknowns”, albeit within the backdrop of business
confidence, a stabilizing economy and accommodative monetary policy.
10
Upside/ Downside Risk to the Transaction Environment.. .. Expected Macro Stability
Sources: Trading Economics, Research Analyst Estimates.
Outlook – Key Issues Facing 2021
Agreement on Federal stimulus package
Economic weakness, bridge to timing for
eventual public vaccination program
Regulatory and macro trade policy changes
Timing for update to Federal tax code
Credit and lending environment
Economic outlook and business confidence
Long-term monetary policy
ISM Purchasing Managers Index
U.S. GDP versus Unemployment
UST 10-Year Yield versus Federal Funds Policy Rate
IndexLevel
40.0
60.0
80.0
Current Q4, 2021E Q4, 2022E
52.4
%Rate
-3.0%
0.0%
3.0%
6.0%
9.0%
Q4, 2020E Q4, 2021E Q2, 2022E
Unemployment Rate
GDP (% YoY)
5.1%
3.1%
%Rate
0.00%
1.00%
2.00%
2020E 2021E 2022E
UST 10-Yr.
FOMC
53.4
57.5
5.7%
3.3%
6.8%
(2.8)%
1.5%
1.2%
0.9%
0.25%0.25%0.25%
Short-
Term
Long-
Term
Focus Items – Illustrative DCF Valuation Impact
Scenario Sensitivity
+/-
(Basis Points)
EV Change
(%)
Cost Inflation (% EBITDA Margins) -100 (5.5)%
Cost of Debt (% Risk-Free Rate) +50 (1.1)%
Effective Cash Taxes (Av. % Rate) +400 (2.0)%
11. A comparative review of public market valuations would imply a strong window of opportunity for those seeking to
monetize assets in 2021. This is further underscored by the expectation for the extension of current monetary
policy in the near term.
11
Sources: Research analyst estimates.
Outlook – What is Driving Market Valuations?
Implied Market Multiples versus Corporate Yields – Current Environment Relative to Past Cycles
Current – Covid-19 Recovery? 2010 – Post-Financial Crisis 2000 – Post Tech-Bubble
EV/ EBITDA – Public versus M&A Markets Equity market valuations may be influential on the
valuation discussion, despite the requisite adjustments for
control, company size and business model comparability
Recent market performance has flipped the script on M&A
versus market multiples, exhibiting a premium in public
comparables
A comparison of the current environment to past
economic/ market shocks demonstrates the impact of
monetary policy on asset values
EV/EBITDA
5.0x
15.0x
25.0x
2018 2019 YTD, 2020
S&P 500 Index
U.S. M&A Market
0.0x
20.0x
40.0x
Baa
Yield
Implied
P/E
Actual
P/E
Yield(%)/P/E(x)
0.0x
20.0x
40.0x
Baa
Yield
Implied
P/E
Actual
P/E
Yield(%)/P/E(x)
0.0x
20.0x
40.0x
Baa
Yield
Implied
P/E
Actual
P/E
Yield(%)/P/E(x)
22.0x
30.0x
3.3%
12.5x
17.1x
5.8% 21.1x
12.3x
8.1%
15.8x
14.9x
11.9x
10.5x10.1x
9.6x
12. Despite the headlines from 2020, the transaction environment has exhibited stability in valuation levels, demand
across strategic and financial buyers alike, as well as strong availability of capital for the right business profile.
Companies may prepare now for a potential transaction in the coming year with a reasonable level of confidence
toward a successful result.
12
Conclusions and Implications for 2021 and Beyond
Stable Macro Environment
and Transaction Landscape
Continued business confidence and process participation
Capital availability in support of transactions
Process Flexibility Required Execution timelines designed for short-term macro disruption
Increased timing for the implementation of new capital structures or
new platform acquisitions
Focus on Cash Flows, Not
Multiples
Timing for normalization, as well as run-rate revenue and EBITDA equally
as important as valuation multiples
Marketing benefit in development of “Post-Covid Upside”
Positioning for Buyer
Attributes
Premium valuations available for recurring and organic revenue models,
as well as completed capex
Focus on technological aspects surrounding core business
Opportunity and Time for
Preparation
Prepare now in order to highlight tracking of KPIs; proving out resilience
of cash flows
Identification of management gaps, as well as tax/ legal planning
14. PanelDiscussion– 2021M&AMarketOutlook
14
Managing Director in
The Forbes M+A
Group’s Utah team
Focused on sell side
and capital formation
transactions
20-year career in
M&A, sector and
financial sponsor
coverage
Discussion Panelists
James Morgan
The Forbes M+A Group
Troy Keller
Dorsey & Whitney LLP
David Stahl
Hillcrest Bank
Brett Stohlton
Peterson Partners
Please Direct Any Questions for the Panel to James.Morgan@forbesma.com
Partner in Dorsey &
Whitney’s Salt Lake
City office
Practice focus on
M&A, Joint Ventures
and government
policy affecting
business
Senior V.P. and
Managing Director
within Hillcrest’s
growing regional
commercial banking
team
Mid-market focus on
capital solutions
supporting a broad
range of transactions
across all industries
Operating partner for
Peterson Partners, a
leading national mid-
market private equity
firm
Role focused on
sourcing investments
and working with
portfolio
management teams