Dykema's survey suggests optimism for U.S. M&A activity in 2021

Reflecting strong U.S. M&A activity in the first quarter of 2021, respondents to the Dykema and Association for Corporate Growth-Detroit’s Spring 2021 M&A Flash Survey overwhelmingly expressed optimism for U.S. M&A activity in 2021, with more than 70% expecting the U.S. M&A market to strengthen in 2021 compared to 2020.

Current optimism is in line with the results of Dykema’s 16th Annual M&A Survey conducted last fall, in which 71% of respondents expected the U.S. M&A market to strengthen in the next year. This optimism is a marked improvement from the results of Dykema and Association for Corporate Growth-Detroit, San Antonio/Austin and Columbus’s June 2020 M&A Flash Survey, at which time only 51% of respondents believed the market would strengthen over the following 12 months.

Respondents’ outlook for the U.S. economy is predictive of their outlook for the U.S. M&A market. In the Spring 2021 M&A Flash Survey, 71% of respondents expressed a positive outlook for the U.S. economy for 2021, with 78% of those respondents expressing a positive outlook for U.S. M&A activity this year. Only 9% of respondents expressed a negative outlook for the U.S. economy; a similar minority predicted a weakening of the U.S. M&A market in 2021.

Two of the top three threats to U.S. M&A in 2021 that respondents are worried about relate to increased tax rates, at corporate and individual levels. Threats related to government policy changes and increased regulation generally garnered 65% of the total responses to this question. This is consistent with Dykema’s 16th Annual M&A Survey from last fall in which two of the top three threats to U.S. M&A cited by respondents were the election of President Biden and Democratic control of both the U.S. House and Senate, presumably because of the potential for increases in taxes and government regulation.
Last fall, the top concern for U.S. M&A, by a significant margin, was the continued spread of COVID-19. In the Spring 2021 M&A Flash Survey, concerns about the impact of continued COVID-related restrictions had dropped to second place, on par with concerns about increased taxes. While COVID remains a significant, with the increased rate of vaccinations, those concerns are lessening.

Availability of capital took the top spot in the list of factors cited as most likely to fuel M&A activity in 2021, with favorable interest rates taking third spot. M&A dealmaking is poised to continue to benefit in 2021 from investment capital levels and debt availability at all times highs. According to PwC Global M&A Industry Trends, 2021 M&A activity is accelerating, with valuations marching higher and so much capital in play.

In line with observations regarding the positive U.S. economic outlook, 63% of respondents listed improvement in economic conditions as fueling M&A activity in 2021, making it the second-most listed factor.
Respondents ranked U.S. financial buyers as the type of buyer most influencing deal valuations during the pandemic, retaking the top spot from the U.S. strategic buyers reflected in Dykema’s 16th Annual M&A Survey. Respondents believed non-U.S. financial and strategic buyers had limited impact on deal valuations in the U.S.

In a bit of a surprise, 61% of respondents indicated they had not worked on a deal in 2020 that involved representations and warranty insurance, suggesting there is lots of opportunity for continued expansion of the use of this deal structure, particularly in the lower middle market deal sector.