A 20/20 Look at 2020 M&A Trends
December 31, 2019
Economists from the government and the private sector predict a slowdown in the country’s unprecedented, decade-long economic growth. How can businesses plan for a smooth transition into 2020 and find growth opportunities in a more turbulent economy?
For companies looking to scale their operations appropriately, transition into new markets, or simply survive, mergers and acquisitions (M&A) can play a key role. 2018 M&A generated $4.1 trillion globally, the third-highest year ever by volume, according to JP Morgan. This trend continued through the fourth quarter of 2019 as The Wall Street Journal has reported $3.8 trillion in global M&A activity.
M&A experts predict this strong activity will continue into 2020. This is especially true, according to SC&H Capital Founder and Managing Director Christopher Helmrath, for businesses – such as those in healthcare – that are counter-cyclical and recession resilient.
Healthcare Innovation and Consolidation
National healthcare spending has mushroomed in the past decade, growing 4.6 percent in 2018 to $3.6 trillion – or $11,172 per person. According to The Centers for Medicare and Medicaid Services, which tracks U.S. healthcare spending, 2019 will reach $11,559 per person, and in 2020 will rise again to $12,087 per person.
However, healthcare industry costs are rising just as quickly, forcing many healthcare providers to operate on narrowing or stagnating margins. Helmrath says the question healthcare providers should be asking themselves is: “How can we spend less and get a higher quality outcome?”
Helmrath says recent bold, barrier-breaking moves reveal an industry in mid-evolution: hospital groups are moving into the pharmaceutical distribution business and even retailers like Walmart are contemplating entering the primary care market.
For providers concerned about surviving the tide of rising costs, private equity can provide cost sharing, Helmrath states. “Partnerships, especially for smaller health care practices, can position providers better, giving them greater efficiency, lower costs, and the opportunity to provide better patient care.”
The Grey Wave
With aging ownership in all professional service firms, these industries should be planning for transitions in 2020, says SC&H Capital Managing Director Matthew Roberson. In 2020, ten thousand baby boomers each day will celebrate their 65th birthdays, according to population date from the Pew Research Center. Roberson says this ‘grey wave’ contributed to historically unprecedented M&A activity in certain sectors in 2018. The trend, he says, has been continuing well into 2019.
Roberson predicts the ‘grey wave’ will continue to push this trend into the next decade. While “there have been a few megadeals,” he says, “the bulk of these deals will happen in the middle-market and lower-middle-market firms.”
For firms that aren’t positioned to enter the market, another option for transition planning is to go the “ESOP route,” says SC&H Capital Managing Director Greg Hogan. ESOPs, or employee stock ownership plans, allow a company’s employees to purchase stock in their company, staking a claim in its future.
“It’s a popular solution,” says Hogan, because “credit markets continue to be strong, and there’s that ability to borrow. You can create liquidity and secure the future of the company if you’re not ready to sell. It’s a good example of a transition strategy that doesn’t prevent you from doing anything in the future.”
Don’t Bet Against Manufacturing
Hogan believes the ready availability of capital will continue to drive M&A momentum in manufacturing.
Economic analysts disagree about growth in the manufacturing sector, and whether the industry is in decline or merely slowing. The Federal Reserve in October reported a manufacturing production decrease of 0.6 percent, but attributed the majority of this decline to an auto parts strike that cut the industry’s output by 7.1 percent.
In the year ahead Roberson sees “softening in certain segments of the manufacturing industry but not a full slowdown. The sector’s underlying fundamentals are strong.”
M&A in the industrial machinery and equipment sector, says Roberson, “continue to be active from both strategic and financial buyers.” Medical, packaging, and specialized plastics continue to attract buyers as well.
Helmrath sees particular promise in the specialized food market in the “high-quality, healthy-for-you” sector. The manufacturers succeeding in this industry, says Helmrath, have responded to changing consumer demands and invested in new technologies and automation.
Roberson also sees growth opportunities for agribusinesses that respond to market demand for transparency into the environmental and social impact of their purchases throughout the supply chain. Products that promise lower carbon footprints or recycling are in demand by buyers and investors looking toward these “millennial-driven” trends.
The Wild Card
Uncertainty about the election will be “by far the largest” wild card that will impact businesses in 2020, Hogan believes, namely due to “how divergent the candidates are about trade and taxes.”
Government contractors in particular need to monitor Washington’s pulse and anticipate government spending priorities in order to compete, says Hogan. While the vagaries of an election year can obfuscate future spending priorities, there are trends that are likely to continue no matter what political winds prevail. Cybersecurity will continue to rise in importance, Hogan believes, as well as data analytics software, cloud services and emerging technologies.
However, a contracting firm’s ability to survive or thrive in the upcoming four years depends just as much on factors within its control than on the federal spending zeitgeist, according to Roberson.
With size and scale set correctly, a company can plan for the potential impact of budget changes, successfully hiring in a tight labor market, and free up equity to nimbly respond to a changing environment, says Roberson, adding: “While contractors can’t predict every change in the political weather, they can still carry an umbrella.”
That said, there’s no doubt “there are going to be segments of the economy where we are going to see slowing,” says Helmrath. The businesses that look ahead and innovate in this environment will be better positioned to attract and act on investment opportunities. “The players that have dominated the market are not necessarily the ones that will be the players in the future – and we’re going to continue to see transformation.”
The SC&H Capital team is always open to a conversation about how we can help you or someone you know evaluate M&A options. We encourage you to Contact Us and begin a discussion on how SC&H Capital can help you.