What’s ahead for M&A in 2020? We ask 8 advisors

If there’s anything M&A professionals dislike, it’s uncertainty. And heading into 2020, there’s more than enough uncertainty to go around, including questions about the economy, international trade, impeachment, domestic politics and more. The funny thing is, the lack of clarity may actually make the first half of the year a great time for M&A, as dealmakers push to close transactions before the looming uncertainty of Election Day and its outcome.

“Many companies will insulate themselves from this uncertainty by seeking to complete deals in the first half of 2020, before the Democratic National Convention in July,” explains Andrew Jessen, head of M&A, William Blair. “The biggest source of uncertainty is driven by who will win the Democratic nomination. If a more moderate candidate wins the nomination, volatility headed into November’s election should be relatively muted. But if a more progressive candidate wins the nomination, investors and business owners will be monitoring the campaigns very closely to see how the Democratic and Republican candidates’ proposed policies could affect specific sectors.”

To find out more about what to expect in dealmaking, Mergers & Acquisitions asked eight bankers and other advisors for their outlook on M&A in 2020:

Paul Aversano, Alvarez & Marsal
Cole Bader, Stifel
Karen Davies, Huntington National Bank
J.R. Doolos, KeyBanc Capital Markets
Andrew Jessen, William Blair
Derek Lewis, Harris Williams
Peter Lombard, Piper Sandler & Co.
Christopher Stradling, Lincoln International

These are the same eight advisors we interviewed in mid-2019. See what they thought then by reading 8 M&A advisors urge closing deals now, while economy stays strong. See what they think now by reading the Q&As, below.

Paul Aversano
Paul Aversano
Managing Director
Alvarez & Marsal

WHAT IS YOUR FORECAST FOR M&A IN 2020?
Despite volume of M&A transactions being down from 2018, I do consider 2019 to be a successful year and still at some of the highest levels from a historical perspective. I am also bullish on M&A activity throughout 2020. Historically, in an election year, M&A has been sluggish, given the market doesn’t like uncertainty – and there certainly is a lot of uncertainty coming into 2020. However, given digital transformation, activist activity, availability of capital, low interest rates and the tremendous amount of dry powder sitting in the alternative investment asset class needing to be deployed, these factors should be driving M&A activity well into the foreseeable future. We continue to see strong M&A activity in the business services, healthcare and technology sectors.

HOW WILL THE OVERALL ECONOMY AFFECT M&A?
As far as the economy goes, I am generally bullish heading into 2020, but there are always reasons to be cautious. I think the biggest risk to the economy comes from outside of the U.S. and could relate to some unforeseen foreign geopolitical event. The world is an increasingly global place, and the global economy is interconnected – so while I currently do not see anything on the horizon that could derail the U.S. economy, I think investors should not be complacent and be taking all steps necessary to recession-proof their investments – regardless of the sector. We are seeing continued issues in the retail and energy sectors, and sectors like automotive could be next. That being said, I am still bullish on M&A even in a down economy, as after a period of pause, both buyers and sellers will be forced to adjust their expectations to the new normal.

HOW WILL THE PRESIDENTIAL CAMPAIGNS AND THE NOVEMBER ELECTION AFFECT M&A?
We are not currently seeing anything outside of the normal, as far as investors looking to accelerate deal flow, and the pipeline of sell-side transactions appears to be relatively robust as far as new processes looking to kick off in the first quarter of 2020. Accordingly, there does not appear to be an election-year impact like we have seen in prior cycles. I believe investors are waiting (or hoping) for more volatility and the markets to come down, such that capital can be deployed and lower valuations. Sectors such as financial services and healthcare tend to be impacted greater by more or less regulation, so depending on the political party in office after the 2020 election, those sectors could be impacted.
Cole Bader
colebader
Head of M&A
Stifel

WHAT IS YOUR FORECAST FOR M&A IN 2020?
Overall, middle market M&A activity is down in 2019 (although we have picked up market share here at Stifel), and the outlook for 2020 is somewhat unsettled at this time. On the one hand, there are several tailwinds supporting deal activity, including continued creative disruption in the technology sector, healthy corporate balance sheets, significant amounts of private equity dry powder, and historically low interest rates. On the other hand, uncertainty surrounding tariffs and trade, and the upcoming U.S. presidential election could deter M&A in certain sectors, depending on how things ultimately shake out. As well, cross-border activity (particularly Asia into the U.S.) is clearly challenged because of the political climate. No matter what happens, I would expect the largest concentration of deals to be (in order) in the technology, healthcare and industrials sectors, just like this year.

HOW WILL THE OVERALL ECONOMY AFFECT M&A?
Despite the market obsession with recession, we believe that economic growth is slowing but not stalling. With a series of interest rate cuts in 2019, the Federal Reserve has done its part to revive cyclical growth, which is a positive for M&A. While consumer spending remains healthy, unemployment low and corporate profits solid, we are closely watching sentiment in the business community. We’d like companies to make greater capital investments and hopefully see a U.S. resolution to the trade war with China. Potential economic impacts from higher tariffs are hard to predict. Right now, if a downturn hits, I suspect a lot of management teams will proceed with deals – but with an ounce or two of caution.

HOW WILL THE PRESIDENTIAL CAMPAIGNS AND THE NOVEMBER ELECTION AFFECT M&A?
There’s no doubt this election has the potential to cause immense disruption, particularly in certain industries that could be significantly impacted by a potential change of administration (banks and healthcare, for example). In those cases, there may be a push to get deals done earlier in the year before any votes are cast. I think we’ll have a better handle on how this all plays out once we know who the Democratic nominee is. Keep in mind, the stock market historically has performed well in presidential election years when a sitting president runs for re-election, and a strong stock market is another tailwind for increased M&A activity.
Karen Davies
karendavies
Private Equity Managing Director
Huntington Bank

WHAT IS YOUR FORECAST FOR M&A IN 2020?
2019 is a deal value year on pace with 2018. Expectations are approximately $2 trillion in deal activity, albeit a good portion of this volume showed up in mega deals in Pharma, Fin/Tech Services, Media and Banking. In Q3 alone approximately eight deals above $10 billion closed during the quarter, accounting for over one-third of total deal value. Globally, Cross Border M&A has slowed due to uncertainty in Trade. Caution is being taken by lenders financing LBOs, as Leveraged Loan Volume is down to its lowest point all year in October 2019, and debt funded dividends from a syndicated lending perspective are also down year over year. Domestic M&A activity, albeit somewhat sector-specific is still active but off the pace in deal count vs deal value year over year.

For Huntington, 2019 continued to show elevated multiples (double digits) and ease of access to credit, given low interest rates and active capital markets as well as a very competitive market for deals with strong support from new entrant direct lenders. Approx. 50 percent of our deal flow at Huntington was rooted in platform add-ons to outdrive organic growth, capitalize on synergies, geographic expansion and new product introductions with the remaining new deal flow originated to support new platforms. Basically 2019, from a new deal perspective, was similar to 2018. Any sector that continues to show consolidation will remain active. For example, Huntington is financing the continued M&A consolidation in Environmental Services, especially Waste Management and Recycling.

Thus far at Huntington, Q4 pipeline is closing out strong and there remains an active backlog of new private side sale engagements that mirrors that of Q4 2018. This could slow down heading into 2020 if trade wars remain unsolved, if concerns remain with the inverted yield curve and if recession indicators pick up pace. There is also the unknown heading into an election year and potential for more geo-political uncertainty. Some industry deal flow has already slowed, specifically Manufacturing and Transportation, which show early signs of sector-specific recession.

HOW WILL THE OVERALL ECONOMY AFFECT M&A?
Huntington’s guidance to our privately held middle market clients and to our PE Platform Owners and Buyers is to always be recession cognizant and ready. While our global institution view is 25 percent risk of recession for the next 6-12 months, specific sectors are already cycling - i.e. Transportation and some Manufacturing. There are still many unknowns. However, the Midwest Regional economic indicators where we serve our Middle Market clients are still showing signs of resilience, and the Public Large Corporates are showing signs of growth as evidenced in the S&P with continued optimism in growth for 2020. Our guidance to our clients is to always, not just in a recession, evaluate all forms of risk in your businesses: labor shortage and wage pressure impacts, supply chain/commodity and foreign currency risk due to Trade Wars, evaluation of cost structure for sensitization to a potential downturn. And for sellers, appropriately time your exit so you are not sitting on the sidelines riding out a cycle if your intent is to transfer wealth. From an Investor and Lender’s perspective, discipline in strong client selection and consistency in strong due diligence is a must heading into 2020.

We are seeing more of a continued interest in our large corporate clients continuing to look for carve out divestitures to maximize continued returns and redeploy capital per their corporate governance and our Middle Market privately held businesses remain interested in wealth transfer and sale processes prior to a cycle. PE and Family office still have over a Trillion of dry powder to put to work so acquisitive activity has not abated. We are seeing a stronger interest by investors in recession resilient, non-cyclical platforms in industries, which can outperform in the next cycle such as automotive after markets, Technology investments in all sectors, HealthCare IT, Food/Beverage and to some extent Pet Food/Products as well as Retail clients that have strong e-commerce platforms assuming Chinese Trade does not continue to challenge margins in the supply channel for those Retail platforms. Basically, investors are looking for strong, recession resistant, diverse end markets and in seeking businesses that are involved in distribution their value is placed on a supply chain that cannot be interrupted or disintermediated in a cycle.

HOW WILL THE PRESIDENTIAL CAMPAIGNS AND THE NOVEMBER ELECTION AFFECT M&A?
This is somewhat of an unknown, if the coming election and the tone it will set for dealmaking will cause deceleration in M&A activity. Often uncertainty alone may cause sellers to idle until the playing field is clear- i.e. push deal flow from 2020 to 2021. Certainly, change in U.S. Party could negatively affect Bank M&A, due to potential regulatory changes. The real unknowns and rationale for a global M&A 2020 slowdown are a combination of three linked variables: global recession indicators including the U.S. indicators, trade wars and geopolitical changes. Domestically, the U.S. could still outperform global M&A in 2020 like it did in 2019. Anecdotally, Huntington’s PE dealmakers and Middle Market CEOs remain evenly split on outperform optimism versus neutral/slow down for 2020 M&A deal activity.
J.R. Doolos
jrdoolos
Director, M&A Group
KeyBanc Capital Markets

WHAT IS YOUR FORECAST FOR M&A IN 2020?
It was a strong year in 2019 across multiple industries, despite the overall market being down from a near all-time high in 2018. From all indications, it appears that 2020 M&A transaction volume should be higher than 2019. This is due in part to the significant momentum gained in the second half of 2019 — the fourth quarter specifically. Across the market, we continue to monitor three primary themes going into the new year: cyclicality, foreign trade risk and labor intensity. The most active sectors will continue to be those with less cyclical exposure, limited risk of foreign trade disruption and less susceptibility to ongoing tightness in labor markets. In particular, there will continue to be strong M&A volume within the healthcare and real estate sectors, as well as service-based based companies across all sub-sectors.

HOW WILL THE OVERALL ECONOMY AFFECT M&A?
Heading into 2020, the economy appears to remain on track for continued growth and is supportive of a healthy M&A environment. Although we are not calling for a recession, we encourage clients to closely diligence and understand the risk factors for companies that operate in historically cyclical industries. No sector can be fully insulated from a potential recession; however, companies with a highly variable cost structure serving non-discretionary markets are in position to best weather the impacts of a recession. Similar to 2019, extra attention is being given to manufacturing companies with potential exposure to commodity pricing or with heavy reliance on foreign sourcing, which could be susceptible to increased costs driven by further tariff activity.

HOW WILL THE PRESIDENTIAL CAMPAIGNS AND THE NOVEMBER ELECTION AFFECT M&A?
In the last two election cycles, there has been a marked decline in M&A activity versus the year prior, with a notable decrease in the months leading up to Election Day. Although we are not advising clients to make M&A decisions based solely on the potential uncertainty that is created during an election process, it has been a contributing factor in determining the appropriate timing to pursue a transaction. Given these dynamics, we are expecting a significant number of assets to come to market during the first half of 2020 and push towards a closing by late second or early third quarter to avoid potential uncertainty later in the year.
Andrew Jessen
andrewjessen
Head of M&A
William Blair

WHAT IS YOUR FORECAST FOR M&A IN 2020?
M&A market fundamentals are solid. Volume and valuations remain elevated by historical standards, despite a decline in 2019 activity. Momentum is driven by strategic buyers seeking acquisition growth and by significant private equity fundraising. This supply-demand imbalance, combined with positive business performance and available lending, should translate into 2020 activity that resembles 2019’s. A continuing trend is the selectivity of buyers. Growing cyclical concerns in a high-valuation environment are causing market bifurcation, with heightened interest in a smaller universe of quality companies. At William Blair, we have benefited from this trend because of our focus on high-quality, high-growth companies; our M&A volume and value both increased in 2019. Looking to 2020, we are optimistic about the M&A market based on a year-over-year uptick in pitch activity and an engaged pipeline. Growing apprehension about the economic cycle and uncertainly related to the presidential election, however, will be closely monitored headwinds.

HOW WILL THE OVERALL ECONOMY AFFECT M&A?
While valuations remain at elevated levels, buyers and lenders have become increasingly selective about the companies they pursue. This trend is driven by apprehension about the duration of the current cycle, rather than concern about economic fundamentals. Overall business performance remains positive, and corporate executives are quite confident in their business outlooks — except for sectors directly affected by the ongoing tariff war with China. For most companies, the primary challenge is recruiting enough talent to support growth, given record-low unemployment. Because of growing wariness of a recession, financial sponsors are orienting more toward economically resilient sectors. However, even in sectors that are considered cyclical, sponsors are conducting more sophisticated market diligence to identify companies that are more insulated from a recession as a result of macro demographic trends, high degrees of recurring revenue, proprietary and highly differentiated offerings, technology, or other characteristics of high-quality businesses.

HOW WILL THE PRESIDENTIAL CAMPAIGNS AND THE NOVEMBER ELECTION AFFECT M&A?
We believe that uncertainty related to this election will affect the timing — and potentially overall volume — of deal activity in 2020. Many companies will insulate themselves from this uncertainty by seeking to complete deals in the first half of 2020, before the Democratic National Convention in July. The biggest source of uncertainty is driven by who will win the Democratic nomination. If a more moderate candidate wins the nomination, volatility headed into November’s election should be relatively muted. But if a more progressive candidate wins the nomination, investors and business owners will be monitoring the campaigns very closely to see how the Democratic and Republican candidates’ proposed policies could affect specific sectors.
Derek Lewis
dereklewis
Managing Director
Harris Williams

WHAT IS YOUR FORECAST FOR M&A IN 2020?
Harris Williams continues to see strong momentum across the firm’s 10 Industry Groups heading into 2020. While the late-stage nature of the cycle is top-of-mind for investors, we expect marquee assets with resilient business models to continue to command premium prices. Near-record valuations for the most in-demand assets have led some buyers to explore sectors and businesses with some element of cyclicality, but with solid long-term potential. Some buyers are choosing to focus on smaller targets, also with a view toward long-term growth. The tremendous amount of capital strategic buyers have on their balance sheets combined with the amount of dry powder private equity groups have to invest will continue to drive deal flow.

HOW WILL THE OVERALL ECONOMY AFFECT M&A?
Going into 2020, investors are certainly aware of the late-stage nature of the cycle. That said, they continue to look for top-quality assets, just as they were a year ago, corporations are still looking to M&A to support organic growth, and private equity firms have capital to put to work. While many buyers are modeling for a down cycle, companies that perform well in different economic cycles and that are managing their businesses for the long term continue to attract investor attention. In today’s economic landscape, certain sectors within the economy are seeing stronger deal flow than others, but Harris Williams continues to see strong interest for quality assets.

HOW WILL THE PRESIDENTIAL CAMPAIGNS AND THE NOVEMBER ELECTION AFFECT M&A?
With any election comes some level of uncertainty, but our advice to clients about the timing of a transaction is company-specific rather than tied to an external event like an election. Certain trends such as tariffs causing uncertainty for companies with international footprints are likely to be top of mind through the 2020 election. That said, the impacts to date on cross-border dealmaking have been relatively limited. Regardless of the outcome of the election, the M&A market will continue to evolve over time and have a positive impact on the economy.
Peter Lombard
peterlombard
Managing Director
Piper Sandler & Co.

WHAT IS YOUR FORECAST FOR M&A IN 2020?
2019 has been a successful year for M&A activity in North America, not a record but a general continuation of the strong market. The drivers of recent years remain: Companies are contending with persistent low organic growth rates and constant technological evolution that is challenging traditional business models and often lowering the barriers to entry. PEs and VCs are investing in those technology trends. Valuations remain strong as strategic buyers leverage healthy balance sheets; debt is available and relatively cheap, and financial sponsors continue to raise record levels of funds.

Technological change cuts across every industry sector and continues to be a consistent theme driving the M&A market. M&A has become a strategic necessity in corporate boardrooms given the rapid creation of new companies that threaten incumbent businesses. Across industries, companies are pursuing M&A to augment and to accelerate the development of new product/service capabilities, delivery models, people and geographic expansion.

These trends favor inorganic strategies rather than internal initiatives (R&D and otherwise), as not just capability but speed to capability gains urgency. These trends will continue to motivate M&A among strategic buyers and private equity investors.

HOW WILL THE OVERALL ECONOMY AFFECT M&A?
We have all learned to live with a lot more economic and (geo) political uncertainty than anyone would have expected just a couple of years ago. The strength of the U.S. economy, low inflation, tax reform, favorable debt and overall capital markets have enabled M&A participants to largely shrug off the noise and push forward, and valuations continue to be historically high if not at peak levels. While the U.S. domestic economy has flashed warning signs, it’s hard to predict a downturn given its resilience to a lot of stress.

For high growth technology companies, the path to profitability, and understanding the levers to drive profitability, have been key focus areas. Lenders while aggressive have been disciplined, and buyers in our sectors are generally investing in growth and capitalizing companies more conservatively to accommodate growth.

Sectors most sensitive to consumer discretionary spending would feel the most immediate impact from recession-which suggests everything from cars to clothes to the latest smartphones to leisure travel is vulnerable. On the flip side, companies would have a greater incentive to integrate the latest technology as a way to manage cost structures and protect profits in a downturn.

HOW WILL THE PRESIDENTIAL CAMPAIGNS AND THE NOVEMBER ELECTION AFFECT M&A?
Historically, M&A markets have tended to slow in the months leading up to a presidential election (with the recent exception of 2016). That suggests a good start to the year, consistent with current conditions, and some urgency to complete deals comfortably in advance of the election. We live in interesting times, and past norms may not apply in the 2020 election year.

This uncertain environment encourages sellers, once set on an exit, to accelerate exit timetables to manage market risk and buyers to model more conservative scenarios, conduct heightened due diligence scrutiny and to be very disciplined.

The overarching secular trends driving M&A will continue, however, as companies pursue strategies to augment growth and innovation. Political polarization won’t end with the election. Companies will need to build nimble platforms to prosper under a range of different policy scenarios. Healthcare is clearly impacted, as are the technology and media sectors and companies with international supply chains.

Christopher Stradling
christopherstradling
Managing Director
Lincoln International

WHAT IS YOUR FORECAST FOR M&A IN 2020?
We are finishing another record year of closings at Lincoln and also have record levels of backlog looking into 2020. With the prolonged period of economic expansion, beyond the timing most expected, we have started seeing private equity firms think about selling high-performing companies with shorter-than-expected hold periods. We think this bodes well for both the quality and quantity of deal flow going into 2020. On the flip side, indications from several private equity firms suggest there has been a slowing level of deal flow in Q4 2019, but based on our backlog, I believe this is merely a calm before a flurry of new deal opportunities to come to market in early 2020.

We recently surveyed more than 160 private equity investors and over 60% said that they expect deal flow to be either flat or up in 2020. If this prediction plays out, 2020 will be another great year for M&A. Add to that the fact that nearly 80% said that their number one objective in 2020 is deploying capital and it’s hard not to be optimistic.

HOW WILL THE OVERALL ECONOMY AFFECT M&A?
We enter the new year with continued strength in the economy overall, but with some areas of strength and weakness that investors should consider carefully. Companies that sell well on the e-commerce channel are likely to continue their expansion even in the face of an economic slowdown, unless the products they sell are highly discretionary and cyclical in nature. Brick and Mortar-only platforms will continue to have challenges.

For example, this holiday season e-commerce sales were up nearly 20 percent on Black Friday (to $7.4 billion), while Black Friday foot traffic and sales were down 2.1 percent and 1.6 percent respectively compared with prior year. As e-commerce continues to take share in the large consumer sector, clearly companies that sell through on-line channels will have more wind in their sails in either strong or weak economies.

HOW WILL THE PRESIDENTIAL CAMPAIGNS AND THE NOVEMBER ELECTION AFFECT M&A?
Investors like predictability and certainty when making a deal. This is particularly important for the first year of an investment, when debt levels and integration risks are at their highest levels. The polarization of presidential politics in recent election cycles have not contributed to the feeling of stability. As the election draws nearer and the differences in leading candidates becomes more apparent, dealmaking could be affected.

All that said, at the end of the election period, it feels likely that the U.S. will end up with either the same president (a known quantity at this point), or a new president that is promising more stability, improved international relations (i.e tariffs) and some form of economic stimulus. In either outcome, I believe the presidential election, while certain to be entertaining, will have less impact on the overall dealmaking market than many predict. The strength of the overall economy and consumer confidence will be the primary drivers of the market.