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10.25.21

What’s fueling the M&A frenzy in 2021?

BY Allan H. Cohen

The M&A market is strong, and I expect strong activity as we head deeper into Q4 2021. I wanted to take a moment to examine some of the factors driving this trend.

Capital Gains Rate. There’s a lot of conversation taking place on the potential increases in the capital gains rate. People are concerned that if the Biden tax plan goes through, capital gains rates are going to increase in 2022. That’s creating a lot of pressure to get deals done before December 31, 2021.

Low-Interest Rates. We’re in a period of unprecedented, low-interest rates. The cost of borrowing for private equity (PE) buyers and others is very low. If interest rates were to go up, the cost of borrowing would go up, and buyers would be unable to pay the kind of multiples that they're able to pay now to sellers.

Owner Fatigue. It's been a very difficult year and a half. People are concerned that there might be another pandemic, and they’ll have to again go through what they went through over the last 18 months. If an owner is looking to sell a business in the coming years, maybe now is the time to sell to avoid a repeat of that difficult time.

Availability of Cash. PE firms are flush with cash. SPACs are in the market to buy businesses, but if the SPACs don't use the money, they have to return it. So there are buyers out there with plenty of cash, incentive to deploy it, and sellers looking to sell, and that's a match that results in a lot of deals happening.

Outperforming Sectors. We talk about sectors that aren’t doing well, but many, in fact, are performing well. Many life sciences, health care, and food and beverage companies are generating unprecedented profits, and companies are selling at high multiples. Those successful businesses are very attractive to buyers, and sellers are taking advantage of the lofty premiums that are being paid for them.

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Allan H. Cohen

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