The second half of 2020 saw a resurgence of M&A across wholesale distribution, and that trend is likely to continue next year, according to Jon Doehr and Ashley Gray of the Southfield, Michigan-based private investment and investment banking firm Cascade Partners.
Doehr, the firm’s managing director, and Gray, a vice president, spoke with MDM this week about distribution M&A, which has been on a rollercoaster ride since the coronavirus struck last spring. According to the duo, however, look for the market to resume its normal cadence and for activity to accelerate in 2021 as more companies aggressively look to buy and sell in the post-pandemic economy.
“We think 2021 is going to be a really strong year,” Doehr said.
One reason for that forecast is because the pandemic has proven to be an inflection point across all industries — and distribution was no different.
Some companies have thrived due to offering COVID-19-proof product categories like PPE or JanSan, or possessing (perhaps even adding) the proper digital capabilities to tap into evolving consumer purchasing habits. At the same time, others struggled because of lockdowns and their lack of e-commerce.
In other words, some invested, some hunkered down. Companies that fall into the latter category are now faced with the decision of selling or holding on. Waiting too long to pull the trigger on a sale could result in a plummeting valuation as 2021 wears on.
“If you can’t project growth, if you don’t see any way to increase your business in the next year or two, you’ve got to make that tough choice,” Doehr said. “The sooner you sell, the better. The longer you wait, there’s a pretty good chance you’re not going to have anything left to sell at the end of the day. It takes some difficult choices for a family-owned business that’s had success, but the landscape is changing. Get out while you can get a decent multiple now as opposed to trying to hang on before it’s too late.”
For those that want to keep fighting, the importance of investing in technology can’t be overstated, Doehr and Gray stressed. This is something MDM has been covering throughout the pandemic, and the duo discussed why enhanced technology is paramount.
“If you’re not ready to make that investment, you’re going to stay small, and you’re going to be an old-fashioned, old-line distributor,” Doehr said. “It’s going to limit you — not that you can’t survive, but it’s going to be hard to grow.”
Gray, citing a building materials deal she worked on last summer, said the seller saw no other way to expand organically and realized selling the business was the only viable option.
“They saw, from a growth perspective, that it was going to be tight for them to grow on their own,” she said. “They were looking for some experience from others to try to expand into different adjacent areas and product lines. If you’re not going to invest in technology, you have to start to target potential investors.”
Look for more insight from Cascade Partners — which specializes in middle market private investment as well as M&A — in future editions of MDM, and read more about the company’s take on deals in the industrial vertical in its latest report, available by clicking here.
Also, be sure to check out the latest deals in our monthly M&A Roundups. And read more about the current state of distribution M&A in our recent articles: M&A Activity Poised for Post-Coronavirus Rebound and M&A in the Time of COVID-19: Lawson Products Executives Talk Business Growth Strategy Amid Upheaval.
Buoyant M&A Across the Economy
The M&A outlook is positive beyond distribution, too. According to the latest forecast from PwC, M&A is projected to lead the economic recovery.
“The M&A recovery that began in the second half of 2020 will accelerate in 2021, as corporate and private investors have access to capital and can pursue deals to build scale and expand scope,” the report read. “For some, growth will come within industries, with market leaders strengthening their position as the economy continues to recover. Others, seeing their business models upended by the COVID-19 pandemic, will explore how small or medium-sized bets in adjacent sectors can help drive transformation.
“And M&A targets will come from a growing pool of sellers — businesses that have fallen into distress during the recession, private investors that always think about holding periods and exits, and companies that are reassessing strategies and could part with non-core assets, especially as valuations remain high.”
Rusty Wiley, CEO of Datasite, wrote for Nasdaq this week that a “variety of economic, governmental, and medical factors … will dictate the activity of the 2021 M&A market.”
These factors include the speed of the COVID-19 vaccine to the broader U.S. population, the arrival of another stimulus bill (which was making progress as of press time) and the tax policies of the new administration.
“Overall, however,” Wiley writes, “advantageous interest rates and the increased availability of capital are set to increase M&A activity in 2021 — even if dealmakers travel less, and continue to work remotely. Ultimately, dealmakers that remain ‘deal ready’ will be best positioned to reap rewards in 2021.”
Join MDM in February for a Virtual M&A Summit
MDM is hosting a Virtual M&A Summit that will tap into these trends and more. The event will be held on Feb. 25, 2021, so be sure to save the date. We’ll soon be sending out the full agenda and speaker lineup, but we assure you it will be an informative and engaging look at the entire M&A landscape, including considerations for buyers and sellers, advice on performing due diligence in a pandemic and a macro look at which sectors are projected to see the most consolidation in 2021.
Call for speakers: If you have expertise in distribution M&A — whether it’s broad knowledge, such as proven best practices for buyers and sellers, or specific acumen in one part of the process, such as performing due diligence during a pandemic, financing a deal or how to assess cultural alignment in M&A — MDM wants to hear from you. We are looking for a keynote speaker plus session presenters and panelists for the summit. Click here to submit your credentials and topic ideas.