2021 COVID and Post-COVID M&A Outlook

The first quarter of 2021 was the busiest opening quarter ever for global M&A (since records started being kept in 1980), according to financial data company Refinitiv. The total global deal value was $1.3 trillion, a 94% increase over the same quarter in 2020, and which was feeling the effects of the pandemic. Q1 2021 was also the second largest quarter on record, only beat by the second quarter of 2007 ($1.4 trillion in deals). Of course, we all know what happened not so long after 2007, so perhaps it is too early to pop the champagne.

The North American EMS sector was pretty active. Here are some of the major deals that have been announced so far in 2021:

• SMTC taken private by HIG Capital (January 2021)
• Spartronics (One Equity) acquired Primus (January 2021)
• National Circuit Assembly acquired Austin Circuit Design (design services) (February 2021)
• East West Manufacturing (Heritage) acquired Varitron (Montreal, March 2021)
• Virtex (Insight) acquired Altron (March 2021)

Given the uncertainly in the markets and travel restrictions due to COVID, it is remarkable that so many deals are being closed. One reason is that companies have quickly adopted new methods, such as using video conferences (Zoom) and drone services. One large investment bank stated that more than 60% of their deals are being closed without a physical meeting between the parties. When COVID first hit, many experts had predicted that 2020 would freeze M&A. This was true for some time, but the momentum started picking up in the second half of 2020. Now that the general mood is more positive, even more deals are being considered.

As it turned out, the total number of North American deals in 2020 for the PCB and PCBA sectors was consistent with previous years. I feel that this trend should continue in 2021 for several reasons:

1. Availability of Capital: Both private equity firms and public companies have a lot of cash. Note that four out of five major deals so far in 2021 involved private equity buyers. For smaller deals, the SBA is lending at great rates for individuals or groups who want to acquire companies.
2. Age of owners is post-retirement: For many manufacturing industries, the average age of owners is at or past typical retirement age. This represents a tremendous opportunity for younger entrepreneurs who wish to own companies.
3. Strong government and mil/aero budgets: The U.S. defense budget is strong and may continue to be so. If indeed there is a pullout from Afghanistan, there will still be a strong demand for electronics in the defense budget.
4. Biden Bucks! Stimulus has created demand for all types of products, which has stimulated the U.S. manufacturing sector. There may be more stimulus packages in the U.S. until the unemployment rate gets to 5% or below.
5. Lending: While banks are still somewhat conservative, the SBA has very good terms for smaller M&A deals, and interest rates are low.
6. Fragmented Industries: Both the PCB and the EMS industry have many smaller shops under $10 million in revenue. Many of these have niches and/or they are survivors, but a majority of these shops will consider a sale over the next five to 10 years.

Certainly, not everything is rosy. The world is still in the middle of a pandemic, although there may be light at the end of the tunnel. There are concerns over the economy, pending inflation, a potential bubble in the stock market, and higher taxes. The EMS industry is experiencing component shortages, and all industries are seeing material price increases and longer lead times. Although a lot of deals are getting done, it is not a great market for companies that have “hair” and/or skeletons.

All those above negatives could cause a pause in the M&A market. However, we feel that post-COVID there are several reasons why M&A may stay steady:

1. International buyers return (many cross-border deals have been on hold due to travel issues).
2. Distressed deals will increase (PPP and stimulus money will run out).
3. COVID-related tech innovation will create “winners and losers.”
4. Re-shoring trend will continue (even some greenfield deals will occur).
5. Infrastructure Bill in the U.S. may create demand (which could continue to push material prices and labor higher).
6. Both private equity firms and public companies will continue to have massive amounts of cash (“dry powder”).
7. Both PCB and PCBA sectors are highly fragmented, especially in the under $10 million revenue segment. Consolidations could continue at a high pace for five years and only make a dent in the fragmentation.

Although no markets continue to go up forever, the first two quarters of 2020 were a strong pause or “circuit breaker” for the M&A market. That created enough pent-up demand to last through 2021. Most likely, the cause of the next downfall is something that we are not worried about at the moment, as you never hear the bomb that gets you. At least for now, it’s time for deals, deals, deals!

Tom Kastner is the president of GP Ventures, an Investment Banking firm focused on sell-side and buy-side transactions in the tech and electronics industries.  GP Ventures has offices in Chicago and Tokyo.  Tom Kastner is a registered representative of and securities transactions are conducted through StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC. StillPoint Capital is not affiliated with GP Ventures.