James Jackson,
Co-CEO & Leader of Merger and Acquisition Advisory Practice,
The Alta Group

As I drafted last year’s M&A article for Monitor in February 2020, I anticipated that it would be a banner year for merger and acquisition activity in our industry. At the time, we were enjoying a strong economy driven by record stock market levels, low unemployment, low interest rates and relatively easy access to capital. These economic conditions, combined with a strong pipeline of motivated sellers and buyers, set the expectation that 2020 would be another active year. Yet there is always the potential for market changes to disrupt M&A activity. My February 2020 article noted several potential black swan events, chief among them: “The ability for the new coronavirus, COVID-19, to spread throughout the world…”

When we were first hit with the economic and social impacts of the new coronavirus in March of 2020, the market outlook for the year changed dramatically. Buy-side and sell-side opportunities were either halted or temporarily suspended as buyer and seller priorities changed.

Given the uncertainty of the potential financial impact of the COVID-19 pandemic on their businesses, would-be buyers and sellers were forced to focus all of their attention and efforts internally toward their origination pipelines, the quality of their portfolios and the safety of their employees. Members of senior management found themselves developing guidelines for the circumstances under which payment deferrals would be granted to challenged customers. They were forced to assess the impact of the pandemic on the industries they served and, in some instances, to shift their originations away from those equipment segments hardest hit by COVID-19. On top of these issues, leaders were busy with the logistics of providing technology resources and management infrastructure to ensure that their employee bases could effectively and safely work from home.

If this were not enough, buyers also were reluctant to consider acquiring a company because COVID-19 precautions prevented them from running a traditional acquisition process. The challenges created by the pandemic resulted in significant barriers to conducting on-site management meetings or in-depth due diligence reviews typically associated with a traditional process.

Notable Recent Transactions

Despite these challenges, there were still a few industry acquisitions that took place during the year. In January 2020, The Bancorp acquired McMahon Leasing. Similar to The Bancorp offering, McMahon Leasing provides vehicle and equipment leasing as well as full-service fleet management services. The acquisition further expanded The Bancorp’s geographic footprint into the southeastern Pennsylvania region.

In February 2020, Regions Bank entered into a definitive agreement to acquire Ascentium Capital. Ascentium was listed as the second largest independent finance company for 2019 in the 2020 Monitor 100 and was previously owned by private equity firm Warburg Pincus. According to the Regions Bank press release, Ascentium had approximately $2 billion in portfolio loans and leases and originations of $1.5 billion at year-end 2019.

Alliance Funding Group was very active in 2020, acquiring two separate independent specialty finance and leasing companies. In March, it acquired Pinnacle Capital Partners. In addition to providing working capital loans, Pinnacle focuses on the beverage, construction, dental lab and specialty vehicle markets. Pinnacle, based in Tacoma, WA, was founded in 2000. In November, Alliance acquired Summit Commercial Finance, a vendor-based lessor founded in 1998. Located in Phoenix, Summit specializes in the convenience store, technology, dental and manufacturing equipment sectors. Summit was previously acquired in October 2019 by Mintaka Financial.

In February 2020, LendingClub acquired Radius Bancorp and its wholly owned subsidiary, Radius Bank, for $185 million in a 75% cash and 25% stock transaction. Radius Bank is an online bank with a branchless digital platform providing commercial and consumer banking services as well as banking-as-a-service solutions. The transaction provided a single platform to combine investors with borrowers and is expected to significantly reduce LendingClub’s cost of capital.

Apparently under duress, publicly held fintech OnDeck agreed to be acquired by Enova in July 2020. Enova agreed to pay $90 million, which consisted of a stock and cash deal and represented a 90% premium to OnDeck’s closing price from July 27, 2000. Enova saw the transaction as complementary to its current offerings of combining consumer and small business online lending.

In October, CIT, which had completed its acquisition of Mutual of Omaha Bank in January 2020, agreed to be acquired by First Citizens BancShares. First Citizens paid $2.2 billion for CIT in an all-stock sale that was designated as a merger of equals. First Citizens will retain its name and headquarters, and the transaction reportedly will result in the 19th largest bank in the U.S., with $110 billion in assets.

In November 2020, Solar Capital, a publicly held business development corporation, acquired a majority stake in Kingsbridge Holdings from private equity firm TZP Capital and the Kingsbridge management team. Solar Capital acquired an 87.5% stake in the company for $216 million in the form of $136 million of equity and $80 million of debt. The remaining stake in the company was retained by the Kingsbridge management team, whose members agreed to roll a portion of their equity ownership into this transaction. Nearly a year earlier, in October 2019, Kingsbridge Holdings expanded its distribution channel for technology equipment through the acquisition of Technology Finance Corporation, a technology lessor that sourced originations through vendors and value-added resellers. One of the principals at TZP Group recently mentioned to me that the Kingsbridge transaction was facilitated by the fact that Solar had a long-term lending relationship with the company prior to the acquisition. They further stated that this relationship provided Solar Capital with first-hand knowledge of the quality of the management team and the performance of the portfolio before and during the pandemic.

The Current Market

Based on the current level of activity at the beginning of 2021, The Alta Group has reason to expect a better year for M&A transactions, particularly in the second half of the year. M&A activity is primarily driven by economic factors, including, but not limited to, interest rates, stock market trends, unemployment rates, liquidity and access to credit, portfolio quality and political uncertainty. Based in part on the current economic climate, several attractive companies are currently considering a sale or are being offered for sale, and a number of qualified buyers continue to show interest in acquiring quality finance companies.

Despite the devastating impact that COVID-19 had on certain industries, we continue to enjoy low interest rates and reasonably strong access to capital. The stock market has continued to set record highs this year. The uncertainty of the presidential election is behind us and the full impact of the virus on portfolio quality is largely understood. As more of the population receives vaccines and our economy continues to open, the more likely it is that business air travel will return to pre-pandemic levels and senior management teams will return to the office. These events should facilitate a return to a more traditional M&A process. There is a large amount of dry powder that companies need to put to work and a pent-up demand to acquire quality assets. These factors should bode well for M&A activity in 2021.

As we learned last year, however, despite the majority of economic factors pointing to a strong year in M&A for 2021, there are other events that could derail the economic optimism. President Biden’s tax plan calls for an increase in the corporate tax rate from 21% to 28%. For buyers that assess value as a multiple of after-tax earnings, this essentially would reduce company valuations. In addition, the plan calls for the capital gains tax to be charged at the same tax rate as ordinary income for certain individuals earning in excess of $1 million annually. Of course, the plan would need to pass in the House and the Senate and may not be retroactive to January 2021.

In addition, the introduction of a $1.9 trillion government stimulus at a time when our economy is starting to open back up may result in higher inflation, possibly creating the need for the Fed to increase interest rates. This would result in higher discount rates and lower values for equipment finance companies. Another factor that could influence M&A activity is business leaders’ perceptions of the current and future business conditions in the industry. The Equipment Leasing & Finance Foundation’s 24-month confidence index for the equipment finance industry stood at 64.4 in February of 2021, which was slightly better than the 58.7 figure reported in February 2020, prior to the impact of the pandemic. This index, which is designed to reflect a qualitative assessment of industry leaders’ perceptions of current and future business conditions, has been generally declining over the past couple of years, which may suggest that the strong M&A cycle is in its later stages.

Potential Impact of Recent Bank Mergers

Similar to what occurred in 2019, in an effort to compete against their larger national rivals, several regional banks announced or consummated mergers in 2020. The mergers were structured to drive economies of scale and improve efficiency ratios through larger customer bases and deposit balances. They also were intended to drive cost synergies through personnel reductions, provide for large investments in digital technology platforms and cover fixed operating costs associated with regulatory compliance.

These factors certainly played a key role in PNC’s decision to acquire BBVA USA. In November, PNC signed a definitive agreement to acquire BBVA USA Bancshares, including its U.S. banking subsidiary, BBVA USA, for $11.6 billion. Bill Demchak, PNC chairman, president and CEO, is quoted on the company website as stating, “Over the last few years, we have focused on organic growth, including the ongoing expansion of our middle market corporate banking business and our digitally-led efforts to expand retail banking nationally. While we have made tremendous progress, accelerating our national scale is critical for us to effectively compete with our largest competitors. And that is precisely our intent with BBVA USA.” The acquisition places PNC as the fifth largest bank in terms of asset size in the U.S. It also will provide the bank with a presence in 29 of the nation’s top 30 markets.

In December of 2020, Huntington Bancshares announced plans for an all-stock merger valued at $22 billion with TCF Financial. The transaction would result in the 11th largest bank nationally, with approximately $168 billion in assets. In February 2021, TCF Capital Solutions announced that TCF acquired BB&T Commercial Equipment Capital, which consisted of a $1 billion portfolio of small-ticket equipment leases and loans. Clearly, these regional bank mergers create opportunities for their associated equipment finance divisions.

Based on the continued need for regional banks to expand and achieve scale to compete with their national rivals, one would anticipate that regional bank mergers will continue during 2021. Since many of the regional banks in the country offer equipment financing, it will be interesting to see what impact these mergers will have on the industry. It seems only logical that we will continue to see experienced equipment finance lift-out teams emerge from these bank mergers as industry veterans elect to locate new bank sponsors or otherwise exit to create their own independent finance companies to serve a specific niche in the industry.

Summary and Conclusion

The current levels of M&A activity and the future economic indicators generally point to a successful year of M&A activity in 2021. Barring the occurrence of the potential risks outlined earlier in this article, I expect the M&A market to continue to remain active during 2021 and for valuations of quality equipment finance companies to remain strong.

James (Jim) Jackson is co-CEO and leader of the Merger and Acquisition Advisory Practice of The Alta Group. Alta’s M&A practice provides buy-side and sell-side advisory services, locates debt and equity financing, provides valuations, and performs other related services to the equipment finance industry. Jackson has more than 30 years of experience in the equipment leasing and finance industry and has served as a senior financial executive at MicroFinancial/TimePayment, Deutsche Financial Services, AT&T Capital Corporation – Leasing Services and Signal Capital Corporation. He can be reached at [email protected].