An improved public health environment and the possibility of higher capital gains taxes will likely drive increased merger and acquisition activity in 2021, according to Citizens’ 2021 Middle Market M&A Outlook. Companies will rely on M&A for growth in 2021 and more sellers will be open to making deals, particularly in the second half, according to survey respondents.

Typically, the economic outlook is the most significant factor in a company’s consideration of an M&A transaction. However, Citizens found that COVID-19 and tax policies of the Biden administration will be the top drivers in 2021, with increased expectations for an M&A spike if the administration passes capital gains tax hikes. Upbeat expectations for corporate valuations and deal flow in the year ahead are also fueling a decidedly optimistic M&A forecast.

“Many business leaders expect the continued rollout of vaccines and the prospect of increased taxes to spur a robust year in terms of deal flow, especially in the second half,” Ralph M. Della Ratta, chairman of Citizens M&A Advisory, said.

“2020 left a backlog of pent-up demand for M&A. With strong valuations, we think a lot of PE firms and liquidity-seeking owners will be eager to get to the market,’’ Jim Childs, CEO of Citizens M&A Advisory, said. “The pandemic may have been the last straw for many business owners who are looking to step back or retire.”

Findings of Citizens’ 2021 Middle Market M&A Outlook

• The COVID-19 pandemic seems to have reduced overall economic optimism, with only 47% of middle market companies anticipating broad improvement in 2021, but business leaders are more confident in their own corporate outlooks, with 55% feeling bullish about the coming year.
• The majority of business leaders (60%) expect corporate growth to continue to come from M&A activity, as strategic growth remains a top priority in 2021.
• Top reasons to sell were to increase the focus on strategic growth opportunities (67%) and to take advantage of current valuations (44%). The top reasons to buy were to increase revenue and growth (61%) and to improve operational efficiency (41%).
• Respondents gave the current M&A environment a muted grade, with nearly half of corporate (49%) and PE respondents (41%) characterizing it as weak. Meanwhile, 36% of companies and 45% of PE firms expect marked improvement in 2021, with a particular focus on the second half of the year.
• Interest in finding an international deal partner is down among both buyers and sellers, continuing a trend from the past three years.
• Confidence in deal completion is down starkly and is an area where teaming with an M&A advisor could help to overcome deal roadblocks, according to Citizens. Sellers are looking for a strong partnership to help them find potential offers — a need that didn’t make the list of top priorities last year.

Citizens’ 2021 Middle Market M&A Outlook was conducted among U.S.-based, middle market businesses ($50 million to $1 billion in revenue) that are currently engaged in or open to mergers and acquisitions activity, as well as private equity firms with clients in the same revenue range. Core business sectors included healthcare, technology, industrial, consumer services, B2B services and other industries. Business executives at 470 middle market firms and 230 private equity firms who are directly involved in decision-making related to mergers and acquisitions (owners/partners, CEOs, presidents and other C-level and directors) completed a 15-minute phone or web-based survey in November and December 2020.