Moderate economic growth, strong performance in the equity markets and continued strong private company M&A activity define our experience in 2019. So,the question begs: What should we expect in 2020?Given that many factors influence M&A activity, it is difficult to precisely predict the future of M&As, but below are our thoughts.

The Economy

According to the Wall Street Journal, many economists are expecting modest growth in 2020. The IMF predicts that United States GDP will grow by 2%, down from the 2.3% growth in 2019.

Most economists point to the following reasons for their moderate growth expectations:

• Countries around the world, including emerging market countries, will continue with monetary policy easing.
• Less uncertainty around the U.S.-China trade war and Brexit.
• The borrower favorable interest rates continue.
• High levels of capital inflows to private equity firms continue at recent historical rates.
• Unemployment in the U.S. will remain low.
• Consumer confidence in the U.S. will remain solid.

There are factors that could be disruptive to continued economic success in 2020 for the U.S.that include:

• A flair up in the U.S.-China trade wars, and/or trade wars between the U.S. and the European Union. This would again increase uncertainty, causing investment by corporations to decrease.
• A serious Geo-Political conflict in the Middle East or other parts of the world could cause a spike in oil prices and/or other economic disruption.
• A significant drop in United States consumer confidence. The underlying fundamentals are still strong – low unemployment, strong wages, a healthy housing market –but at the end of December, The Conference Board Consumer Confidence Index dropped, indicating that consumers are feeling less optimistic and are less likely to accelerate consumer spending.
• Wage or price inflation, particularly here in the U.S.Inflation would cause central banks to halt their easy monetary policies.

Recession models put the likelihood of a recession within the next 24 months at 25%. At the beginning of 2019, a Wall Street Journal poll of economists also predicted a 25% chance of a recession for 2019.

The presidential election may also have an impact on the economy in 2020. Although historic data shows that the economy generally grows in an election year and the 12 months that follow, the uncertainty around who will win the Presidential election in November, and the tax and economic policies post-election, could result in a pull-back in investments, causing the economy to slow.

M&A Activity

M&A activity was strong in 2019, as indicated by the following statistics from FACTSET’s “January 2020 Flashwire”:

United States M&A Deals 2019 vs. 2018

Middle Market M&A Enterprise Value/EBITDA& Premiums 4^th Quarter 2017-4^th Quarter 2019

CCA is expecting M&A activity to remain strong in 2020, even if the economy dips, and we are not alone in this sentiment. Several prognosticators, including PwC and Deloitte, also predict a strong M&A market in 2020. This is based on several factors:

• The large amount of corporate and private equity liquidity available. According to Deloitte’s “The State of the Deal – M&A Trends 2020” U.S. companies had $1.55 trillion dollars of cash on their balance sheets at the end of 2019 and M&A is their top target for deploying that cash. According to PwC, private equity funds have $2.5 trillion of cash on hand.
• The low interest rate environment. As outlined in The Economy section above, most economists expect interest rates to stay low in 2020.
• Economic fundamentals are still solid.
• Companies are still looking to diversify and acquire talent and technologies. These are often achieved through acquisitions.
• There are an estimated 2.34 million small businesses in the U.S. that are owned by Baby Boomers. Many of these aging owners are, or will be in the near future, planning and pursuing exit strategies.

The timing of deals in 2020 could be impacted by fears of a recession and the Presidential election, with both potentially causing sellers to try to get deals done earlier in the year. Sellers may be concerned that a recession would cause a decline in valuation, and – as outlined above – the uncertainty of the Presidential election may push sellers to make a deal.

A potential factor that could impact deal volume, the structure of deals and due diligence is the returns buyers have achieved on other deals they have done recently. However, according to a Deloitte survey of 1,000 public and private corporate executives and private equity investors, 63% of these respondents think deal activity will increase in 2020, with only 4% predicting that it will decrease.

The Deloitte survey indicated that time to complete due diligence has increased as much as 30% over the past 10 years. This was attributed to greater deal complexity, good deals being harder to find this far into a long M&A cycle, and regulatory, policy and information security concerns.

CCA Prediction

The U.S.economy is likely to continue to grow at a moderate pace. Given the decade-long favorable run we have experienced, an adjustment is inevitable, but we don’t believe it will happen in 2020. Nevertheless, we are optimistic that private company M&A activity will remain strong for 2020, and that sellers remain in position to achieve favorable valuations. However, despite the seller favorable environment,buyers will continue to scrutinize deals heavily,in particular with intense focus on quality of earnings reviews, but due to the factors outlined above, they also will continue to be motivated to enter into deals.

Chesapeake Corporate Advisors, LLC (CCA) is a boutique corporate advisory firm, founded in 2005, committed to serving investor-owned and closely held emerging growth and middle market companies. CCA provides strategic advisory services (value creation), investment banking services (value realization), and valuation & financial opinions to companies with revenues generally between $10 million and $200 million. For more information about Chesapeake Corporate Advisors, please visit the website at www.ccabalt.com or call 410.537.5988