M&A Activity To Pick Up In Second Half Following Covid-19-Triggered Slowdown

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,…

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