Florence Joffroy-Black and Dave Sheppard, MedWorld Advisors05.03.21
There’s only one word that can best describe medtech’s current M&A market: hot. With more than 10 deals transpiring monthly, it appears the medical device industry may exceed 100 total transactions this year.
Clearly, it is a seller’s market right now. And in many sectors, the glut in available inventory could be problematic, easily compromising sellers’ ability to attract buyers. But such a challenge is not a concern for medtech firms.
There are many reasons why the industry’s M&A market is red-hot this year. We’ve detailed the top four in this column.
1. Selling to Avoid Higher Corporate Taxes
The Biden administration is proposing sweeping changes in both tax rates and structure. If passed, these changes will lead to new levies that will impact corporate finances, operations, executive teams (including owners), and sellers/shareholders. Table 1 lists some of the tax changes under consideration.
In addition to these proposed tax changes, the industry should be on alert for the possible re-introduction of the 2.3 percent Medical Device Tax, which—for those with short memories—was part of the 2010 Affordable Care Act (a.k.a., Obama Care). The Medical Device Tax was especially onerous because it taxed revenues and eliminated tens of thousands of jobs (several industry studies confirmed the latter fact). It took nearly a decade for Congress to repeal the tax. The industry must stay vigilant to ensure it is not resurrected in any form because its return not only would negatively impact medtech businesses (making them less attractive) but also diminish valuations for sellers. Even though many businesses are still “valued” at a multiple of EBIT (Earnings Before Interest and Taxes), the “multiple” valuation would be lower under the device tax.
2. Economic Outlook Matters
Not surprisingly, buyers are more willing to invest and spend money when they have confidence in the economy and financial markets. The good news is the global gross domestic product (GDP) is expected to grow more than 6 percent this year. Historically, worldwide GDP has hovered in the 3 percent to 4 percent range. Led by the latest $1.9 trillion U.S. stimulus package (adding about 2.5 percent of growth alone), the increase in America’s GDP is expected to be close to 6.5 percent. China and Europe are also expected to return to very positive GDP growth rates, at roughly 8 percent and 5 percent respectively.
Moreover, the financial markets have been on a tear. In early April, the Dow Jones Industrial Average was at 33,153; the NASDAQ Composite shot up to 13,480; and the S&P 500 topped 4,000—all historical highs for these Wall Street indexes.
3. Liquidity Creates Impact
The U.S. Federal Reserve (Fed) policies have a huge impact on liquidity. During the COVID-19 pandemic, the Fed has taken a number of steps to limit economic damage. For example, it lowered the Federal Funds Rate (the amount banks charge to borrow from each other overnight) by 1.5 percentage points since March 2020; the current range is between 0 percent and 0.25 percent, which is very low by historical standards.
The Fed also has supported the financial markets’ overall function. It redeployed “Quantitative Easing” (QE), a tool that was heavily used during the Great Recession. QE involves purchasing large amounts of securities (commercial and mortgage) to enable key lenders to free up cash for capital markets lending. In addition, the Fed has incentivized lenders (banks) to actually loan money by creating policies that encourage borrowing.
Finally, the Fed has supported the economy through direct lending by backing small business loans (via its “Main Street Lending Program”) and directly buying bonds from larger corporations (through its “Primary Market Corporate Credit Facility”).
These actions by the FED have generated plenty of cash liquidity in the capital markets, which in turn, has funded economic growth. This liquidity also has helped fuel increased M&A activity across industries, including the medical device sector. These actions may begin to tighten, however, later this year and beyond.
4. Buyers on the Hunt
All these previously mentioned factors have motivated buyers to invest and they are very active. Consequently, this has created an extremely robust M&A market that shows no signs of slowing down. It also has generated healthy competition for good quality businesses, which has led to higher valuations. Some of the key types of buyers are outlined in Table 2.
Companies considering testing the medtech M&A market in the near future should consider 2021 as the year to exit. And, since deals take time, potential sellers may want to consider getting started as soon as possible. Don’t let these dynamic market conditions go to waste—they won’t last that much longer. Hesitate too long, and the opportunity may be lost.
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at florencejblack@medworldadvisors.com or at www.medworldadvisors.com
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.
Clearly, it is a seller’s market right now. And in many sectors, the glut in available inventory could be problematic, easily compromising sellers’ ability to attract buyers. But such a challenge is not a concern for medtech firms.
There are many reasons why the industry’s M&A market is red-hot this year. We’ve detailed the top four in this column.
1. Selling to Avoid Higher Corporate Taxes
The Biden administration is proposing sweeping changes in both tax rates and structure. If passed, these changes will lead to new levies that will impact corporate finances, operations, executive teams (including owners), and sellers/shareholders. Table 1 lists some of the tax changes under consideration.
In addition to these proposed tax changes, the industry should be on alert for the possible re-introduction of the 2.3 percent Medical Device Tax, which—for those with short memories—was part of the 2010 Affordable Care Act (a.k.a., Obama Care). The Medical Device Tax was especially onerous because it taxed revenues and eliminated tens of thousands of jobs (several industry studies confirmed the latter fact). It took nearly a decade for Congress to repeal the tax. The industry must stay vigilant to ensure it is not resurrected in any form because its return not only would negatively impact medtech businesses (making them less attractive) but also diminish valuations for sellers. Even though many businesses are still “valued” at a multiple of EBIT (Earnings Before Interest and Taxes), the “multiple” valuation would be lower under the device tax.
2. Economic Outlook Matters
Not surprisingly, buyers are more willing to invest and spend money when they have confidence in the economy and financial markets. The good news is the global gross domestic product (GDP) is expected to grow more than 6 percent this year. Historically, worldwide GDP has hovered in the 3 percent to 4 percent range. Led by the latest $1.9 trillion U.S. stimulus package (adding about 2.5 percent of growth alone), the increase in America’s GDP is expected to be close to 6.5 percent. China and Europe are also expected to return to very positive GDP growth rates, at roughly 8 percent and 5 percent respectively.
Moreover, the financial markets have been on a tear. In early April, the Dow Jones Industrial Average was at 33,153; the NASDAQ Composite shot up to 13,480; and the S&P 500 topped 4,000—all historical highs for these Wall Street indexes.
3. Liquidity Creates Impact
The U.S. Federal Reserve (Fed) policies have a huge impact on liquidity. During the COVID-19 pandemic, the Fed has taken a number of steps to limit economic damage. For example, it lowered the Federal Funds Rate (the amount banks charge to borrow from each other overnight) by 1.5 percentage points since March 2020; the current range is between 0 percent and 0.25 percent, which is very low by historical standards.
The Fed also has supported the financial markets’ overall function. It redeployed “Quantitative Easing” (QE), a tool that was heavily used during the Great Recession. QE involves purchasing large amounts of securities (commercial and mortgage) to enable key lenders to free up cash for capital markets lending. In addition, the Fed has incentivized lenders (banks) to actually loan money by creating policies that encourage borrowing.
Finally, the Fed has supported the economy through direct lending by backing small business loans (via its “Main Street Lending Program”) and directly buying bonds from larger corporations (through its “Primary Market Corporate Credit Facility”).
These actions by the FED have generated plenty of cash liquidity in the capital markets, which in turn, has funded economic growth. This liquidity also has helped fuel increased M&A activity across industries, including the medical device sector. These actions may begin to tighten, however, later this year and beyond.
4. Buyers on the Hunt
All these previously mentioned factors have motivated buyers to invest and they are very active. Consequently, this has created an extremely robust M&A market that shows no signs of slowing down. It also has generated healthy competition for good quality businesses, which has led to higher valuations. Some of the key types of buyers are outlined in Table 2.
Companies considering testing the medtech M&A market in the near future should consider 2021 as the year to exit. And, since deals take time, potential sellers may want to consider getting started as soon as possible. Don’t let these dynamic market conditions go to waste—they won’t last that much longer. Hesitate too long, and the opportunity may be lost.
Florence Joffroy-Black, CM&AA, is a longtime marketing and M&A expert with significant experience in the medical technology industry, including working for multi-national corporations based in the United States, Germany, and Israel. She currently is CEO at MedWorld Advisors and can be reached at florencejblack@medworldadvisors.com or at www.medworldadvisors.com
Dave Sheppard, CM&AA, is a former medical technology Fortune 500 executive and is now focused on M&A as a managing director at MedWorld Advisors. He can be reached at davesheppard@medworldadvisors.com.