How You Could Profit From The M&A Boom

How You Could Profit From The M&A Boom
Carl Hazeley

over 2 years ago3 mins

  • Global M&A activity is on track for a record-breaking year, driven by low leverage, high private equity firepower, and SPACs needing to do deals

  • From a sector perspective, industrials, real estate, and financials have accounted for half the deals announced so far

  • Two ways to play this trend are investing in small- and mid-cap companies, and investing in the sectors where most of the action is happening

Global M&A activity is on track for a record-breaking year, driven by low leverage, high private equity firepower, and SPACs needing to do deals

From a sector perspective, industrials, real estate, and financials have accounted for half the deals announced so far

Two ways to play this trend are investing in small- and mid-cap companies, and investing in the sectors where most of the action is happening

Mentioned in story

Mergers and acquisitions – M&A to their friends – have picked up from a slump early last year: company dealmaking activity is currently on track to set a new annual record. Here’s what’s been driving the trend so far – and, crucially, where future opportunities may lie for your portfolio.

Source: Bloomberg, Goldman Sachs
Source: Bloomberg, Goldman Sachs

What’s driving record M&A?

There are four major factors at play right now. First, corporate leverage isn’t that high. While companies have large amounts of debt in absolute terms, it isn’t that big relative to their earnings or assets. That means firms can easily borrow money at low interest rates to make acquisitions – and many have been doing just that.

Second, private equity (PE) firms have record cash piles. With over $1.5 trillion of so-called “dry powder” to spend on deals, there’s lots of money currently in search of M&A opportunities.

Third, the global economic recovery is largely on track: Europe’s reopening and recovery has lagged the US’s, but economists expect strong growth to continue through the rest of this year.

And fourth, European special-purpose acquisition company (SPAC) activity has picked up. SPACs have two years to spend the money they raise on acquisitions before they have to return it, meaning deals are on the up – and the momentum’s likely to stick around.

Where’s the M&A focus been?

In terms of target sectors, industrials, real estate, and financials have accounted for half the number of deals struck so far this year.

Source: Bloomberg, Goldman Sachs
Source: Bloomberg, Goldman Sachs

In industrials, a strong economic recovery has been a boon for cyclical firms – whose earnings tend to ebb and flow with economic growth. That’s set the scene for high levels of dealmaking as buyers try to get in on the action.

In financials, banks have had a tough time recently – particularly in Europe – so teaming up could help them boost revenues and profits by cutting out duplicate costs. In Italy, that’s been made all the more likely by government plans to extend merger-related tax breaks until next year. In payments, meanwhile, the shift online has been accelerated by the pandemic – and given there are so many players in the space, analysts reckon there’s plenty of room for M&A.

Diving into SPACs

SPACs have been all the rage in the US for a couple of years now – but in Europe, they’ve only just started catching on. In the UK, regulators are making efforts to align SPAC rules with the US, which would likely attract even more investment.

There’s already an estimated $130 billion worth of SPAC cash currently looking to be spent on acquisitions within the next two years. And according to Goldman Sachs, SPACs could drive just shy of a trillion dollars’ worth of deals over this timeframe.

What’s the opportunity here?

As I see it, there are two clear ways to play the M&A boom: investing in smaller stocks, and investing in target industries.

Smaller stocks are attractive because of the typical size of the deals being done: most companies getting taken over are worth below $10 billion (i.e. small- and mid-sized). Having a higher proportion of smaller stocks in your portfolio, gives you a better chance of benefiting from one of them being bought out.

And the trends influencing the industrial, financials, and payments sectors in particular seem likely to continue for a while yet. Owning stocks in these industries again gives you a better shot of benefiting from M&A activity.

It’s worth flagging, though, that picking stocks solely in the hope that they become an M&A target is risky: unless buyer interest is already obvious – in which case the likelihood of a deal may be mostly priced in already – you’re basically taking a lucky dip.

If, on the other hand, M&A optionality’s simply an added bonus to an already solid investment thesis you’ve developed in either a smaller firm or one in the industries highlighted above, then it could prove a nice route to additional upside.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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