Donald Trump’s second presidential term is anticipated to catalyze a significant uptick in merger and acquisition (M&A) activities, particularly targeting mid-cap stocks. Following Trump’s recent electoral victory, the stock market experienced a notable surge, fueled by investor optimism surrounding a potentially business-friendly climate. This anticipated change is markedly distinct from the Biden administration’s approach, which has been characterized by a stringent antitrust stance led by Federal Trade Commission Chair Lina Khan. The combination of these regulatory changes with the recent cuts in Federal Reserve interest rates has created an environment that is expected to facilitate more M&A activity.
In contrast to the slower deal-making pace during Biden’s term, industry players are looking to Trump’s administration as a potential turning point. Corporate leaders and financial analysts believe he will prioritize changes in regulatory frameworks, including a revamp of the FTC. These expectations are coupled with the Federal Reserve’s recent rate cuts, which have decreased capital acquisition costs, further encouraging companies to pursue acquisitions as a strategy for growth. Analysts from firms such as Goldman Sachs predict a 20% increase in M&A dollar volume by 2025, signaling a rebound from the current sluggishness that has plagued the market.
Particularly, sectors such as technology, healthcare, and consumer staples are viewed as ripe for M&A activity given the robust financial positions of larger companies, which are sitting on substantial cash reserves. High-profile leaders in the corporate world, including Warner Bros. Discovery’s CEO David Zaslav, have expressed optimism about Trump’s potential impact on business consolidation. Investment experts from various firms suggest that companies with strong cash flows and healthy growth rates represent attractive acquisition targets, highlighting mid-cap stocks’ historic outperformance as a profitable segment for interested acquirers.
With mid-cap stocks defined as having market capitalizations between $2 billion and $10 billion, they have typically offered higher returns compared to both large-cap and small-cap stocks. For instance, investments in mid-cap indices have outperformed, with significant long-term growth being observed over the past two decades. Given their competitive position in the market, many of these firms are now being scrutinized as potential acquisition candidates. Forbes undertook an analysis to identify promising mid-cap stocks that could appeal to potential acquirers, focusing on both growth and value metrics aligning with current market dynamics.
In identifying candidates for potential acquisitions, criteria were established to ensure the selected companies demonstrated both growth and value characteristics suitable for larger firms and private equity investors. The evaluation focused on factors like earnings growth of more than 7%, a return on invested capital (ROIC) exceeding 15%, and a shareholder yield greater than 4% for value candidates. Notably, Dropbox emerged as a prominent candidate in both categories, despite its declining stock price, it showcases a remarkable ROIC of over 55%, indicating effective management. This analytical approach aimed at uncovering lesser-known mid-cap companies presents potential value drivers for prospective acquirers.
However, even with the potential for regulatory shifts to facilitate M&A activities, industry experts caution against overstating the implications of a Trump administration on deal-making fundamentals. While regulatory leniency may remove some barriers, there are underlying economic considerations, such as higher interest rates and their implications for financing. As a result, acquirers are likely to remain discerning, seeking out deals that genuinely enhance shareholder value. The focus on achieving synergies, expanding market share, and improving operational efficiencies will remain critical in determining the success of prospective M&A ventures in the evolving economic landscape influenced by Trump’s administration.
