Citi analysts Scott T Chronert and Louis L Odette review small and mid-cap activity during 2013 and the outlook for 2014, including a look at shareholder activism, in their research note “M&A: Is “A” for Acquisitions, or Activists?”

Measuring small and mid cap M&A

“Our preferred measure of M&A activity is to assess the dollar value of “market cap” which is effectively removed from each of the Russell 2000 and Mid Cap indexes due to M&A activity,” says Citi.

By this measure, the M&A tally for 2013 for the Russell 2000 was as follows:

1-rut-2013-m-and-a

Therefore, a total of 79 deals were struck aggregating $58B in terms of market cap that left the Russell 2000 in 2013.

In 2013, $86B worth of market cap exited the Russell Mid Cap in the course of 13 deals, as per the following table.

2-rmc-2013-m-and-a M&A

Small and mid cap M&A returns

When measured on a post-deal basis over a three month time frame, Citi observed that M&A target companies clocked on average returns of 23.9% and acquirer companies posted 16.3% returns.

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Historical trends

The chart below shows that M&A activity picked up along with the economic recovery after 2008, and that trends, both in terms of deal count as well as deal value, were rather similar for the RUT as well as the RMC.

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Factors favoring small and mid cap M&A in 2014

  • According to Citi, higher stock market levels make for increased M&A activity. “For sellers, they are more inclined to sell when their stock prices are high, so that they feel they are getting a favorable price for the company. On the other hand, to the extent that sellers pay for their acquisitions at least partially in their own stock, they feel they have a stronger currency when their stock price is high,” observes Citi.
  • A steady improvement in economic conditions – Citi estimates “a quarterly pattern of growth averaging 3% through 2015 with unemployment dropping below 6% and inflation still low but edging above 1.5%” – could nudge corporates towards increased M&A.
  • Competitive interest rates
  • Another key trend in 2014 could be ‘margin arbitrage’ – the concept of businesses changing hands depending on their contribution to corporate profit coffers – “one man’s poison may be another’s meat.”

Small and mid caps grappling with activism in 2014

Measuring this is far more difficult than M&A, Citi admits, and complicated by erratic time frames and the uncertainty of activism outcome. Nevertheless, here is a table that shows the current number of companies that have known activists as shareholders:

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