In addition to corporate value creation, innovation, hidden value search... Mergers and acquisitions are one of the many alpha generators in the ODDO BHF Active Small Cap fund. After four deals each in 2019 and 2020, the pace of activity has picked up. By focusing their stock selection on innovative and even disruptive stocks, they consider to be in the sweet spot of this very promising segment. ODDO BHF AM estimates that a further 60% of their fund's holdings are likely to benefit from an M&A offer in the medium term.
The volume and size of M&A deals has increased to a new peak in Europe, by an average of 15% from pre-pandemic levels.
This is fueled by low interest rates, soaring stock prices, cash-rich corporate balance sheets, burgeoning demand for private equity, leveraged buyouts and SPACs. While there is a risk of overheating in the long term, this recent acceleration in M&A activity has reason to continue with the abundance of capital that may well shape the M&A landscape through 2022 and beyond.
According to Moody's Investors Service, non-financial corporate liquidity reached a record high of $2.1 trillion at the end of June 2020, a 30% increase over the same period in 2019. The COVID-19 pandemic has led many companies to review their portfolios and reassess their strategies. Small caps are the key to new markets and products, new technologies and new growth opportunities. It is in this segment that innovation and creativity are concentrated. This drives large companies to swallow small caps.
The company's investment process aims at identifying and selecting innovative and under-the-radar companies. their approach involves not only a detailed fundamental analysis of the company, management and sector dynamics, but also ownership structures and the attractiveness of the sector to potential acquirers. All these elements traditionally have a major impact on valuations, including in M&A transactions, according to our analysis. This approach led to the selection of Dialog Semiconductor for example, which produces chips and specific integrated circuits for power management in smart phones and the Internet of Things, with about 50% of its sales to Apple . The quality of its technology led the large Japanese company Renesas to acquire the group with an attractive premium in February.
Corporate acquirers are not the only ones with an acute appetite for small caps. The abundance of capital is also whetting the appetite of private equity and SPACs (special-purpose acquisition companies) who are all competing for the most attractive assets and the best technology. Private equity fundraising has been brisk and, with over US$1.9 trillion of dry powder, its buying power, along with that of other private market capital, is at an all-time high. Acquisition SPACs have also reached a record $495 billion since the beginning of the year.
Although the creation of new SPACs has paused, the considerable number of existing companies that have yet to find a target , around 400, represents up to half a trillion US dollars of combined cash and leverage, specifically earmarked for future transactions, also in Europe, according to independent analysis.
For small-cap shareholders, this fierce competition between acquirers is driving up acquisition premiums. For example, German company Zooplus received competing bids from two private equity firms, Hellman and Friedman and its rival EQT , which have pushed the share price up by almost 80% since the beginning of August.
