Key Points: M&A set to continue; stocks that could benefit

Equity & Portfolio Strategy

This is a summary of the key points from our analysis of the companies who could benefit if M&A is set to continue at the rate that it has started 2021 with. If you would like to read the whole note, please subscribe below and access here.

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Key Points: M&A set to continue; stocks that could benefit

• Specifically, in the US, between the years 2016-2020, annual deal value averaged about $1.8trillion. Through May 2021, US deal value was already $1.4 trillion.

• The 54 megadeals (transactions of at least $5 billion) announced so far in 2021 has already eclipsed the number of megadeals in all of 2020.

• We have also seen more than 200 transactions in the $1billion - $5billion value in the first 5 months of 2020 compared to an average of 230 announcements a year over the last 5 years. 

• Who could be next? Through experience, our view is that the best way to assess potential targets is to look at well invested businesses with strong cash generation that are potentially being under-valued by the equity market. We believe, those are the types of businesses that have a high hit rate of being taken out especially by private equity. 

• In our M&A screens, we use the above thought process to assess businesses across 6 different metrics based on invested capital, cash generation and using our Valuation tiers. We have then selected all businesses that clear at least 5 of the 6 criteria.

• This leaves us with two screens that highlight 23 large cap stocks (>$5bn Mkt Cap) and 25 mid-cap stocks ($1bn - $5bn Mkt Cap).

• Following this, we have tried to condense it down to 5 stocks that are potentially very interesting given they flash up on the screen but also are stocks that we already like, irrelevant of M&A.