Trump’s second term may unleash a new wave of acquisitions, and mid-cap stocks could be in the crosshairs of acquirers.
By Sergei Klebnikov, Forbes Staff
The stock market surged higher following Donald Trump’s election win earlier this month as Wall Street celebrated the new business-friendly administration and the more lenient regulatory environment it is expected to bring.
Under the Biden administration, dealmaking has been sluggish due in part to an aggressive antitrust approach from the Federal Trade Commission headed up by Chair Lina Khan. A year-and-a-half Federal Reserve rate hiking campaign also slowed the pace of deals. Trump, however, has made it no secret that he wants to overhaul government departments, and once he takes office in January, a change in the FTC seems like it will be among his first orders of business. Plus, the Fed started cutting rates in September.
Dealmakers and corporate lenders are expecting a second Trump term to usher in a new era of merger and acquisition activity, while Wall Street now expects that under Trump, stalled deals like the Kroger-Albertsons grocery merger could get the green light.
Recent interest rate cuts from the Federal Reserve have lowered the cost of capital for companies to do deals, particularly those involving debt. The dollar-volume of M&A activity in 2025 will rise 20%, compared to a 15% decline this year, says Goldman Sachs’ chief U.S. equity strategist, David Kostin.
“A tidal wave of tech M&A and overall deal activity could now be on the horizon with Trump in the White House,” says analyst Dan Ives at Wedbush.
Public company CEOs have also lauded what they see as a more favorable outlook for dealmaking. Warner Bros. Discovery CEO David Zaslav told analysts on a call earlier this month that the new Trump administration would be beneficial for business consolidation.
Andrew Peck, co-chief investment officer at $43 billion Baron Capital, predicts that sectors like healthcare, consumer staples and especially technology—where larger companies are sitting on big cash piles—are ripe for M&A activity. CFRA Chief Investment Strategist Sam Stovall agrees about healthcare and consumer staples but adds to the list depressed sectors like industrials and materials. Bank of America says that just about any company with positive cash flow, above-average sales growth and low debt levels are takeover candidates.
Mid-caps, which range in market capitalization from about $2 billion to $10 billion, have been the stock market’s sweet spot since the turn of the century, with the S&P Midcap 400 Index posting total returns 39% higher than both the large cap S&P 500 Index and Russell 2000 Small Cap Index. An investment of $10,000 in May 2000 in the MDY exchange traded fund that tracks the S&P 400 has mushroomed into a value of $92,260. By comparison, $10,000 invested in the SPY, which mirrors the S&P 500, and IWM, which tracks the Russell 2000, grew into $65,560 and $66,430, respectively.
Forbes decided to hunt for acquisition candidates among under-the-radar mid-cap stocks by selecting companies appealing to potential acquirers interested in both growth and value.
In screening for top targets in the growth category, Forbes used the following metrics: Companies with a market range of between $2 billion and $15 billion, closely approximating the typical range for mid-cap stocks. These companies are big enough to exert competitive pressure on larger cap companies in their industry, spurring takeover interest. They are also small enough to be easily digestible for larger companies, and for private equity firms and Warren Buffett-style investors in search of well-run businesses that produce consistent and rising cash flows. There are more than 10,000 private equity firms globally and according to an S&P Global report earlier this year, they are sitting on a record $2.6 trillion in dry powder.
For our mid-cap growth candidates, we required stocks to have more than a 7% increase in current-year earnings per share and revenue. We also required a return on invested capital (ROIC) of at least 15%, a calculation used to determine how well a company allocates money to profitable projects or investments. For the value category, we additionally required shareholder yield of greater than 4% but dropped the requirement for 7% current year growth in earnings per and revenue.
On both lists we also considered enterprise value divided by earnings before interest, taxes, depreciation, and amortization—a metric widely used by acquiring firms that looks at the amount of cash flow generated if you were to buy all of a company’s stock and assume all of its debt. Finally, we then ranked both lists by ROIC and took the 10 stocks ranking highest in that metric.
Top of both the growth and value lists was Dropbox, the $8.5 billion (market capitalization) cloud storage company. Though shares are down some 7% this year, Dropbox boasted an impressive 55.6% return on invested capital, meaning that management has had a good track record of investing in profitable projects.
On our value list, the top performers were all in the consumer staples sector, though their share prices have largely been flat this year. These include retailer Bath & Body Works, department store chain Dillard’s and footwear brand Crocs, which boasted a 37%, 28% and 26% return on invested capital, respectively.
The top targets in our growth list, meanwhile, include the likes of home service plan provider Frontdoor, radiopharmaceutical company Lantheus Holdings and clothing retailer Abercrombie & Fitch. Many of these stocks have seen share prices jump higher in 2024 on the back of solid earnings growth: Lantheus is up 20% while Abercrombie & Fitch and Frontdoor have both risen more than 50%.
“Regulatory shifts may open doors but won’t fundamentally change what makes a good deal good, and while a potential administration change could ease regulatory scrutiny, factors like higher interest rates could offset any surge in deal activity,” cautions Kurt Havnaer, manager of the Jensen Quality Mid Cap (JNVIX) mutual fund. “Looking ahead, acquirers will likely remain selective, focusing on deals that create tangible shareholder value through revenue synergies, market expansion, and operational efficiencies.”