NEW YORK ( TheStreet) – As a year dominated by megamergers comes to a close, middle-market M&A in 2015 should increase as confidence among dealmakers trickles down to mid-cap companies, Richard Jeanneret, the Americas vice chairman of transaction advisory services at Ernst & Young told attendees at the Deal's Deal Economy Event in New York City on Thursday.
"Middle-market M&A has been down, but I think the large deals will help bring out the middle market," Jeanneret said.
Others sitting with Jeanneret on the panel, Sense of the Markets: International Tension and Competition, agreed.
"The smoke has finally cleared from the crisis, and I think CEOs are more confident doing M&A," said Joseph Sullivan, the president and CEO at asset manager Legg Mason.
Middle-market deal flow, along with the effects of shareholder activism, were among the topics discussed by the panel, which also featured Saguenay Strathmore Capital chairman and CEO Brian Walsh and Stephanie Link, CIO at TheStreet.com and co-portfolio manager of Jim Cramer's Charitable Trust.
EY counts nearly $3.5 trillion in cash on corporate balance sheets at a time when equity markets in the U.S. are flying high, leading to a consensus on the panel that deal activity should continue as boards and executives look for ways to drive growth.
"With the amount of capital that is sitting on balance sheets ... I think that capital is going to be deployed," Jeanneret said, noting that it remains to be seen if that use will be in the form of dividends, buy-backs or M&A.
Although buybacks and dividends can improve share performance, the panel cautioned that such uses of capital aren't real growth indicators . M&A, on the other hand, can be a growth mechanism if it is done in a careful way that's accretive to earnings.
To that end, "CEOs are deploying more rigor, and accountability for transactions is higher than its ever been," Jeanneret said.
While the U.S. equity markets are moving in a positive direction, there are still opportunities to find undervalued companies, the panelists said.
Those finding them, the panelists said, include shareholder activists such as Carl Icahn, Bill Ackman and David Einhorn.
Legg Mason's Sullivan said that Nelson Peltz's Trian Fund Management was actually a good partner for Legg Mason during its five-year involvement at the company. Peltz, who stepped down from the Legg Mason board last week, had been a director since October 2009 and aided in the company returning more than $2 billion to shareholders during his tenure.
"Trian was a good catalyst for us," Sullivan said. "They were a good voice within our company to challenge us to focus on what we did well and force us to take action."
Even if activists aren't directly involved, their influence is being felt.
"What we are seeing are more corporates [being] much more proactive," Jeanneret said. "Mainly this is leading to divestitures with [boards] saying, 'If we don't do it ourselves, someone is going to do for us.' "
Activists can also "set a floor [valuation] for stock prices," said TheStreet's Link.
She said that Cramer's charitable trust has a number of investments that mirror that of activist hedge fund Jana Partners, which has been instrumental in a number of M&A-related activist campaigns.
Jana's successful 2014 activist campaigns include Apache, which on Nov. 20 announced plans to sell $1.4 billion in assets at the behest of the activist; McGraw Hill, which completed a reorganization of its business in September after the activist pressured the company to realign; and Petsmart (PETM) , which the activist successfully pushed to explore a sale.
Even with global M&A activity expected to remain healthy because of low interest rates, a lively U.S. equity market and activism, risks are still out there, some panelists warned.
"Geopolitics is the biggest risk in my opinion," said Saguenay's Walsh. "There are macro risks in Europe."
He added that China and India also hold their own set of risks for retail investors and companies looking for growth.
Still, the panelists said that these areas also provide large rewards despite their risk profile compared to the U.S., which is the safest global economy because it's not dependent on imported natural resources.
"There are better values overseas," said Link. "You've got to look to places like Europe, like China and India, which isn't cheap but has had strong growth."
--Written by Michael Brown in New York