NEW YORK (
) -- The recent deals for
( AMRPQ) and
may indicate to some a return of the mega-deal, after years of post-crisis C-Suite caution.
It certainly is a fun exercise to speculate where Warren Buffett might aim
, after the 'Oracle of Omaha' said in March that his failure to make a large acquisition
But given a trend toward smaller mergers and buyouts by corporations and private equity firms, investors may do well to continue to focus their M&A speculation on small and mid-cap companies.
Rising valuations for corporations across the
Russell 2000 Index
Russell Midcap Index
( RMCC), a stabilizing economic outlook, an imperative for revenue growth and attractive financing, may continue to drive small and mid-cap deals in 2013, according to a March 4 screening of M&A targets by Citigroup analyst Scott Chronert.
Last year, M&A removed about 5% of the Russell 2000's total equity value -- $58 billion -- and helped drive the 14.6% return for the index, with a similar amount being acquired from the Russell Midcap index, according to Chonert's calculations.
"We continue constructive on the outlook for
small and midcap M&A activity during 2013," Chronert wrote.
"Typically, small cap will be characterized by more deals, but with smaller size. Conversely, deal count in mid cap is typically lower, but with offsetting higher deal values," the analyst added, while noting Buffett and
has driven mid-cap M&A this year.
, media conglomerate
, payments specialist
Total System Services
, home retailer
American Eagle Outfitters
Packaging Corporation of America
, as possible private equity buyout targets with market caps in excess of $4 billion.
The team of Citigroup analysts also see underachieving companies such as
Abercrombie & Fitch
, car parts supplier
Allscripts Healthcare Solutions
Fuel Systems Solutions
and gaming software maker
Take-Two Interactive Software
, as notable small and mid-cap deal targets in 2013.
Those firms may be the target of a strategic or private equity suitor because of low valuation multiples, higher than free cash flow yields and debt levels below peer trends, according to the Citigroup analysts, who have "buy" ratings on each of the firms mentioned.
Citigroup's forecast for a steady flow of small and mid-sized deals would reflect a continued trend for private equity firms to target in the $1 billion to $5 billion range, and for corporations to look at tuck-in acquisitions rather than transformative mergers.
Even deals the size of Dell's proposed $24.4 billion takeover and a
private indicate that private equity firms are stretched to contribute more than $1 billion in equity to a buyout, as leverage levels come down.
Despite an increased number of deals during 2012, vverall M&A activity around the world ended the year roughly flat from 2011 levels, according to data provider
While M&A globally came in at about $2.7 trillion -- below 2008 levels in excess of $3 trillion -- the number of deals done exceeded levels from four years ago.
Even in the absence of blockbuster mergers like Heinz or Dell, private equity firms such as
, banks including
and boutiques like
, were hard at work last year.
So a surge in 2013 deal making may not be such an aberration from the previous year. Dealogic data show that the nearly $1 trillion in transactions in the fourth quarter of 2012 was the highest quarterly total since the same period five years earlier.
Those who expect that merger and activity will continue to rise with overall markets and the economy, may do well to focus on small and mid-cap targets given the constraints on private equity and a more cautious stance to mergers taken by boards across Corporate America.
For more on M&A trends, see what
. Also see
Morningstar's top 2013 M&A picks
-- Written by Antoine Gara in New York