One of the many results of the U.S. 2024 election that made the forty-fifth President the forty-seventh will be fewer business regulations. After a period of slow merger and acquisition activity, it could pick up over the coming months and years.
Goldman Sachs recently forecast that M&A activity would increase in 2025:
For over a year, capital markets have sought clarity on two common bottlenecks for M&A: monetary policy and regulation. With these dynamics normalizing, a generational technology disrupting industries, sponsors seeking liquidity, and a growing desire from corporates to transform their portfolios through M&A, we expect significant upside potential for dealmaking next year — but with a healthy dose of volatility as capital markets navigate “known unknowns” in the form of tariffs, geopolitics, and more.
Increased M&A activity could support certain stock market sectors, creating significant profitable opportunities for investors and traders.
Creating economies of scale
- Small-cap stocks have market caps between $300 million and $2 billion.
- Medium-cap stocks have valuations between $2 billion and $10 billion.
- Large-cap stocks have market caps over the $10 billion level.
- M&A activity can create economies of scale and provide capital from large-cap companies that acquire companies with lower valuations.
Dilutive versus accretive acquisitions
- Acquisitions tend to provide premiums to current valuations for the acquired company.
- The acquirer’s shares will decline if the market perceives the acquisition as dilutive or subtracting value from the larger company.
- The acquiring company’s shares can rise if the market perceives the deal as accretive or adding value to the larger company.
- Therefore, cash-rich companies searching for acquisitions are very selective.
- Acquisition prospects could create significant competition, boosting valuations and share prices for the target companies.
The sectors that stand to gain the most
- Small and medium-cap companies are the most fertile ground for acquisitions.
- Emerging technologies requiring significant capital to achieve goals could be hot M&A prospects.
- According to Goldman Sachs, cross-border M&A could increase to enhance multinational reach.
- Fewer U.S. regulations could turbocharge M&A activity across all sectors.
The trading products that could benefit
- The Russell 2000 ETF, IWM, could benefit from increased M&A activity as it reflects small-cap companies.
- The iShares Core S&P Mid-Cap ETF (IJH) reflects the mid-cap companies in the S&P 500 index. While the SPY ETF has a 17.86 P/E, the IJH is less expensive from a valuation perspective with a 12.82 P/E, making it fertile ground for M&A activity.
- Select stocks within these indices can offer substantial upside potential if they become takeover prospects that will command significant premiums to current share prices.
Turbocharging those products with leverage
- The TNA, UWM, and URTY are 2X and 3X ETFs on the small-cap Russell 2000 stocks.
- MIDU provides 3X leverage for the mid-cap stocks.
- Leverage comes with significant risks as the ETFs employ swaps and options that suffer from time decay when the indices move lower or remain stable.
- Leveraged products require time and price stocks.
- Optimizing leveraged ETF trading requires accepting small losses in the quest for oversized gains.
If fewer U.S. regulations significantly increase M&A activity in 2025, it could bolster the stock market. Small and medium-cap companies could command significant valuation premiums as cash-rich large caps compete for acquisitions. Increased M&A deals would likely push the leading stock market indices to higher highs over the coming months and years.