M&A Deals to Rise This Year, Boosting Small-Cap Stocks, UBS Says

The number of mergers and acquisitions will increase this year to the highest since 2007, with small companies benefiting from the trend, according to UBS AG strategists.

There will be close to 250 “major” deals in 2011, near the highs of 2007 and 2000, UBS AG strategists including Thomas Doerflinger and Jonathan Golub, in New York, wrote in a report today. That compares with 2010’s 165 deals over $1 billion and 2009’s 101, according to UBS.

The U.S. economy last quarter grew less than the previous three months as unemployment unexpectedly jumped to 9.1 percent and homebuilder confidence plunged. The slowdown means companies aren’t going to grow organically and will instead use acquisitions to expand, helping small and mid-cap stock valuations, the analysts said. Additionally, high profitability and cheap stocks will entice companies to make deals this year, UBS said.

“M&A is attractive today because organic growth is difficult to generate when the economy is in a secular slowdown,” the analysts wrote. “With cash-rich companies ‘buying growth’ in a languid economy, acquisitions should be a major source of valuation support for small and mid-cap stocks over the next few years.”

Margins (SPX) have climbed to the highest level since 2007, as companies cut costs to bolster earnings even as sales declined, according to data compiled by Bloomberg. The 7 percent slump in the S&P 500 from April 29 through last week pulled the index down to trade at 12.8 times 2011 estimated earnings, compared with 13.8 before the decline started. The benchmark gauge for U.S. equities has been trading above 13 times recorded earnings since April 2009, Bloomberg data show.

There have been 12,592 deals announced globally this year, totaling $1.21 trillion, a 30 percent increase from the $928.7 billion in the same period in 2010, according to data compiled by Bloomberg.

Below are the 44 M&A candidates listed by UBS:

Abiomed Inc. (ABMD US)
Affymetrix Inc. (AFFX US)
Alliant Energy Corp. (LNT US)
Alpha Natural Resources Inc. (ANR US)
American Eagle Outfitters Inc. (AEO US)
Anadarko Petroleum Corp. (APC US)
Brinker International Inc. (EAT US)
Cadence Pharmaceuticals Inc. (CADX US)
CBOE Holdings Inc. (CBOE US)
Celgene Corp. (CELG US)
Cepheid Inc. (CPHD US)
Chesapeake Energy Corp. (CHK US)
Chico’s FAS Inc. (CHS US)
CMS Energy Corp. (CMS US)
Consol Energy Inc. (CNX US)
DISH Network Corp. (DISH US)
Eagle Rock Energy Partners LP (EROC US)
Education Realty Trust Inc. (EDR US)
Foster Wheeler AG (FWLT US)
GT Solar International Inc. (SOLR US)
H.J. Heinz Co. (HNZ US)
Hain Celestial Group Inc. (HAIN US)
Hansen Natural Corp. (HANS US)
Health Net Inc. (HNT US)
HeartWare International Inc. (HTWR US)
Impax Laboratories Inc. (IPXL US)
Incyte Corp. (INCY US)
Informatica Corp. (INFA US)
Jardine Lloyd Thompson Group Plc (JLT LN)
Joy Global Inc. (JOYG US)
KBR Inc. (KBR US)
Lear Corp. (LEA US)
Lorillard Inc. (LO US)
Nasdaq OMX Group Inc. (NDAQ US)
Noble Corp. (NE US)
Peabody Energy Corp. (BTU US)
Rowan Cos. (RDC US)
Ryland Group Inc. (RYL US)
Salix Pharmaceuticals Ltd. (SLXP US)
Shaw Group Inc. (SHAW US)
Sourcefire Inc. (FIRE US)
Thoratec Corp. (THOR US)
Visteon Corp. (VC US)
Veeco Instruments Inc. (VECO US)

To contact the reporters on this story: Whitney Kisling in New York at wkisling@bloomberg.net; Roger Neill in London at rneill3@bloomberg.net.

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net.

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