Steven McBoyle On Global M&A In Small-Caps | Royce
article , video 09-11-2018

Steven McBoyle On Global M&A In Small-Caps

Portfolio Manager Steven McBoyle discusses the recent surge in U.S. small-caps acquiring European companies.


Can you explain the recent uptick in U.S. small-caps buying European companies?

It has been most notable of late that a number of our Premier companies have been making acquisitions, and particularly in Europe. So just to name a few examples, we had a world leader in welding equipment buy a $400 million sales division of a larger business, very complementary line of business, furthering European scale. We had a world leader in control systems, for aircraft and industrial engines. Effectively an $860 million transaction, all cash. Once again, furthering European scale. And a most recent one would be a motion control business, valve manufacturer, that made a $700 million acquisition, both cash and stock, primarily of European manufacturing assets that will, from an addressable market perspective, allow them to move into pumping manufacturing. So just to name three examples, but certainly an interesting trend.

What do you think is driving this recent M&A surge?

It’s interesting. Of the three mentioned examples I gave you, they are all divisions of larger companies, they’re all primarily European assets, and they’re all effectively cash financed, or subsequently debt financed. So I think managements are sensitive to the fact that we’re in a rising rate environment. This is the appropriate time to be locking in low cost financing if you’re considering acquisitions. I suspect a strong dollar is part of the equation. But perhaps most unique, just given the consistency amongst them, is that they are all divisions of larger companies. So again, the logic flows that through complementary synergies, operational excellence, our Premier companies effectively are going to be able to improve the underlying operating profits of the combined assets.

What do you think are the implications of this surge?

Well, the most obvious implication is broadly our U.S. small-cap management teams are finding sizeable investments that reap strategic and financial benefits at a point in time where financing is low. Obviously European assets are coming to the market at attractive valuations. So from our perspective, if that is indeed accurate, these are clearly value creating opportunities. And again, we have to continue to diligence the acquisitions. The other implication in all these instances that I’ve mentioned, they are all lower margin profitability businesses. So again, you would anticipate through the financial models of 2019 and 2020 there will be flowing operational and restructuring benefits that perhaps management is indicating will be helpful in offsetting a slower growth environment.




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Royce Premier Fund - Average Annual Total Returns as of 6/30/18 (%) 

Premier 1.43 2.59 16.81 11.45 10.56 8.62 11.51 10.64 11.81 12/31/1991
Russell 2000 7.75 7.66 17.57 10.96 12.46 10.60 10.50 8.03 9.98 N/A

Annual Operating Expenses: 1.16% 

1 Not annualized.

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