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Holly LaFon
Holly LaFon
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Royce Funds Commentary: Steven McBoyle on Global M&A in Small-Caps

Portfolio Manager Steven McBoyle discusses the recent surge in US small-caps acquiring European companies

September 11, 2018 | About:

Watch the video here.

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.

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at www.roycefunds.com. Operating expenses reflect the Fund's total annual operating expenses for the Investment Class as of the Fund's most current prospectus and include management fees, other expenses, and acquired fund fees and expenses. Acquired fund fees and expenses reflect the estimated amount of the fees and expenses incurred indirectly by the Fund through its investments in mutual funds, hedge funds, private equity funds, and other investment companies.

The thoughts and opinions expressed in the video are solely those of the persons speaking as of July 9, 2018 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

About the author:

Holly LaFon
I'm a financial journalist with a Master of Science in journalism from Medill at Northwestern University.

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