You probably didn’t notice that shares of KeyCorp (KEY) popped more than 12% on Monday morning.

Which is understandable.

Based in Cleveland, Ohio, this regional bank is nothing compared to JPMorgan Chase (JPM) and its $587.298 billion market cap… or Bank of America (BAC) at $297.386 billion… or even the down-and-out Citigroup (C), which can still claim $111.854 billion.

KeyCorp, after all, has just $15.577 billion.

Then again, none of those big banks rose more than 1% on Monday morning, much less by double digits.

The reason KEY popped so much was simple. It agreed to sell a 14.9% stake to the Bank of Nova Scotia (BNS) for about $2.8 billion – a mini-merger if you will.

The bigger financier will pay $17.17 per share, which makes for a 17.5% premium over KEY’s closing price on Friday, August 9. And that, in and of itself, is a reason for shareholders to celebrate.

At the risk of stating the obvious, mergers and acquisitions (M&A) are very big deals for companies to decide on – and not just in terms of immediate money spent or made in the transaction. There is so much more room for growth from there thanks to new markets, connections, and ideas being opened.

Of course, the wrong M&A decision can backfire, which is why management considers them so carefully before they make a move. Both the acquisition target and the timing have to be just right.

That’s why increased M&A activity is so often taken as a sign of a healthy economy. Optimistic businesses are much more likely to look for growth opportunities in the first place. Plus, there tend to be more businesses worth buying.

So, the fact that we’ve seen such a drop in mergers and acquisitions the last few years is telling.

Fortunately, I believe this trend is about to reverse.

Two Reasons Why We’re Seeing So Little M&A…

I’m working on a larger report about this right now, which I hope to release to subscribers soon. But here’s one little piece of it so far:

M&A activity was trending up through 2017, 2018, and 2019. It dipped from there due to the shutdowns, though still well above 2016 levels, only to shoot right back up to its highest levels ever in 2021.

But then you’ll notice that enthusiasm plunging off the proverbial cliff through July 2024. And while estimated activity through the end of the year is up, comparatively speaking, it’s still a far cry from what we experienced just a few years ago.

That’s due to a few reasons, one of them being rising interest rates. These can and do factor in enormously to a company’s M&A decision-making considering how businesses rarely make such big moves from savings alone.

They borrow to buy up the competition. And interest rates, of course, determine how much extra they’re going to pay on that debt.

It’s exactly like with the housing market, where monthly mortgage payments have ballooned. The higher the interest, the less desirable the opportunity becomes.

Now, that alone doesn’t stop some companies from moving forward. As I already mentioned, there are several reasons why M&A activity increases or decreases.

Another is government approval, and that’s been more difficult to obtain over the past three years.

As I’ve said before, politics do influence business. You can argue if those influences are worth it or not, but you can’t deny that companies operate in certain ways due to certain regulations under certain administrations.

And M&A activity has slowed under the Biden administration. That’s thanks – in large part – to the recently combative Federal Trade Commission, headed up by Ms. Lina Khan. My upcoming report will detail that further…

Along with how I’m going to be playing the situation as 2024 comes to a close.

And at Least One Reason Why It’s Time To Start Looking Up

I’ve already stated that I think Donald Trump will win another term. I still do, in which case, we’d have a new executive administration – including in areas that oversee the markets and their dealings.

This would mean we’d very likely go back to an economic environment like the one we saw in 2017-2019.

I can’t promise another banner year like 2021. A good portion of that was due to deals that were delayed in 2020, after all.

Then again, the deals that have been set aside the last three years could all lead to a bigger explosion still. As I detail in my report, companies throughout the U.S. have growing piles of money they’re just waiting to use.

  • Berkshire Hathaway (BRK-A)(BRK-B) has $189 billion.

  • Apple (AAPL) has $162 billion.

  • Alphabet has $108 billion…

The list goes on from there.

That money is set aside for growth opportunities. Under the right circumstances. Which clearly have not manifested yet.

Nor does everything hinge on Trump winning. We’re looking at significant changes moving into 2025, regardless of how November goes. A drop in interest rates alone – much less multiple drops, as is likely – would be an enormous boost to corporate confidence.

Now, I always tell my readers they should never buy a stock based only on the idea that it will be bought out. After all, if the deal never materializes, they’ll be left holding a company that won’t otherwise benefit them.

But I am a firm believer in owning businesses that are worthwhile on their own and small enough to tempt a larger competitor into buying them out. And there are several out there that fit this criterion.

You can make your own list of likely M&A deals, of course. What you want to do is:

  1. Locate industry leaders with lots of money and a history of successful expansion.

  2. Find small- and mid-cap rivals that would tempt those big companies’ portfolios into making a move.

That’s certainly what I’m doing, crunching numbers and analyzing the possibilities. If you’re interested in comparing lists (or just seeing mine), I can’t wait to tell you more.

Regards,

Brad Thomas
Editor, Wide Moat Daily