A positive outlook for merger and acquisition activity

Market Talk

Small-cap equities: Signs of life despite a lumbering economy

Listen as Christopher S. Beck takes you through his views on recent developments in the small-cap market that provide for investor confidence. [Runtime: 5:20]


We have forecast for some time that merger and acquisition (M&A) activity might increase coming out of the 2008–2009 recession. While M&A activity has not proven as vigorous in recent years as we would have expected, we continue to believe that it should pick up. We believe conditions remain ripe for M&A activity for several reasons. These include:

  • Favorable credit markets. With central banks around the world committed to maintaining low interest rates in 2013, abundant liquidity generally makes it easier for companies to finance large-scale acquisitions.
  • Limited organic growth opportunities. We believe corporate profit margins have potentially reached a plateau for many industries. As a result, companies may have fewer organic growth opportunities to enhance their earnings. In such an environment, acquisitions could be a high priority for companies seeking increased sales, economies of scale, and operating leverage.
  • Improved economic climate. After slowing in 2012, global economic growth appears to be stabilizing at low levels entering 2013. We believe this provides a satisfactory backdrop for M&A activity.
  • Strong corporate balance sheets. Companies are looking to make better use of historically large cash hoards (see the chart below), which earn virtually no return currently due to the zero interest rate policy of the Federal Reserve.


Corporate cash holdings are above levels last seen since the 1980s. (Source: Ned Davis Research. Dec. 2012)

Charts are for illustrative purposes only and are not representative of the performance of any specific investment. Past performance does not guarantee future results.

U.S. companies may proceed cautiously

Although we believe M&A activity is likely to increase, U.S. companies could proceed cautiously due to uncertainty over U.S. fiscal policy and sustained global economic strength. Resolution of ongoing fiscal policy matters and continuing signs of economic strength could likely spark significant M&A activity.

Positioned to benefit from M&A activity

We currently hold companies that, in our view, generate strong free cash flow and have healthy balance sheets. Historically, those types of businesses often benefit disproportionately from M&A activity, while retaining the financial resources to return money to shareholders through dividend increases, debt pay downs, and share repurchases.

The views expressed represent the Manager’s assessment of the market environment as of March 2013, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Views are subject to change without notice and may not reflect the Manager’s current views.

Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Funds' prospectuses and their summary prospectuses, which may be obtained by visiting delawarefunds.com/literature or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.


Investing involves risk, including the possible loss of principal.

Investments in small and/or medium-sized companies typically exhibit greater risk and higher volatility than larger, more established companies.

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