Current trends in public M&A activity
Ten key insights emerge from our analysis of Australian public M&A takeover activity over the last two and a half years.
1. Deal structures for acquiring control of ASX listed targets are becoming increasingly novel and complex
Geopolitical uncertainty, global economic fluctuations and ongoing public health concerns have prompted buyers to get creative. To repel competition and respond to increased shareholder activism, buyers are devising increasingly novel transaction structures to improve the prospects of their deal successfully completing.
2. Shareholder activism continues to influence deal outcomes
With extended global market uncertainty, it is inevitable that a material divergence of views on value will often arise between acquirers, target boards and their shareholders. This in turn provides a catalyst for shareholder activism to disrupt announced M&A deals. Add heightened environmental, social and governance concerns by investors into the mix, and the prospect for shareholder activism is magnified. Shareholder activism is now an omnipresent feature of the Australian deal landscape that acquirers, targets and their advisers must navigate to successfully close Australian public M&A deals.
3. Pre-bid arrangements are no silver bullet for success
Before publicly launching proposals, prospective buyers often seek to put their foot on a key parcel of shares by acquiring a direct physical stake in their target. Recent transactions show that prospective acquirers are also trying to achieve the same outcome via other softer arrangements including the grant of call options, entry into pre-bid acceptance agreements, voting agreements and equity swaps.
Despite this, our analysis suggests that there is no correlation between these pre-bid stake-building arrangements, positive target board engagement, deterrence of rival bidders and, ultimately, deal success.
4. Novel auction tactics are being used in battles for control
Recent activity shows a proliferation of auctions for control of ASX listed targets. With competition for control of targets with attractive assets increasing, novel tactics are being used in these auctions to displace competing bidders and achieve success. A review of recent auctions for ASX listed targets shows that strategic trade buyers are often willing to pay more than a financial buyer for a target to access new markets, economies of scale, synergy, integration benefits and to develop further competitive advantages.
5. Hostile bids are back
The economic unpredictability caused by COVID-19, challenging market and trading conditions, and geopolitical uncertainty, as well as significant drops in revenue and outlooks for some industry sectors, have made it difficult for market participants to assess the fundamental value of a target.
Over the past two and a half years we have seen numerous hostile bids in the Australian market. This is becoming more common as target boards, their shareholders and bidders have increasingly divergent views on value and what represents an acceptable premium to the market price of a target’s shares.
6. The ‘mega deal’ is back
Despite the COVID-19 pandemic and associated economic uncertainty, FY21 and FY22 have seen an emphatic resurgence of deal activity in the $1 billion plus range, with 23 mega deals with an aggregate value of over $150 billion announced in that time.
7. Super funds are making direct moves on ASX listed targets
With assets under management exceeding $3.5 trillion as at 31 December 2021, superannuation funds have emerged as a significant player in Australian public M&A. Recent bids illustrate the superannuation sector’s growing confidence in making their own direct, independent offers for ASX listed targets – not just as a junior member of a consortium, which, until recently, is how super funds have been participating in M&A deals.
8. Contingent uplift payment structures are enjoying a revival
Contingent uplift payment structures are providing a solution for resolving valuation impasses between a prospective acquirer and target boards. By agreeing to pay target shareholders more if certain contingent events occur after control passes, these structures are providing the pricing flexibility that target boards need to ensure that deals that might not otherwise proceed in an uncertain market can be put to shareholders with a positive recommendation.
9. ‘Stub equity’ structures remain popular
Acquirers continue to offer target shareholders the opportunity to receive some of their consideration in the form of unlisted shares in a private holding company. This structure – colloquially referred to as ‘stub equity’ – provides target shareholders with flexibility to maintain an investment exposure in the target, rather than exiting in full for cash at a point in the cycle where they may perceive the potential for higher future value.
10. M&A activity is ramping up in the listed investment company sector
More than three-quarters of listed investment companies (LICs) currently trade at a discount to their underlying net tangible assets (NTA). Faced with shareholder agitation over persistent NTA discounts, LIC’s have moved to restructure and consolidate.