M&A Meltdowns: Unravelling the lessons from failed M&A deals

11 minute ready + PDF download  20.03.2024 Alberto Colla

Although the overwhelming majority of friendly takeovers of ASX-listed companies succeed, the Australian corporate landscape has become littered over time with failed take-private deals – ones that were publicly announced with a unanimous recommendation from the target's board, endorsed by an independent expert but ultimately failed to complete. We identify and explore the fifteen lessons for prospective acquirers, target boards and key shareholders.

Every take-private deal that is announced comes with an embedded level of completion risk. In the aftermath of any failed public deal, one or more of the parties are often left licking their wounds with substantial sunk costs in terms of advisory fees and lost management time, other foregone alternative opportunities, as well as reputational impacts. Plenty of sobering lessons have been served up in failed Australian take-private deals over the past 15 years – sometimes these lessons have not been heeded, with a recurrence of the same or similar mistakes.

What then are the lessons that can be drawn from these failed 'friendly' deals?

In our report, 'M&A Meltdowns: Unravelling the lessons from failed M&A deals', we identify fifteen lessons (i) for prospective acquirers to achieve deal success, (ii) for target boards to de-risk the deal they are publicly recommending to their shareholders and, in the process, maintain (enhance) their reputation, and (iii) for key shareholders of a target company to maximise value for themselves and collectively for all other shareholders.

These fifteen lessons draw not only from recent failed take-private deals but also ones whose ashes still smoulder after more than a decade and that live long in the corporate memory. We also draw on lessons from take-private deals that were on the cusp of failure but got over the line due to a proactive and effective response to the potentially terminal challenges they were facing.

"Plenty of sobering lessons have been served up in failed Australian take-private deals over the past 15 years – sometimes these lessons have not been heeded, with a recurrence of the same or similar mistakes. The unifying theme of these lessons is that public market deals are imbued with execution risks, meaning that each stakeholder group - prospective acquirers, target boards and key shareholders - needs to be flexible and pragmatic in anticipating and responding to those risks. Although the risks are different for each group they overlap in several respects."

Alberto Colla, Partner, Lead Author, Member of Australian Takeovers Panel

Seven lessons for prospective acquirers Navigation Show below Hide below

Prospective acquirers need to navigate three key stakeholders to achieve deal success: (i) the target board, (ii) the target shareholders and (iii) regulatory authorities. There are potential pitfalls with each of these gatekeepers.

Lesson 1: Select your target carefully and construct your offer appropriately

Target selection has a crucial bearing on deal success. Analyse the target's share register. Construct your offer so it is compelling to the target's board and its key shareholders. Engage with them and secure their support before the deal goes public (e.g. Pacific Equity Partners (PEP) takeover offers of Healthia, Patties Foods, 2016 and Citadel Group, 2020).

Lesson 2: Be prepared to increase your price after going public in response to material changes in financial performance (either the target or yours!)

Deals often take months to consummate after initial public announcement, especially if you require regulatory approvals. A target's financial performance can improve significantly between initial announcement and scheduled implementation, materially affecting your initial pricing. This may cause the target board, key shareholders and/or the independent expert to reconsider their initial support for your offer. You may well need to increase your price to reflect a material improvement in the target's financial performance between initial announcement and scheduled implementation (e.g. Western Areas, 2021; Origin Energy, 2023).

Lesson 3: Be prepared to increase your price after going public in response to other developments

These developments could include the emergence of a superior offer or shareholder activism (as to the latter, see Lesson 4).

Lesson 4: Be prepared for shareholder activism

This is now a well-embedded risk in the Australian M&A landscape. Shareholder activism can emanate from a variety of sources; for example, a long-term institutional shareholder of the target (e.g. Australian Super increasing its shareholding in Origin Energy and voting down the deal), an industry competitor that wants to block or partner with a prospective acquirer (i.e. Minerals Resources stake in Essential Metals, Gina Rinehart purchasing shares in Liontown Resources), an environmental activist (e.g. Cannon-Brookes derailing the AGL demerger). Prospective acquirers must anticipate potential activist intervention, be pragmatic and nimble in how they respond.

Lesson 5: Consider deploying a dual-track transaction structure

A dual-track scheme and takeover bid structure can be an effective strategy to discourage competition, respond to increased shareholder activism and improve deal execution certainty. This structure has been used on several occasions since 2019 and was upheld as valid by the Takeovers Panel in 2023. This option is only viable for acquirers prepared to accept less than 100% ownership of a target company. A variation is a dual-track scheme structure where shareholders consider alternative scheme proposals concurrently.

Lesson 6: Be careful before making a 'best and final' public statements

Exercise caution when declaring an increase in your offer price as being 'best and final'. This can backfire by boxing you into a corner with no room to move, causing the deal to fail (e.g. contest for control of Nitro Software, Origin Energy).

Lesson 7: Have a flexible strategy for securing your regulatory approvals

Deals are invariably subject to regulatory approval conditions arising from the acquirer's need to obtain one or more of FIRB clearance, ACCC clearance or similar clearances in other jurisdictions. Depending on the industry sector, the country of origin of the prospective acquirer, and the level of competitive market overlap, these regulatory approvals can be complex and slow to obtain or be declined altogether. The Australian regulatory landscape can be complex, so a prospective acquirer needs a flexible, well-thought-out strategy for securing its regulatory approvals; otherwise, the deal will fail (e.g. Qantas / Alliance Aviation, Dye & Durham / Link Market Services).

Five lessons for target boards Navigation Show below Hide below

A take-private deal is arguably the most critical corporate action a target board needs to navigate, with heightened reputational risks for the directors. There is little margin for error in what is a very public process after the initial announcement. Many of the same lessons outlined above for prospective acquirers are relevant to target boards but with a different angle. We distil five key lessons for target boards.

Lesson 1: Push as much regulatory approval risk as possible onto the prospective acquirer

Deals are invariably subject to regulatory approval, including FIRB, ACCC clearance or similar clearances in other jurisdictions. A target board should seek to contractually allocate as much of the risks associated with those approvals as possible to the prospective acquirer. This can be done in the transaction agreement by (i) requiring the prospective acquirer to agree to a reverse break fee if a regulatory approval is not obtained, (ii) placing an obligation on the prospective acquirer to accept conditions that a regulator may impose on its approval, (iii) placing an obligation on the prospective acquirer to pay a 'ticking fee' (an increase in the offer price) for any delay in receiving regulatory approvals beyond a set date.

Lesson 2: Be wary of material adverse change (MAC) conditions

Due to embedded statutory timeframes that apply to any take-private deal in the Australian market, there is a long lead time between public announcement and closing – at least two months but often longer if multiple regulatory approvals are required and/or if the proposed deal terms or offer structure have added complexity that attract elevated disclosure requirements (e.g. if target shareholders are being offered listed or unlisted securities in the acquirer or if there is a capacity for target shareholders to make a 'mix and match' type election between part cash, part scrip etc). To protect the prospective acquirer's position during this lead time, it is standard for the acquirer to have the benefit of a 'no material adverse change' condition.

Target Boards need to negotiate carefully the scope of this condition. There have been multiple examples over the years where prospective acquirers have sought to invoke material adverse change conditions to withdraw entirely from a publicly announced deal or to renegotiate a lower price. This was especially the case with the onset of the Covid pandemic. In some cases, the acquirer succeeded. Even if the acquirer did not succeed, the purported reliance on the material adverse change condition created material delay and market instability for the target, and sometimes a reduced offer price.

Lesson 3: Engage with your key shareholders before going public

History has repeatedly shown that it is dangerous for a target board to publicly announce and recommend a take-private transaction without sounding out their key institutional shareholders in advance. Failure to lock in support from key shareholders exposes the prospective acquirer (and, by practical extension, the target board) to a subsequent price negotiation behind closed doors. This could either play out with a 'who blinks first' binary outcome – either the prospective acquirer seeks to accommodate the privately communicated price expectations of the key shareholder (and then the enhanced deal gets approved) or the prospective acquirer sticks to its original pricing and rolls the dice on the outcome of the scheme vote. If the deal fails, the target board will need to explain to shareholders why the board embarked on an expensive and time consuming process that ultimately failed, without sounding out and shoring up the key shareholder support from the outset.

Lesson 4: Beware of industry competitors who may want to scupper your deal

There are multiple instances where an industry competitor has sought to protect their market position by purchasing target shares on-market (up to 20%) between public announcement and expected deal completion, with a view to defeating the scheme vote or blocking, or securing a 'seat at the table'. If this risk arises, the target board will then be forced into a concerted shareholder engagement campaign to elicit the required level of shareholder support. Sometimes this type of campaign works (e.g. Amcom Telecommunications and Vocus, in the face of TPG buying 19.9% of Amcom). Often, a concerted shareholder engagement campaign is not enough to neutralise the voting impact of the spoiler (e.g. Origin Energy and AustralianSuper).

Lesson 5: Ensure there's robust deal protection in scrip mergers

So-called 'mergers of equal' and other scrip-based mergers necessarily have a notional acquirer, which will be the continuing listed entity, and a notional target, which will become a wholly owned subsidiary of the notional acquirer and delisted from ASX. The implementation agreement for transactions must have reciprocal deal protections (exclusivity, break fee and matching rights) that apply equally for the notional target's benefit. If not, the notional target could be left high and dry with high sunk costs if the notional acquirer withdraws to pursue a superior proposal that it subsequently receives before the scrip merger is consummated (e.g. Horizon Oil and Roc Oil, 2014).

Three lessons for key shareholders Navigation Show below Hide below

Target key shareholders are focused on maximising value for themselves and, by extension, all other shareholders. The right balance needs to be struck between price aspirations and what is commercially realistic. The following are three critical lessons for key shareholders.

Lesson 1: Be careful of a rose-tinted, blue sky view on value

Key shareholders invariably want more money than what is being offered. They should seek to negotiate the best price possible either before the deal is publicly announced or after (ahead of the shareholder vote or the offer's closing date). But pushing too hard on price can be counterproductive. Using a key shareholding to defeat a scheme can lead to significant subsequent remorse.

Key shareholders sometimes need to adopt a pragmatic view of value. The future is inherently uncertain, and there have been instances where a key shareholder's rose-tinted, blue-sky view on value was applied to defeat a scheme, only for the share price performance of the target over the ensuing years to fall well behind the price that was offered (e.g. Redflex, in response to the take-private offer from Macquarie Group and Carlyle Group 2011).

Lesson 2: Think carefully before agreeing to publicly support an announced deal

Shareholder intention statements are an established but complex feature of public M&A transactions. They provide a public indication of the level of shareholder support (or opposition) for an announced control transaction. In December 2015, the Takeovers Panel issued a guidance note on shareholder intention statements to clarify the permissible boundaries for these statements. Key shareholders of a target who are approached to provide public intention statements should exercise caution and judgment – refer to Shareholder intention statements in takeovers - navigating the uncertainties.

Lesson 3: If you don't like a scheme and want to vote it down, you don't need 20%

Institutional shareholders and/or industry competitors who oppose a proposed scheme often buy (further) shares in the target on-market. This has proven to be an effective spoiling strategy. The maximum stake that an opposing institutional shareholder and/or industry competitor can lawfully acquire is 20%. In practical terms though, it is often not necessary for an opposing institutional shareholder and/or industry competitor to buy up to the 20% maximum. Often a stake comfortably under 20% will be sufficient to defeat a scheme vote, especially if the target has a widely dispersed share register.

Not buying up to the full permitted limit of 20% can deliver a material economic saving for an opposing shareholder, both in terms of a lower overall financial outlay and then containing the subsequent paper loss on the acquired stake.

For a more detailed look at the fifteen lessons summarised here, download our full report.

For prospective acquirers, target boards and key shareholders of the target, a take-private deal is rarely straight-forward. In the period from initial public announcement to expected completion, there are invariably challenges for all three stakeholders groups to navigate.

As this publication shows, a take-private deal can quickly move from promise to peril. All three stakeholder groups need to be mindful of the common downfalls that have afflicted past deals. Having a flexible, pragmatic approach, with contingency arrangements to respond to these potential downfalls, is paramount.