This year’s review has been characterised by a smaller number of deals that have been hard fought by a small number of motivated bidders scrapping over a few assets. It does conjure up images of those avian scavengers fighting over yesterday’s lunch.
The market defied earlier predictions that 2013 would see an increase in M&A activity and instead we saw competition among bidders for a small pool of assets. More than a third of the deals over $25 million had to contend with rival bidders.
Even in takeovers, buyers continue to look for the support of the target board and we saw a significant increase in the use of implementation agreements in takeovers. Our experience suggests that this is primarily because bidders continue to require due diligence before transacting, with management and boards still cautious about the possibility of hidden “nasties”.
For the third year running, the most decisive indicator of success of a deal is a positive target recommendation. No bidder in the last three years has reached 100% without target board support, albeit sometimes late in the day and after a lot of pressure has been brought to bear. While a recommendation does not guarantee success or 100%, not having a recommendation virtually assures a poor result.
The pre-bid stake, both real and synthetic also continues to be a powerful predictor of success. The acquisition of a significant block of stock pre-announcement will usually ensure engagement with the target board and is a useful way to use the sale of its pre acquired shares to recoup its costs if overbid. Indeed, the majority of bidders in 2013 took substantial holdings before launching a bid or scheme. In the battle for corporate control, size matters – the size of a pre-bid stake is highly correlated with the likelihood of success of a transaction.
While the use of no-shop, break fees and other lock up devices has become almost ubiquitous, they are by no means a guarantee of success. There were a few examples of bidders and targets negotiating more “bespoke” provisions to suit the circumstances of the transactions, however for the most part, deal protection provisions have become almost boilerplate. That said, we have seen what may be a growing trend for courts to view these arrangements with suspicion.
Even if an upfront recommendation cannot be secured, bidders have a number of tools available to build momentum and succeed in the “end game”. These include price increases (including using two-tiered offers and dividend sweeteners), waiving bid conditions, using acceptance facilities or broker handling fees and making strategic use of “truth in takeovers” statements.
What is in store for the year to come? We see signs from our practice and market intelligence that the M&A market will rebound this year after a lacklustre 2013. We expect stronger equity prices, more private equity funds from Australia and overseas looking for deals, a more buoyant ECM market and a generally more positive market sentiment will drive the number if not the size of value of deals.
In particular we believe that a recovering U.S. economic recovery and evaporating concerns about a Chinese hard landing, will see public company valuations ahead of where they were a year ago. The question in the public markets and especially for the ASX 100 will be whether the more confident buyers will be sufficiently confident to pay the higher prices?
This article originally appeared online at the University of New South Wales’ Centre for Law, Markets and Regulation.