Our annual top 10 M&A predictions for the coming year are set out below. We also look back at how accurate our predictions for 2013 were as well.
- M&A is back
After a period where deal values and deal volumes were down, the green shoots of M&A activity that we saw in the market over the past few months have translated into increased deal flow. We expect to see this continue into 2014 as companies search for growth via acquisition. In particular, we are seeing, and expect to continue to see, deals having a more solid foundation and having a greater chance of executing than at the start of the year.
- The return of the contest
With increased deal flow and greater confidence will be the return of the contested control situation. We have already seen contests for control emerge in relation to a number of targets, such as Trust Co, RHG, Warrnambool Cheese & Butter and the CPA Office Fund (all contests in which HSF has played a key role). We think this trend will continue into 2014.
- Welcome back, ASIC
For whatever reason, it is becoming tolerably clear that ASIC sees itself having a bigger role in takeovers. In the middle of this year, ASIC released comprehensive guidance across a range of issues, including its position on matters such as intentions disclosure, collateral benefits and joint bids. Its involvement in situations such as Billabong, where it required Billabong to obtain a new independent expert’s report on the basis that the expert’s independence had been tainted, suggests to us that we are likely to see greater involvement from ASIC in deals in 2014. In particular, we expect to see ASIC follow up on its new takeover guidance by involving itself on those issues in deals.
- Deal protection under scrutiny
Deal protection seems to be receiving close attention from courts and regulators. Last month, the Federal Court in the now defunct Cape Alumina scheme of arrangement proposal raised questions about some of the standard provisions and approaches to deal protection. Relatively standard formulations that have been used in many deals have been questioned. We think this trend will continue into next year and will be one that market participants will need to navigate carefully.
- A big year for FIRB
For reasons other than the GrainCorp decision, we think that 2014 will be a big year for FIRB on the policy front. Prior to the last election, a Senate committee had made a broad investigation in relation to many aspects of FIRB, but in particular the national interest test. While that committee began its work in relation to the agricultural sector, we think it is possible that the reform of the national interest test and our foreign investment regime more generally could be in for a shakeup in 2014.
- Bid conditions in the spotlight
Takeover bids conditions are trotted out in long lists that often seem a big ask and have little chance of being satisfied. We query whether this is good practice and expect greater scrutiny of bid conditions, especially those which create uncertainty in the market. This uncertainty is often exacerbated if a condition is breached and the bidder takes its time to decide whether or not to rely on the breach. We think that practice will face greater scrutiny in 2014 from regulators and the Panel.
- Warranty insurance becomes mainstream
At the turn of the century, it is fair to say that warranty insurance was not mainstream. There had been uses of it in other markets, but its Australian traction was far from great. Move forward 13 years, and the market acceptance and usage of warranty insurance means it is in a very different position to that which it occupied those years ago. In 2014, we see warranty insurance as finally becoming viewed as mainstream and that its use will be a common feature of the M&A landscape, including in public M&A deals.
- Competition clearance alternatives
Murray Goulburn’s bid for Warrnambool Cheese & Butter demonstrates that an alternative path to seeking ACCC clearance is available, namely making a direct application for authorisation to the Australian Competition Tribunal. The Tribunal is required to consider the public benefits that a transaction may create and, accordingly, can outweigh and override competition concerns and the Tribunal works on a fixed time frame. Irrespective of the result for Murray Goulburn, we expect to see other bidders following down this path.
- Shareholder activism arrives
Australia is catching up on the worldwide trend of shareholder activism. This has become a huge industry in the US and the financial returns being generated there will surely encourage bolder players to emulate the tactics and approaches of their US counterparts. We have seen the start of this with the Carnegie/Soul Patts/Brickworks situation, which we expect to continue in 2014.
- Creative consideration
Australia has a long and proud reputation for being creative when it comes to structuring transactions. This has manifested itself in recent years with various forms of contingent consideration, including shares that convert into a specific value of ordinary shares depending on the bidder’s share price and additional cash payments depending on the outcome of business performance or litigation. Given the utility of these arrangements in bridging the value gap between sellers and buyers, we expect these devices to be used again in 2014.
Review of our 2013 predictions
How did we do last year? In one or two instances putting the doctrine of ‘Truth in Takeovers’ to one side, we think the following predictions came true:
- Foreign investment rules front and centre,
- Shareholder activism to be active,
- Swaps in the spotlight,
- Distressed debt is the new equity,
- Longer time periods for deals,
- Announcing an approach (and stemming the demand for calls for a put up and shut up rule),
- Takeovers remain truthful,
- Takeover reform is back.
The following predictions were perhaps slightly less accurate:
- More successful China inbound M&A, and
- Change the Panel President and you change the Panel.