After a sustained period of near-frozen activity, the Australiasian mergers and acquisition (M&A) market is gaining momentum. Steve Anderson looks at what this means in terms of business opportunities in the region.
“Six months ago there were no M&A deals being done of any kind,” says Josh Bolot, Corporate Advisor at Investec Bank, an international specialist bank, from his Sydney office. “Heads were down. Pessimism reigned. And during this period, corporations were focused on their balance sheets and reducing debt. But today, we are seeing an increase in activity from our clients who are contacting us about preparing for and engaging in acquisitions.”
The MergerMarket Preliminary Global M&A Roundup report for Q1-Q3 of 2009 substantiates Investec’s experience. The Asia-Pacific region in the report, which includes Australia and New Zealand, reported that M&A activity in the region continued to “fare better” than other global regions, with 1,359 transactions announced at a total value of $210 billion – “a drop in both value and volume of approximately 25% on the same period in 2008. That compared favourably with the global picture, which was down 40%.”
In New Zealand the climate was very much the same as Australia.
Scott St. John, CEO of First New Zealand Capital noted, “In the first half of the year there was very little activity, as the companies here engaged in recapitalisation of their balance sheets.” But the climate has changed.
The recovery of Australian and New Zealand companies has transmitted to the Australian and New Zealand emerging growth and technology companies that have established a significant United States presence.
US private equity funds have become very attractive growth-plus-liquidity alternatives for these ventures. Although the debt component for these deals has now diminished to the point where most deals are all-equity, the typical structure requires the existing equity holders to sell 60 percent or more up front to a private equity fund or a syndicated group of funds, while retaining the balance. These deals often include an equity “kicker” bonus for performance and continuing management of the venture, with substantial assistance from the fund managers for two to three years.
The plan is usually for an IPO or trade sale, so that the fund will realise the expected 20 percent rate-of-return hurdle.
This is an alternative that is well suited for rapidly growing companies seeking capital and other assistance in situations where the founders and shareholders are not ready to cash out and the expectation is that the valuation will be higher in the future.
In this scenario the interests of the founders / early shareholders and the private equity funds are fully aligned and the valuations in a first round take-out are usually attractive compared to alternatives.
Australia’s M&A strength
Australian companies have been quite active in M&A in the banking, mining and some technology sectors.
ANZ bank announced in September 2009 its second acquisition in two months, A$1.6b to ING for its stake in wealth management and insurance operations in Australia and New Zealand. In August the bank had announced that it would pay A$550m for several Asian assets of Royal Bank of Scotland.
Then, in October, Macquarie announced its intention to buy Fox-Pitt Kelton Cochran Caronia Waller, a US-based boutique bank for $130m cash and assume $16.7m in long-term debt.
The trend started influencing the service sector as well. Indian Ocean Capital, a Perth financial advisory business, announced it was doubling staff levels. Director Gary Castledine said the current economic downturn and the large number of mergers, acquisitions and closures of Australian advisory firms had “created significant uncertainty in the sector. It’s our view that things will start to improve towards the end of 2009, at which time we will have some of the best in the business on board to make the most of the upturn in investment opportunities.”
Paladin Energy, an Australian uranium mining company, completed an institutional placement of up to A$430m to position itself for more consolidation in the global uranium sector. And Newcrest Mining chief executive Ian Smith said that the gold mining company had assigned two teams to look for merger and acquisition opportunities globally during the next 12 months.
What changed and who changed it?
The global recession has been termed a “balance sheet recession”. Companies had too much debt and when consumption declined they were left over-exposed.
Josh Bolot of Investec notes that many Australian companies began focusing on reducing and restructuring the debt on their balance sheets in the eye-of-the-recession storm.
“The equity markets engaged in balance sheet restructuring, with a majority of ASX100 companies raising cash – some even going back to the market for a second time,” he says.
“The global fiscal stimulus has helped the market here,” says Scott St. John. “Our government, quite rightly, played its cards very carefully and has been conservative in the way it has protected and managed NZ’s balance sheet. However, the global efforts that have stabilised markets generally definitely flowed into New Zealand.”
Stock markets have responded. Today, the Australian All Ordinaries index is up 60 percent since 31 December, 2008 (in US dollar terms).
Is the trend sustainable?
There are many in the private and public sectors who think the worst is behind us and that M&A will continue to be active, though it may not return to the valuations of recent times.
In Australia and New Zealand, the recession trough was not as deep as in other economic regions. Graham Mitchell, Director of Investment New Zealand noted that “the recession was not deep in New Zealand. Banks are better capitalized and there have been no bank failures, and as a result New Zealand is emerging from the recession earlier than other countries.”
Michael Malone, Managing Director of iiNet, the Australian internet service provider, wrote in the Company’s 2009 annual report, “The focus for iiNet in the 2010 full year will be to continue to enhance customer service, improve brand recognition and launch new content, while looking for value creating acquisition opportunities to build to scale.”
The Australian firm Challenger Financial Services CEO Dominic Stevens said back in August that “there would be merger and acquisition opportunities in the year ahead and consolidation had already started”.
Global M&A activity has continued to be sluggish. “The 1,759 announced deals in Q1-Q3 2009 is the lowest since Q3 2003,” according to MergerMarket’s Preliminary Global M&A Round Up. But that does not seem to be the case for Australia and New Zealand.
Interestingly, according to Josh Bolot, “prices of target companies have not been lower at this time as a result of the economic downturn. The difference is that transactions are more likely to be funded from cash reserves or offering scrip as consideration, with the ability to source significant debt funding remaining constrained.”
Another factor is the sources of debt funding in this new wave. New Zealand is seeing large funds located in Europe and elsewhere that want part of their portfolio in equity investments in a politically secure country,” noted Graham Mitchell. “Over the next five years we expect to see that increase.”
Mr. Mitchell added on the sustainability topic, “The New Zealand government recognizes that it is in a unique position of being on the front foot today, and is interested in using investment to drive it forward. And the New Zealand government has a strong appetite for growth.”
Where are the Hot Spot sectors?
According to MergerMarkets Preliminary Global M&A RoundUp, by volume only, the biggest sectors for M&A globally have been Industrial & Chemicals (17.7%), Consumer (13.7%), Financial Services (11.4%) and Energy, Mining and Utilities (10.9%).
In Australia, the announced deals speak for themselves as being in finance and mining. New Zealand has seen more activity in technology, particularly cleantech.
Sustainability sustenance from past recessions
In the depression of the 1930s provided some excellent examples in the US that recessions are the time to grow. DuPont invested in research and development and employed a lot of unemployed scientists. At the end of the depression, 40 percent of its sales were from products that had not been around at the beginning of the depression.
Fast forward. Intel, the microprocessor and chip maker, continued to invest heavily in new products. Proctor and Gamble is investing in the biggest production expansion in its 170 year history by opening 19 new factories.
Boston Consulting Group’s study of mergers and acquisitions in the United States from 1985-2001 found that deals done in recession returned 15 percent more to stockholders than mergers during good times.
If M&A activity is an accurate indicator, many companies spent their time and money wisely during the downturn.
Steve Anderson started as a journalist, working first at The New York Times and the next 30 years interpreting business to investors. He is now Managing Partner, Marquis Advisory Group (San Francisco and Sydney).