05 Jul 2013

Few deals, real uncertainty for M&A in 2013

Sydney, 5 July 2013: Strong gains in equity prices over the last 12 months and high levels of volatility in the past few weeks are likely to have been significant contributing factors in the sustained slowdown in significant M&A activity in Australia which is continuing into the second half of 2013.

Clayton Utz partners Karen Evans-Cullen and Jonathan Algar, co-authors of The Real Deal 2013 Half-Year Update (PDF 296.6KB), said there were several reasons rising equity prices and volatility acted as a dampener on M&A activity.

"One is that strong share price performance significantly reduces the scope for opportunistic bids," said Karen. "Target boards are better placed to reject takeover bids and bear hug approaches where the company's share price has improved in recent times. Such a trend is also likely to have deterred private equity bids, with shareholders prepared to wait out strategic change or transformation projects, for example, while they are still deriving some equity growth."

Jonathan said the mergers most likely to succeed in this environment were scrip deals, although these still had their challenges. "Scrip bids, where bidders pay target shareholders with their own equity rather than cash, make a lot of sense for domestic strategic buyers when equity prices rise, as bidders feel they are getting good value for their scrip they offer as consideration. However, these deals have added risk in volatile markets where the bidders' scrip is susceptible to stockmarket movements, while the target's share price may remain relatively stable underpinned by the bid price," he said.

As was the case in 2012, major shareholders will continue to play an increasingly active role in stimulating M&A activity. Commented Karen: "Having sat through prolonged periods of uncertainty following the GFC, a number of major shareholders have become tired of waiting patiently and leaving their fortunes in the hands of the markets. Now, they're wanting to actively consider their options."

Of the nine announced deals in 2013 calendar year to date over $50 million, major shareholders helped to initiate five. "There are still a range of strategic options available to major shareholders. These include sell into third party bid, take private, joint bids, sale to strategic investor, and if all else fails, a block trade. We expect major shareholders will need to use a variety of these options depending on their particular circumstances."

The Real Deal 2013 Half-Year Update follows the release in March of The Real Deal 2013 (PDF 469.2KB), an in-depth analysis by Clayton Utz's M&A team of all Australian public company deals valued at over $50 million during the 2012 calendar year. The Real Deal provides an unparalleled depth of insight and analysis into public M&A deal structures, tactics adopted by targets and acquirers, and developments shaping the future of the Australian M&A market.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.