13 Mar 2014

Real competition for deals likely in 2014 as bidders angle for assets

Sydney, 13 March 2014:  Competitive and recommended bids are likely to continue as key themes of M&A activity in 2014 – but in this environment, bidders may need to be prepared to pay substantial premiums to secure their targets.

Target boards will also need to actively manage the bid process to maintain competitive tension between bidders if they want to secure the best outcome for shareholders. 

These are among the likely M&A trends this year according to THE REAL DEAL 2014 edition (PDF 3.1MB), which contains in-depth analysis by Clayton Utz' Corporate M&A team of public M&A activity above $50 million.

THE REAL DEAL 2014 edition reveals that competitive bidding scenarios dominated what limited public M&A activity there was in 2013 – with only 21 announced deals above $50 million for just 17 targets, activity levels were down 50% on 2012 and the lowest since 2002. With stronger equity markets readily available, low cost debt and the return of competition to the public M&A arena, there was a change in how targets responded to 'bear hug' pressure tactics by bidders and much less scope for opportunistic bids.

Clayton Utz corporate / M&A partner Karen Evans-Cullen said 2014 was likely to see more competitive bidding activity for strategic assets, which generally saw shareholders rewarded with higher premiums. In the past 4 years, target shareholders in competing bids have received an average premium of 65%, compared to an average premium of 44% for all deals.

Ms Evans-Cullen said to attract such premiums, target boards would need to maximise competitive tension and level the playing field so competing bidders could put forward their best proposals at the same time. The aim for target boards is to give target shareholders a real choice and ensure bidders compete on price, not conditions.  

 "We saw a very good example of this in the competing bids for Warrnambool Cheese & Butter.  The successful bidder, Saputo, was able to leverage its competitive position to get shareholders to accept its offer ahead of Murray Goulburn, which had yet to secure competition approval.  We may see more of those tactics with future competitive bids," said Ms Evans-Cullen.

Among other trends, 2013 saw risk-averse strategic investors using methods other than traditional M&A to either acquire or divest a stake in Australian listed companies. Explaining this trend, Corporate / M&A partnerJonathan Algar said: "A number of significant shareholders used the block trade mechanism as a quick, effective and low risk option for divestment, particularly in the first half of 2013.  In other cases, sale direct to another strategic investor was the alternative chosen."

A continuing feature of Australia's M&A landscape is the success of bids that have been recommended by the target board particularly in a competitive scenario.  Ms Evans-Cullen and Mr Algar said this highlighted the critical role the target board has to play in determining which bidder is successful.

Unlike previous years, 2013 also saw as many deals by domestic bidders as foreign bidders.  The decline in the number of foreign bidders reflected the decline in M&A activity in the energy and resources sectors which have in the past been dominated by foreign bidders.

Over the next 12 months, M&A activity is most likely to occur in sectors where there are strong growth prospects or the ability to secure strategic assets, such as infrastructure, real estate and agribusiness as well as sectors where there is significant structural or regulatory change occurring such as retail, financial services, media or telecommunications. 

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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.