Predator or Prey:Australia’s changing role in global business transactions

DealmakersANZ Q&A Panel Event

Predator or Prey: Australia’s changing role in global business transactions

This was the question posed at the recent Intralinks #DealmakersANZ Q&A panel event, which was attended by hundreds of the most senior members of the country’s investment banking and corporate advisory communities.

The #DealmakersANZ panel explored the cadence of M&A activity, which sectors are driving it, who’s looking to invest, likely avenues for exit and some of the less common mechanisms being used to drive deals to a close in an increasingly difficult market.

There was general consensus amongst panelists that Australia is in a better position than most economies to take advantage as capital markets defrost around the world.

Debate was stronger as to whether business has moved decisively enough to be more the predator and less the prey, given the fast growing international interest in Australian assets.

Dealmakers ANZContents

Dealmakers ANZ 2

Growth off a small base 3

The New M&A 4

Where are the opportunities? 6

Where to from here? 8

02

The world of mergers and acquisitions remains competitive and aggressive. Positioned literally at the bottom of the world but strategically close to Asia, is Australia. predator, prey or a combination of both?

Predator or Prey: Australia’s changing role in global business transactions

Intralinks’ first quarter 2013 Deal Flow Indicator report confirmed a small overall increase in early-stage M&A this year, with data showing two and six per cent quarter-on-quarter and year-on-year growth respectively in the M&A space. Sector-specific data across Asia Pacific, however, tells a very different story including a 100 per cent increase in energy deals quarter-on-quarter and a 19 per cent increase year-on-year.

Nevertheless, the market remains challenging. Hard work and creativity are required to get deals away.

Jonathan Algar, partner at law firm Clayton Utz confirmed the conditions, saying “it’s a really challenging environment.”

A slowdown in investment from China has had a particular impact on the Australian market. Despite this – which many think will only be a short-term blip – Mr. Algar said innovation, careful management of the currency and generally stable economic conditions bode well and that financial services, superannuation and agriculture will produce plenty of opportunities for future deals.

The massive injection of capital into the private equity sector will also be key to unlocking M&A activities according to panel member Nick Humphrey, a partner with law firm Sparke Helmore. He noted that private equity firms have raised $3.6 billion and have money to spend, saying “it’s a very important dynamic – funds are now cashed up and ready to invest.”

Growth off a small base

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Predator or Prey: Australia’s changing role in global business transactions

With a turnaround in the M&A market imminent, it’s worth exploring how deals are changing.

More detailed due diligence, larger deal teams and new deal structures are just some of the market characteristics. Deals are harder to do and it is taking time to get bidders across the line. Care also must be taken to bridge the gap between the vendor and the target’s expectation of value, said Jonathan Algar.

“This is especially difficult when equity markets are trending up, which should lead to fewer cash deals and more scrip deals,” he explained.

According to Nick Humphrey, we need to get used to longer and more detailed due diligence and very big deal teams. He cited a recent example from his own experience with a recent transaction, which had 58 people on the deal, took 18 months to do and that “stopped and started about three times.”

Mr. Humphrey also said Australia has much to learn about how earn outs – the variable portion of a transaction that’s generally determined by the asset’s performance – are structured in the UK and US. How they are secured, when they are accelerated and conditions for when they lapse are key considerations.

The New M&A

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Dealmakers ANZ Panel (left to right)

Brad Howarth: Facilitator, Finance and Technology journalist

Jonathan Algar: Partner, Clayton Utz

Mark Stanbridge: Partner, Ashurst Australia

Matthew Porzio: Vice President, Product Marketing

Nick Humphrey: Partner & Head of Corporate, Sparke Helmore Lawyers

Peter Dunne: Partner, Herbert Smith Freehills

Predator or Prey: Australia’s changing role in global business transactions

Another relatively new dynamic, said Mr. Algar, is the increasing prevalence of ‘bear hugs’ – highly conditional, non-binding indicative proposals subject to due diligence. Bear hugs enable a bidder to approach a target company and request due diligence and at the same time not be bound to proceed to a takeover.

“People want due diligence even on listed companies and they really want to do a deep dive,” he said. This is especially so given economic uncertainty.

The disclosure of a bear hug by a target or bidder puts price pressure on target boards, causes major shareholders to engage with target boards and forces targets to provide due diligence. The result according to Mr. Algar is that “as a mechanism, they [bear hugs] have taken the place of a hostile takeover.”

Mr. Algar also indicated that due diligence will become even more critical as scrip-based transactions rise and make it even more important to prove the synergies the transaction will realise between two entities. “In this environment it’s important to do the due diligence and provide the story to both sets of shareholders. This is a trend that will continue.”

Matt Porzio, Vice President of Product Marketing for Intralinks, agrees this is a dynamic that has been demonstrated globally. “Highly acquisitive companies with large balance sheets and the ability to access capital are going out and really driving the process and leveraging technology. They are building out deal teams and not waiting for seller to determine how they are going to share information,” he explained.

“So we are seeing fewer bidders on deals. However the amount of information being shared and that is required for review has increased by almost 40 per cent year on year” indicating the increasing value of technology to the due diligence process overall.

05

Predator or Prey: Australia’s changing role in global business transactions

Certainly, the flavour of the M&A market in Australia is rapidly shifting. Mining and resources deals will no longer dominate and other sectors are likely to come to the fore.

“The world driven by mining, resources, energy is a changing world,” said Mr. Stanbridge. “It’s been tightening for some time and I think it’s going to tighten more.”

So there’s a need to look beyond mining and resources. All panelists were in general agreement that opportunities for deals would likely arise in the in the financial services sector, especially given regulatory reform and the increase in the superannuation guarantee.

“I do think some of the larger players will seek to buy market share and customer lists. There will be activity in the wealth management space,” suggested Mr. Stanbridge.

Peter Dunne believes telecoms will continue to be an interesting area, driven in part by the NBN Co. He expects to see infrastructure deals increase, given underinvestment in the area.

Where are the opportunities?The world driven by mining, resources, energy is a changing world... it’s been tightening for some time.

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Mark Stanbridge: Partner, Ashurst Australia

Predator or Prey: Australia’s changing role in global business transactions

The arrival of large sovereign wealth funds will also change the nature of deals in Australia. Mr. Dunne said players such as the Ontario Teachers’ Fund, which are more aggressive and invest from their own balance sheet, will become more sophisticated especially if they can identify good assets. He said this will create more competition between the private equity sector and sovereign wealth funds and, according to Matt Porzio, it opens the way for some interesting momentum plays.

Nick Humphrey agreed, saying the interest from Asia is strengthening in the agribusiness, food and water space. A major structural shift is interest from private equity funds in social infrastructure and agri assets. “Through our China network we’re seeing requests for access to dairy, pasture and so on,” said Mr. Humphrey.

He says health is another area of interest, especially from US private equity investors seeking niche market opportunities. “Rollups are still going through and the recently announced IPO of Virtus is a great example of that. If they are structured well, when you go to market you can still realise value.” The Virtus transaction was generally agreed by all panelists to be a hallmark deal for private equity and its desire to extract value from deals involving an IPO exit.

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Intralinks Matt Porzio on the Australian M&A Market

Predator or Prey: Australia’s changing role in global business transactions

There was some consideration of whether some of the market paralysis at present is due to the impending Australian Federal election but a wider feeling that there are some deeper structural changes in the market that could resonate for some time.

Overall agreement was that, should global markets continue to improve in the lead up to the election, the M&A market could be set for a real turn-around following that point, with opportunities for deals to be done across the board.

The next #DealmakersANZ event will provide perfect opportunity to determine if our esteemed panel were right!

Where to from here?

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