A return to hostile relations in FY17

Posted 1 August 2017

MinterEllison's "Directions in Public Mergers & Acquisitions" report identifies a number of key trends that will influence the M&A market in the coming financial year. The report suggests that the year was consistent, with 18 deals completed in the first half and 21 in the second half. Most of the activity fell within the mid-range of the market ($50 - $400 million) with only four "mega deals"™ worth more than $1 billion. According to the report, areas of significant movement included IT & software services and the real estate industry. Volatile market environments appear to be characteristic of FY17. Brexit, the election of Donald Trump and instability in the Middle East are all listed as prominent causes of instability. Alberto Colla, partner and M&A specialist, commented that, despite some uncertainty, "FY 2017 was a dynamic year shaped by heightened volatility on the global stage and an increasingly complex regulatory landscape". Colla goes on to suggest that volatility has paved the way for many acquirers to accelerate their growth plans and make opportunistic hostile offers. The report observes that there were several instances where bidders put offers directly to shareholders with attractive premiums. The report suggests that the rise in hostile bids can be traced to vulnerable targets, with boards demanding disproportionately high premiums which has forced bidders to bypass the board, as opposed to entering negotiations to strike an acceptable deal.

The success of several hostile takeovers may encourage bidders to follow a similar approach in FY18. The report points to Downer EDI's successful bid for services provider Spotless. After going unconditional, they successfully acquired 67% per cent of shares and four seats in line with its controlling interest. CIMC were similarly successful in their acquisition of 100% of engineering outfit UGL. Correspondingly, FY17 also saw a sharp increase in pre-bid stake building where bidders conducted outright purchases alongside complex swaps and derivatives in order to quickly deliver a 50% controlling interest. The other advantage of this tactic is that it deters other potential bidders. The response to this trend has been growing pragmatism and fewer instances of a "fundamental impasse over value assessments", according to the report. Target boards appear to be assessing offers realistically in the context of market conditions. The report seems to indicate that the target boards are quickly adjusting to the rise of hostile bids and that there may be a decline in response. While there may well be more attempts at hostile takeovers in FY18, boards are likely to be more prepared and, all things being equal, there ought to be a decline in their rate of success.