Top 10 M&A developments in 2008
1 Difficult times, but a land of opportunity
The severe global financial meltdown has clearly dominated the M&A landscape in 2008. This has created difficult times, yet opened up many opportunities.
The lack of availability of credit and refinancing options, declining asset values, a financial market meltdown and a general economic downturn has caused many companies extreme discomfort. Perhaps the worst of times to be a seller, but the best of times to be a buyer as there are many opportunities to buy cheap assets.
Separately, the second half of the year saw a rapid decline in the Australian dollar in line with the fall in commodity prices, making Australian companies look even cheaper to foreign buyers, which can also be expected to give rise to many opportunities in 2009.
2 Credit crunch – cash is king
The credit crunch, which started in August 2007, took hold in 2008, almost completely closing the debt markets for new M&A. Acquisitions became harder to complete.
All the major banks undertook major equity capital raisings and many other companies undertook rights issues or placements to reduce leverage or for ‘balance sheet repair’. There was only one IPO of note—that being BrisConnections—which has not fared well.
The scarcity of cash also made scrip mergers popular. Notable examples include Westpac/St.George, the proposed bid by Lion Nathan for Coca Cola Amatil and the proposed private equity bid for Asciano (which included a stub equity component).
Separately, the game changed for private equity. While there remains a steady supply of equity funding, with debt hard to come by, the larger private equity deals of 2006 and early 2007 were no longer possible. With asset prices lower, there are some good opportunities for private equity in the mid cap market. In addition, PIPES (private investment in public equity) are becoming of more interest, with private equity prepared to consider taking major stakes in public companies while keeping them listed.
3 Mining boom and bust 2008 – a tale of two halves
2008 was a tale of two halves for the mining sector.
While the financial markets began to implode in the first half of 2008, the mining boom continued as commodity prices stayed high. Notable deals included the proposed merger of BHP and Rio Tinto, the hostile takeover bid by Sinosteel for Midwest (the first ever hostile bid by a Chinese company) and the competing takeover bids for Indophil.
Chinese (and Indian and Russian) interest in Australian mining assets was high (Chinese interest included buying a strategic stake in Rio). The interest was so much that the Australian government promulgated some specific FIRB rules for state owned entities and sovereign wealth funds. While the application of such rules remain unclear, the government ruled that Sinosteel could not acquire more than 49 per cent for Murchison, should it bid for that company. It has been reported that many applications for FIRB approval by Chinese companies were withdrawn while the uncertainty over the government approach remains.
However, the market downturn in October 2008 changed all this. The fall in commodities prices changed the paradigm for mining stocks. Many previously economic projects were no longer so. Stock prices fell and many deals were pulled, most notably BHP/Rio. Nonetheless, with lower prices, many good buying opportunities exist.
One constant throughout the year was energy stocks. Coal seam methane has been all the rage with notable deals including the landmark Santos/Petronas link up, which then led to Origin spurning a bid by BG by entering a joint venture with ConocoPhillips and BG acquiring Queensland Gas.
4 Takeovers Panel becomes a ruler for all times and laws
The Takeovers Panel jurisdiction expands.
In the battle for control of Midwest, Sinosteel applied to the Panel for a declaration of unacceptable circumstances on the basis that another shareholder breached acquisition limits under the Foreign Acquisitions and Takeovers Act 1975 (Cth). The Panel found that it is important that all securities market participants could assume compliance with the law by others, such that a ‘level playing field’ existed for all. In declaring unacceptable circumstances, the Panel pointed to a failure to comply with relevant Australian law as leading to a market that is not efficient, competitive and informed. This is perhaps a stretch of the policies underlying the takeover provisions of the Corporations Act. Many say that the Panel is not the correct forum for dealing with breaches of the foreign acquisitions legislation.
The Panel also reviewed corporate electoral processes in the Lion Selection 02 matter. There, the dispute centred around the collection and processing of proxies in relation to a shareholder meeting. At that meeting, shareholders were to consider an alternative proposal to an existing takeover bid. So while the matter tangentially involved a takeover bid, the heart of the dispute was not a takeover law issue.
The Panel’s preparedness to extend its jurisdiction beyond the takeovers provisions of the Corporations Act to other statutes and legal processes raises interesting questions. There is divide as to whether this approach is correct. There is a question whether this expansionist approach will extend to other laws and processes or whether there will be a retreat from this high water mark.
5 Bid conditions get mission critical
With the economic downturn and deals being harder to complete, greater focus has been placed on conditions to takeovers, schemes and M&A deals in general.
Acquirers and (where debt is available) financiers have been giving extra scrutiny to the conditions to acquisitions to protect themselves from downside risk and market changes.
Where due diligence is not available, bidders are demonstrating an increased propensity to make bids subject to conditions relating to due diligence access, earnings confirmations and liabilities confirmations.
In the United States, large-scale litigation has arisen in cases where financiers have triggered conditions to funding which has resulted in M&A deals falling over. It may only be a matter of time before we see similar litigation in Australia.
In Australia, takeover bids have lapsed and deals have not proceeded because of breaches of material adverse change conditions, ASX and commodity price index conditions as well as specific earnings conditions.
6 Financial sector consolidation
Amid the problems of the credit crunch, the financial sector globally has seen consolidation occur on a very significant scale. While Australian financial institutions are generally better placed than their global peers, it has also experienced consolidation. The ranks of regional banks were thinned as Westpac acquired St George, and then days before government rescue packages were announced in the United Kingdom and in Australia, Commonwealth Bank signed an agreement to acquire BankWest from HBOS.
Earlier in the year there was the Bendigo Bank and Adelaide Bank merger. Queensland-based financial group, Suncorp also announced late in the year that it had been in discussions to dispose of its banking and wealth management arms.
7 ACCC releases new merger guidelines
The ACCC replaced its 1999 merger guidelines with new 2008 merger guidelines. A draft was released in February with final guidelines released in November.
While notification to the ACCC remains voluntary, the ACCC now encourages notification of a merger where the products of the merger parties are substitutes or complements and the merged firm will have a post-merger market share greater than 20 per cent.
One of the important changes from the earlier guidelines is the abandonment of the ACCC’s previous concentration threshold tests (often inaccurately referred to as the ‘safe harbour test’). The previous guidelines indicated that the ACCC would look closely at mergers where the post-merger market share of the top four firms exceeded 75 per cent, or of the relevant combined entity exceeded 40 per cent.
Under the 2008 guidelines, the ACCC has adopted the ‘Hirfindahl-Hirschman Index’ (HHI). This is the index used by regulators in the United States and European Union and is the sum of the squares of the percentage market shares of each of all market participants. The ACCC states it is less likely to have competition concerns where the post-merger HHI is less than 2000 or the change in the HHI is less than 100. However, the HHI is intended to be one of many factors that the ACCC will take into account when analysing a merger.
Separately, the formal ACCC clearance process remains completely unused even though it confers statutory immunity. Market participants continue to prefer the more flexible informal clearance approach, particularly now that the ACCC has increased the transparency of its merger review processes to address many of the previous concerns.
8 Taking a stake and shareholder commitments
With deals being difficult to complete, the manner in which bidders acquire pre-bid stakes to gain some measure of deal security has been the focus of some attention.
There is an increasing desire from bidders to have shareholders commit to accepting a takeover bid from day one. BG extracted such a commitment from AGL in BG’s bid for Queensland Gas and similarly four institutional shareholders (holding 34 per cent in aggregate) did the same in Manhattan Software’s bid for MYOB. Such commitments effectively lock the shareholders into accepting the bid under ASIC’s ‘Truth in Takeovers’ policy. The Takeovers Panel decided that the unqualified commitments in the MYOB bid went too far. Nevertheless, the upfront commitment was important in creating momentum for the Manhattan takeover offer which was ultimately successful.
Separately, cash-settled equity swaps continue to be used as a means of accumulating a pre-bid stake. This is despite the Takeovers Panel finalising its Guidance Note 20 on equity derivatives during the year. In short, GN 20 requires, in the context of a control transaction or a proposed control transaction, disclosure of derivatives which, when aggregated with actual holdings, amount to five per cent or more.
One common point with the shareholder commitments and equity derivatives is that for no (or minimal) cash outlay, a bidder gets a hold on a pre-bid stake from which it can launch a bid. This can be important at a time when choppy markets mean it may be undesirable to make a cash outlay for a pre-bid stake if the market price of the target subsequently falls.
9 The Panel gets shorty
In a number of respects, the Takeovers Panel adopted a clear, concise and effective mantra in 2008, providing shorter and more concise decisions in a faster timeframe. It also commenced a rewrite of the guidance notes endeavouring to keep it simple and easy to understand.
In other procedural developments in the Panel, parties were encouraged to limit their written submissions to a set number of pages in a pro forma application form. These procedural changes are designed to keep the Panel in line with its purpose of being a user friendly, efficient, commercial dispute resolution body.
While speed and efficiency are to be welcomed, care does need to be taken. By way of example, if facts material to the making of a Panel decision are not publicly communicated in the reasons, the usefulness and precedent value of that decision to the market will be diminished. Query also if shorter guidance notes give a clearer message or whether they actually give less guidance.
10 Scheme reform?
In June, the Australian government’s Corporations and Markets Advisory Committee (CAMAC) released its long-awaited discussion paper on members’ schemes of arrangement. The paper is the first government review of the scheme provisions in decades.
Helpfully, for those interested in a competitive market for control of listed companies, CAMAC is positively disposed to the use of schemes to effect mergers. The paper does not propose to limit the use of schemes, but contains a well-considered discussion on whether the takeover avoidance provisions in the Corporations Act ought to be reformed or repealed so as to better facilitate the use of schemes.
Other reform proposals include ‘road map’ disclosure, involving providing shareholders with a road map of information together with the reference to a website with full information. The paper looks at anomalies between schemes and other control transactions, including liability regimes. It also discusses the possibility of the hostile scheme.
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