“Buying growth” will continue to drive M&A in 2019: MinterEllison

| December 7, 2018
Following strong activity in the Australian public M&A sector and the record year for transactions booked in FY2018, MinterEllison said it saw a continued uplift for the 2019 with a positive sector outlook.

In its top five M&A predictions for 2019, the firm’s leading M&A commentators say the New Year will see more mega-deals, continuing action in the middle market, and trends including “buying growth”, “opportunistic takeovers” and use of the “bear hug” strategy as key themes.

“We believe there is more upside in M&A markets next year and see the presence of a cashed up private equity sector as one of the key drivers for 2019 growth,” said Alberto Colla, MinterEllison Partner and Public M&A sector expert. Mr Colla said he also saw the Asian region’s strong M&A activity continuing into 2019 with a possible peak in H2.

MinterEllison’s Top Five Public M&A Predictions for 2019

1. “Buying growth” a key driver shaping markets and takeover action

One of the key reasons for the continuation of the buoyant M&A market is the challenge of achieving organic growth. The market has seen the trend towards “buying growth” and this is flagged to continue particularly in sectors such as Energy and Natural Resources, Healthcare, and Technology/Telco.

“We see this thematic extending into Asia and the Pacific region,” said Mr Colla. “There are cross Tasman opportunities to consider as well as Asia Pacific that will be a big part of the market in 2019.”

Mr Colla also pointed to opportunistic buying of growth, where factors such as rising interest rates in the domestic market, tariffs, and geopolitical uncertainty could drive down share prices and drive more takeover action in the search for quality targets.

2. Auctions here to stay as acquirers play strategy card

The number of auctions for ASX listed target jumped in FY18, reversing the trend of the previous year when auctions activity was subdued. There will be heightened auctions activity again in 2019 with aggressive and highly strategic tactics being deployed to win.

MinterEllison says that the kinds of auctions seen in FY18 have helped to evolve the market and educated players about what approached can work.

“There is a greater understanding of auctions and how they work – and players have become sophisticated,” said Mr Colla. “We think sectors to watch for consolidation in the new 2019 year include health and aged care, information technology, mining and minerals, and food, beverages and tobacco.”

3. Rise and rise of the hostile takeover

MinterEllison predicts not only more shareholder action in 2019 but also greater preparedness to launch hostile bids, with mixed success in FY18.

“In 2019, we expect to see hostile bidders bypassing target boards to put offers directly to target shareholders,” said Alberto Colla. “Players are aware of heightened execution risks including lack of access to due diligence beyond publicly available information on the target; the prospect of the target launching a robust defence including actively soliciting competing bids; and the lack of bidder deal protections that are an established feature of friendly deals, yet they will still pursue a hostile situation.”

He said this trend was partly driven by the search for value and growth.

4. Foreign bidders will extend their market presence

In 2019, foreign bidders will continue to dominate the Australian public M&A marketplace in

“Next year will be a strong one for foreign investment in Australia, particularly from the US, with further Japanese interest expected in the mid-market,” Mr Colla said. “We believe US and Japanese investment in particular will continue throughout 2019. The focus will be on the mid-market transactions, and in sectors such as robotics and IT; We haven’t ruled out the likelihood of the Australian market seeing more mega deals with foreign players as the FIRB regulations are better understood and integrated into planning.”

5. “Bear Hug” Technique enters market

A key prediction for the new year is that the market will see takeover targets in 2019 increasingly offer business or operational warranty and indemnity insurance to acquirers and for the local market to see more traction in the use of the “bear hug” technique. A bear hug is an offer pitched at a compelling takeover premium, where there is doubt the target company’s management is a willing seller.
“We predict the bear hug type transactions will be increasingly used in the next few years,” said Con Boulougouris, MinterEllison M&A Partner. “The presence of indicative non-binding proposals as a means to give the bidder exclusivity or get an auction started is a significant trend and also a ways of sharpening the minds of directors and boards.