Highlights: 

• The market for Australian public mergers & acquisitions (M&A) has seen a strong resurgence in the two financial years since the GFC, both in terms of the number of deals being done but also in terms of their value.
• Success rates are also on the increase, with 70% of announced deals ultimately resulting a successful outcome.
• Deal protection is currently under intense scrutiny, with the UK Takeovers Panel taking a strict line and prohibiting deal protection mechanisms such as “no-shop / no-talk”, matching rights and break fees. It remains to be seen whether the Australian Panel has a similar view on the anti-competitive nature of many deal protection arrangements.
• Deals are still highly conditional – approximately 90% of transactions in FY2011 had conditions attached to them.
• There has been an increase in foreign M&A activity with 51% foreign bidders in FY2011, compared to 42% foreign bidders in FY2010. In particular, FY2011 saw strong activity from North American bidders.

DEAL LANDSCAPE

The market for Australian public mergers & acquisitions (M&A) has seen a strong resurgence in the two financial years since the GFC, both in terms of the number of deals being done but also in terms of their value. The total consideration publicly committed to by bidders in FY2011 was $79m, up from $19m in FY2009 – additionally the number of deals with a market value over $500 million is on the increase. It remains to be seen whether this resurgence will continue in the face of current global economic uncertainty around. The early M&A figures for FY2012 do not look too alarming, but it may be too early for the effects to impact Australian public M&A, given most deals are often planned many months in advance.

Success rates are also on the increase, with 70% of announced deals ultimately resulting a successful outcome. This seems to be due to a number of factors, including an improved degree of success amongst hostile deals, an increase in the number of friendly deals and also a continued use of deal protection mechanisms, which have a strong correlation with success. Success rates have also been impacted by noticeably more bids originating from China and India being successfully completed.

DEAL STRUCTURE

Deal protection is currently under intense scrutiny, with the UK Takeovers Panel taking a strict line and prohibiting deal protection mechanisms such as “no-shop / no-talk”, matching rights and break fees. It remains to be seen whether the Australian Panel has a similar view on the anti-competitive nature of many deal protection arrangements, however they feature prominently in friendly deals in Australia and yet do not appear to have a negative effect on competition in M&A – both 2010 and 2011 saw a healthy number of competitive auction scenarios in public M&A.

Deals are still highly conditional – approximately 90% of transactions in FY2011 had conditions attached to them. Overall, the trend in takeovers seems to be towards having more conditions, which goes against the trend of last year. An indication that, despite the increased activity, bidders seem to be more cautious. In contrast, FY2011 also saw the continuation in the trend of more unconditional on-market bids.

Bidder caution continued in relation to the minimum acceptance thresholds, with an increase in 90% minimum acceptance thresholds and a decrease in 50% minimum acceptance thresholds in FY2011. In only three of the deals with 90% minimum acceptance thresholds was the condition waived or varied. Overall, only 11% of bidders waived their minimum acceptance condition.

42% of transactions had lock-up arrangements in FY2011. This is significantly higher than in both FY2009 and FY2010, when only around a quarter of deals had some form of lock-up.  There is also a clear movement towards implementing a range of lock-ups. Directors stating that they will accept the offer in the absence of a superior offer still remains the most common lock-up, however we are seeing more pre-bid acceptances, option agreements and even voting agreements, all of which appear to be helping success rates.

ORIGIN OF BIDDERS

There has been an increase in foreign M&A activity with 51% foreign bidders in FY2011, compared to 42% foreign bidders in FY2010. In particular, FY2011 saw strong activity from North American bidders. Given the relative strength of the Australian dollar against theUSand Canadian dollars over the past year, it is perhaps surprising that of the 21 deals involving North American bidders, cash was the form of consideration in 13 of those deals.

Bidders in the deals with values over $1 billion were again predominantly offshore, spread across North America, Asia andEurope. Involvement by domestic bidders in ‘mega deals’ appears to have slowed after a resurgence in FY2010.