Corporates are on track to cement this year as one of the biggest for acquisitions since the global financial crisis, brushing off volatile markets as organic growth proves hard to come by and the weaker currency amplifies activity in Australia.
According to Thomson Reuters data exclusive to The Australian, there was $US35.8 billion ($50bn) of mergers and acquisitions announced in the third quarter, up 11 per cent on the proceeding three months despite wild volatility amid fears for China’s slowing economy.
With three months of the year still to go, the activity pushed year-to-date M&A to $US111.4bn, up 33.2 per cent on the same period last year and the strongest first nine months period since 2011.
Bankers, lawyers and fund managers said companies were increasingly on the hunt for growth and synergies, evident yesterday when Vocus Communications and M2 Group unveiled a $3bn merger to become the nation’s fourth-largest telco.
The deal capped a busy past month headlined by Woodside’s $11.6bn bid for Oil Search, which highlights companies’ growing sense of urgency about future growth prospects after years of spending cash on increasing dividends and buying back shares.
Vitamins company Swisse Wellness was also bought for $1.7bn by Hong Kong-listed Biostime, and US credit bureau Equifax lobbed a $2.3bn offer for Veda.
“There are a few themes supporting M&A at the moment — but the overarching one is the search for earnings growth in insipid economic conditions, fuelled by abundant and cheap capital. This doesn’t look like changing any time soon,” said Tony Osmond, head of investment banking at Citi.
“The rapid fall in the Australian dollar has (also) suddenly put some perennial long-term Australian targets in the ‘affordable zone’ for foreign acquirers.”
Guy Alexander, co-head of M&A at law firm Allens, said activity was being boosted by a “real uptick” in M&A in publicly listed companies in the last six months, complementing the stream of deals in the hot infrastructure and utilities sector.
Domestic M&A activity is up 77 per cent this year to $US48.9bn, while inbound deal flow has reached $US36.5bn.
“I’m acting for Woodside, we’re doing Veda, we’re doing M2, we’ve got another two or three in the wings waiting to go so there’s a lot on,” Mr Alexander said.
“In terms of comparison, you are going back at least to 2011, even to the boom times around 2007, to see this level of public M&A in the pipeline.”
Despite the cheer, completed M&A transactions are down 22 per cent to $US78.3bn as some deals fell over or are yet to be agreed, eating into banks’ “success” fees. Also, initial public offerings have dived 52 per cent to $US3.8bn, with few large floats on the horizon aside from that of the multi-billion-dollar Link Group.
Rothschild Australia co-head Marshall Baillieu said the M&A numbers had been “skewed” by some big inbound takeovers, such as Asciano and Toll. “We started the year cautiously optimistic and now we’re seeing greater momentum building, but this is going to take a while. It’s going to be a slow uptick, which is consistent with what’s happening offshore,” he said.
In a report in April, Credit Suisse strategists predicted Australia was only halfway through its fourth M&A cycle in 20 years. The other three cycles — 1995-01, 2002-07 and 2009-11 — averaged $590bn of deals.
Globally, M&A this year of $US3.38 trillion is the second-biggest year ever and is on track to challenge the 2007 full-year record of $US4.61 trillion, according to Dealogic.
Rather than just give cash back to shareholders through increasing dividend payout ratios and buybacks, Mr Alexander said boards were more open to M&A for growth. Mr Baillieu agreed investing more capital in growth options was “starting to get a greater airplay in the boardroom” as they “project further out and build the business”.
“In the last couple of years there’s been a lot of emphasis on increasing payout ratios, but I do think shareholders are putting pressure back on boards to actually drive some growth rather than sit still and churn the business,” Mr Alexander said. “And once you get a couple of deals in the market, boards are only human — they actually take confidence from deals being done and that actually drives more deals.”
John Murray, managing director of Perennial Value Management, said while dividend payout ratios would likely stay high for some time, “ultimately, companies won’t shrink to greatness through forever returning capital via higher dividends and share buybacks”. “What is important is that companies sensibly manage their capital and adapt this to prevailing times,” he said.
“What could change the status quo is some definitive economic measures from the Turnbull-led government which increase both business and consumer confidence.
“In turn, this could lead to companies retaining more profits to reinvest in growth initiatives. Longer-term, an improved reinvestment cycle will lead to a stronger overall economy and therefore better returns for shareholders.”
Mr Murray added he expected more M&A from offshore buyers as the weaker Australian dollar made companies “materially cheaper” than in recent years.
Paul Uren, JPMorgan co-head of global investment banking for Australia, said that ongoing volatility “isn’t going to be a long-term constraint on the M&A environment” and would actually lead to greater M&A by private equity groups.
“When you look at the combined low-interest rate environment and that search for enhanced profit growth, M&A is becoming the preferred means of deploying capital versus share buy backs and so on,” he said.
Karen Evans-Cullen, a partner at Clayton Utz, added: “The second half of the year is always stronger for M&A, so I think we will see a strong finish to 2015. Since the end of the holiday period in the northern hemisphere, we have seen the level of inquiry pick up significantly out of the US. The declining Aussie dollar would be helping this renewed interest in Australia from the US.”
Rothschild’s Mr Baillieu added that while companies were still nervous about the outlook for the economy, they were increasingly dusting off their “list of targets”.