MinterEllison has released its ‘top five M&A predictions for 2019’, with commentary from the firm stating that the next 12 months will see “more mega-deals, continuing action in the middle market, and trends including ‘buying growth’, ‘opportunistic takeovers’ and use of ‘bear hug’ strategy” in the public M&A sector.
“There is more upside in M&A markets,” MinterEllison partner Alberto Colla has forecast, noting the presence of the “cashed up private equity sector” as a driver of growth.
1. “Buying growth” a key driver shaping markets and takeover action
The challenge of achieving organic growth is a “key reason” a buoyant M&A market is set to continue through 2019, according to MinterEllison.
In particular, the firm flags “buying growth” in sectors such as energy and natural resources, healthcare and technology.
Mr Colla said it’s a theme he sees extending into Asia and the Pacific region.
“There are cross-Tasman opportunities to consider as well as Asia-Pacific that will be a big part of the market in 2019,” he said, pointing out also that factors such as rising interest rates domestically, 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
MinterEllison predicts that heightened auction activity will see aggressive and highly strategic tactics “being deployed to win” as a result of higher auction activity in FY18.
“The kinds of auctions seen in FY18 have helped to evolve the market and educated players about what approaches can work,” the firm stated.
“Players have become sophisticated,” Mr Colla explained, “there is a greater understanding of auctions and how they work.
“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. The rise of the hostile takeover
After witnessing mixed success of hostile bids last year, MinterEllison has predicted “a greater preparedness” for the launching of such bids in 2019, as shareholder action increases.
Mr Colla said hostile bidders are expected to bypass target boards to put offers directly to target shareholders, in a trend “partly driven by the search for value and growth”.
“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,” Mr Colla said “yet they will still pursue a hostile situation.”
4. Foreign bidders extending their market presence
“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 noted, reiterating MinterEllison’s prediction that foreign bidders will continue to dominate Australia’s public M&A marketplace.
The firm hasn’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”, according to Mr Colla.
“US and Japanese investment in particular will continue throughout 2019,” he said, with a focus on mid-market transactions, and in sectors such as robotics and IT.
5. The “bear hug” will enter the market
MinterEllison has labelled the “bear hug” as key to takeover targeting in the coming year.
According to the firm, “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.” This is a technique it expects will see more traction in the local market.
The firm explained that it expects to see targets “increasingly offer business or operational warranty and indemnity insurance to acquirers”.
For MinterEllison partner Con Boulougouris, “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 way of sharpening the minds of directors and boards.”