Last year was a record for takeovers on the ASX. Tens of billions of dollars worth of takeover bids were announced during 2021 over a range of assets from airports (Sydney Airport), to electricity transmission (Spark Infrastructure and AusNet) to financial technology (AfterPay).
There are many reasons behind the spike in takeover activity, and they point to further takeover activity in the near term, in my view.
Cheap and readily available debt has added fuel to the takeover fire, increasing the prices that buyers such as private equity funds are willing to pay for listed companies.
Furthermore, domestic super funds have recently emerged as a major player in acquiring listed companies. This represents a change in their strategy from simply buying shares in companies to bidding for entire companies.
Large industry super funds have now amassed significant funds under management which allows them to buy entire companies.
Additionally, converting public companies into private unlisted companies does not require these super funds to value the companies based on the daily price movements on the sharemarket. Owning unlisted assets was very attractive during March 2020, when Australian shares fell 20%.
The biggest change over the past two years has been takeover offers from either super funds, or a super fund working in a consortium with an established private equity business.
In this scenario, the super fund provides capital, with private equity providing both capital and expertise in conducting a successful bid for a public company.
There has also been a shift in perceptions about companies that can be taken over. Until recently, large Australian listed companies with market capitalisations over $5 billion were considered immune from receiving a takeover offer, as they were seen as too big a fish to swallow.
The firepower of global private equity firms and super funds has changed that. The takeover bid for Sydney Airport was for $32 billion. Block Inc’s (ASX: SQ2) bid for AfterPay was initially valued at $39 billion, which in August 2021 made this the largest deal in Australian corporate history.
Atlas Funds Management's funds have benefited from takeover activity over the past two years, but we can't honestly claim that these investments were made expecting a near-term premium from a takeover.
Many of the key characteristics that Atlas Funds Management looks for in a company, namely stable forecastable earnings, high barriers to entry, low levels of government regulation and low levels of debt, are prized by private equity and super fund suitors alike.
A company with stable and growing profits is likely to be attractive to super funds which have long-term liabilities to their members.
Similarly, companies with both consistent earnings and low debt are prized by private equity firms looking to use debt to fund a takeover. Companies with high levels of regulation, or that operate in sensitive industries, are less likely to receive takeover offers due to the potential for the bid to be rejected.
So, the factors that make companies attractive to retail investors might increase their likelihood of being targets for takeover bids.
Investors without the benefit of hindsight are extremely unlikely to be able to make short-term investments in anticipation of a company being taken over.
Even in situations where a takeover bid is likely and logical from a majority shareholder, investors can't influence the timing.
Consequently, when investors are faced with a takeover offer, they have three choices:
With interest rates remaining at zero in investors' cash accounts, Atlas Funds Management would only sell its position in the company receiving a takeover offer on-market if we had a strong belief that the suitor may either reduce or pull their bid.
Typically, this occurs when a troubled company receives a takeover offer, which allows the suitor to take a closer look at a company's financial accounts.
Atlas Funds Management's general stance when receiving a takeover offer is to be patient and do nothing. In the absence of a superior investment opportunity and with interest rates on our cash accounts being close to zero, the opportunity cost of holding out for a higher bid is minimal.
For successful takeover offers, rarely has the first bid for a company been the final offer. In a takeover, the company's board often wants to be seen to extract a higher premium from the reluctant bidder, who may have budgeted on making a higher bid at a later date.