But the ongoing debate for M&A practitioner is around the appraisal.
While this is a point of contention in any agreement, the big changes that are happening in the macro environment (increasing interest rates, geopolitical tensions, climate challenges) and the recent pressure on the equity and debt markets have created a Wider chasm between buyers, who believe valuations have permanently reset, and targets, who still cling to the hope that yesterday’s prices will return.
How can you value in a recession without a recession?
“There’s always a debate at the start of a market downturn about whether to adjust fundamental valuations,” says Alexander.
Part of the problem in Australia, Friedlander says, is our incredible 30-year recession-free streak.
“None of the recessions we’ve experienced in Australia have been long enough to really test a permanent decline in fundamental value,” he says.
But some boards have clearly readjusted their view of the valuation in light of falling markets and a challenging macro environment.
Five of the eight recently announced deals have involved an offer price below the share’s 52-week high price target. Nearmap, for example, sold for 7 percent less than its 12-month high; Pendal’s deal was agreed to at 33 percent less than his 12-month high; BHP has bid 18 percent below OZ Minerals’ 52-week high; minnow iSelect sold for 32 percent less than its 12-month high; and dye & Durham finally won over Link with an offer price 13 percent below the 52-week high.
Damian says he feels the valuation question is beginning to have an answer, but Alexander wonders if the recent rally in equity markets might mean it will take longer now for boards to appreciate the change in conditions.
“My feeling is that because the market has come back a little bit, boards feel more solid in rejecting some of those approaches,” Alexander says. “But there is still a disconnect between Australian boards as to where we are going.”
No help from shareholders
Shareholders, who are increasingly vocal in deals these days, aren’t exactly helping.
“Major shareholders always say two things: one, the price isn’t good enough and two, don’t let this deal slip away,” says Alexander. “When you’re in a board seat, and that’s really hard to read.”
Dealing tactics have also been in the spotlight throughout 2022. While several target boards may have accepted prices well below their recent peaks, they certainly haven’t gone down without a fight; Friedlander and Alexander say it has become common for boards to hold two or three rounds of negotiations behind closed doors with potential buyers as they seek to push for a better price.
Another tactic boards use to get a higher price and keep the acquirer on the hook is to offer a kind of prior due diligence, usually in the form of a management presentation.
But the offer of a management presentation often comes on the condition that the acquirer signs a standstill agreement that prevents them from buying shares in the target, and potentially launching a hostile takeover, for 12 months.
The tactic satisfies upset shareholders who want targets to keep the acquirer on the hook while they try to force a higher offer, but Friedlander says it puts acquirers in a bind; they are not getting full due diligence, and a potential takeover tactic is being removed from their toolkit.
The big question for negotiators is: will the recent surge in deal activity continue? Our trio is divided.
Damian is relatively optimistic; this is not a bad year for me&R if you think about long-term averages, and private equity and retirement activity have room to improve.
“Several superfunds have caught their breath because of recent acquisitions, but they will be back. They need to keep acquiring things,” she says.
Alexander believes that clarity on several of the big questions hanging over the market — interest rates, equity market moves, and debt market conditions — will help.
“I think we’re going to see a good deal flow in the second half, particularly in the last quarter.”
Friedlander is more cautious. “I am worried about some global things that will have an impact. A lot could happen in America for the rest of the year.”
Midterm elections, an aggressive Fed and regulatory changes, including proposed rules that would allow intelligence agencies to scrutinize investments by US companies in China, expanding scrutiny of deals between the two nations, could play a role. deal activity, says Friedlander.