Leading M&A professionals are cautious about what the New Year might hold after a “disappointing” year, which saw M&A volumes and values significantly down compared to 2011. 

According to Allens partner Alex Ding M&A in 2012 was ”disappointing”, while Herbert Smith Freehills partner Tony Damian said 2012 was characterised by deals taking longer than usual. “There were deals to be done, but they took a long time,” he said. “On occasions, it took the better part of a year to get something done. Companies have not felt under pressure to get out there and lead the charge.”

Despite the subdued market conditions, particularly in the resources space, King & Wood Mallesons partner David Eliakim expects to see increased interest in the non-resources space. “There has been a fair pipeline of opportunistic public M&A,” he added.

Damian said 2012 had seen the start of more “sophisticated” deals coming out of Chinese investors, a trend he expects to see continuing into 2013. “The fact that 83 percent of Australian public M&A deals involving bidders from China were successful in the year ended 30 June 2012 shows that trend,” said Damian. “We think China will be a big part of 2013.”

However, according to Ding, despite a higher success rate, overall there has been a decline in China-driven inbound Australian M&A deals.
“Insofar as the resources sector is concerned, this drop is probably due to a drop in demand for resources - as witnessed by the drop in commodity prices -  and increasing caution on the part of Chinese buyers to ensure that they are not overpaying for assets,” he said. 

In addition, China's M&A investment focus has started to shift by geography, industry and investment strategy according to Zing. “We are likely to see them broadening their investment destinations rather than being focused primarily on resources rich countries such as Australia,” he added.

2012 M&A results were also affected by an increased disparity between what bidders were willing to pay and sellers were willing to accept. “We are seeing a continuing valuation gap between bidder and target expectations,” said Eliakim. “This is leading to a number of standoffs, particularly in the private equity space.”

However, it is not all bad news for the M&A market: “A number of compounding factors indicate that China's growth is at a turning point,” said Ding. “This includes a shift towards encouraging growth driven by increased domestic consumption rather than export-led strategy and that China outbound M&A will become more focused on acquisitions in developed economies in the telecoms, industrials and consumer staples sectors and perhaps less on acquisition of mining and materials businesses.”

Eliakim also said that if there is a shift, the market will be very active. “This is because there is a huge weight of money looking for a home, well capitalised corporates and the Australian superannuation system for example.”

Damian was even more optimistic. “I think the volume of deals will be higher,” he said. “There have been a lot of things sitting on the sidelines that make sense and I expect to see them arrive in 2013.”

Herbert Smith Freehills partners Tony Damian and Rodd Levy provide their top 10 M&A predictions for 2013 and look back at what happened in 2012.

1 More successful China inbound M&A: Success rates for Chinese inbound M&A into Australia have been steadily increasing. In FY2010, only 40 percent of Australian public M&A deals involving bidders from China were successful. This has been increasing, so that by FY2012, 83 percent of Australian M&A deals involving bidders from China were successful.

2 Takeover reform is back: It is unusual for takeover reform to grab the front page headlines, but that is exactly what happened in 2012. Unless interrupted by the Federal election due next year, we expect to see the ASIC/Treasury consultation process deliver outcomes and reform on some of these topics in 2013.

3 Takeovers to remain truthful: Truth in takeovers had a significant year in 2012. We expect parties in takeovers to take heed of the messages the panel sent out in 2013.

4 Foreign investment rules front and centre: The Senate Standing Committee is to examine the role of the Foreign Investment Review Board. The report of the Committee is scheduled to be released in February 2013. The Government’s announcement that it will create a national register of foreign ownership of land was also significant. Parties in sensitive sectors will need to apply time and effort into considering foreign investment issues and addressing them through conditions or other means.

5 Swaps in the spotlight: In 2012 we saw swaps in the spotlight and they have become an increasingly familiar part of the landscape. While we expect reform to include a more certain requirement for the disclosure of long positions over five percent, we also expect to see continued use of swaps by bidders below five percent.

6 Shareholder activism to be active: As shareholders chase better and better investment performance, it is expected that shareholders will be more willing to take pro-active steps to encourage M&A transactions. While this has been a notable feature of US M&A practice, 2012 saw this come to the fore in Australia. This trend is expected to continue in 2013.

7 Distressed debt is the new equity: ‘Loan to own’ has been a feature in various deals over the last 12 months, whereby investors purchased debt in the secondary market and then forced the company to undergo a creditors’ scheme of arrangement where the debt was cancelled in exchange for an issue of equity, thereby forcing any minority creditors along for the ride. This style of transaction has occurred in overseas markets for some time and we expect that the success of the transactions here will ensure it remains a feature of our market into 2013.

8 Change the panel president and you change the panel: The imminent appointment of a new president of the Takeovers Panel to replace Kathy Farrell is set to impact how the panel performs, though not detract from the solid reputation it has forged over the last 12 years.

9 Longer time periods for deals: 2012 saw transactions taking a long time to progress.  The reasons are hard to pin-point, but additional caution being taken by bidders, targets and shareholders to agree to accept the terms of the transaction is a highly likely factor and one set to continue.  It is clear that the gestation period for M&A deals in Australia is stretching out to all time highs.

10 Announcing an approach: The proposed ASX guidance that target companies need not disclose confidential approaches if they are indicative and conditional should reduce the pressure on boards to make immediate disclosure. We think this will be positive for the market and should give serious bidders more confidence that their approach can be kept confidential until a transaction is ready. This is expected to stem demands for a put up or shut rule in Australia.