Corrs M&A Newsletter - March 2012

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Corrs 2011 M&A Year In Review: Part 3

The end game: bid conditions and closing strategies

By Sandy Mak and Braddon Jolley

In our two newsletters last month we shared with you the upcoming release of our review of all the public M&A transactions announced in 2011 with a deal value above $25 million. Our newsletter last week included our key findings from the second topic in our deal survey – bid structures and funding.

The three major themes of our survey are:

This week, we report on the key findings of the last of these three major themes – the end game: bid conditions and closing strategies.

What distinguishes our review from others on the market?

For a start, we have invested a considerable amount of time and effort in working out what really matters to bidders and targets in doing an M&A deal.

A full copy of our 2011 M&A deal review results will be available in the coming weeks. Please contact the editors Braddon Jolley or Sandy Mak if you would like to receive a copy or a presentation on our findings.


 

Corrs 2011 M&A Year in review – bid conditions & closing strategies highlights

By Nicole Graham and Michelle Ko

Key Takeaways

Conditions

Deals remain highly conditional – in schemes more so than bids

Conditions are common in takeovers and entirely ubiquitous in schemes. Approximately 87% of the total transactions surveyed had conditions attached to them – conditions were present in 81% of takeovers and 93% of schemes[1].

This may reflect the fact that bidders in takeovers (particularly hostile bidders) are prepared to take more risks than acquirers under a scheme of arrangement. Common conditions included material adverse change conditions, minimum acceptance conditions and regulatory conditions such as FIRB and ACCC approval. Our full report will take a more detailed look at these conditions.

Material adverse change conditions – most common, but relatively irrelevant

The most common condition we encountered was the “material adverse change condition” – 77% of the total transactions surveyed had a MAC condition.

Our general conclusion that schemes are more conditional than takeovers is particularly evident when it comes to MAC conditions – only 61% of takeovers had a MAC condition as opposed to 93% of schemes.

How do you craft a good MAC clause? If our survey is anything to go by, it’s what is excluded from the clause rather than what is included that appears to be the subject of the most negotiation.

More interesting, however, is the fact that despite the prevalence of MAC conditions in public deals, of all the deals that failed to complete in 2011, only one bidder actually relied on a MAC clause.

Our full report will provide an analysis of the types of MAC condition triggers and exclusions used in deals and their implications for the success of a transaction.

Minimum acceptance condition

Minimum acceptance conditions have a very important role to play in protecting a bidder, but bidders have to be prepared to waive them to successfully close a transaction. The majority (71%) of total takeovers surveyed had a minimum acceptance condition and half of these had a 90% minimum acceptance threshold.

According to the results of our survey, bidders are statistically more likely to close a transaction if they waive their minimum acceptance condition.

Obviously, closing a bid does not necessarily equate to getting to 100%, although our survey suggests that bidders who are prepared to waive their minimum acceptance conditions in order to close a bid are more likely than not to get to 100%.

Interestingly, however, the level of a bidder’s minimum acceptance condition does not make any statistical difference to the likelihood of getting to 100%. Bidders who waived a 90% minimum acceptance condition were statistically just as likely to get to 100% as bidders who waived a lower minimum acceptance condition.

Of the takeovers from our sample with known results at the date of the survey with a minimum acceptance condition, 85% closed.

Price increases

Do price increases following the announcement of an initial offer price make a difference to the success[3] of a transaction? Not particularly. 89% of transactions where the bid or scheme price was increased closed, as compared to 82% of transactions where there was no increase in the offer price[4]. Cash is clearly the most flexible form of consideration. 17% of bidders increased the original offer price during the course of the transactions. In all of these deals, consideration consisted of cash only.

Price increases are also more common in hostile deals than friendly transactions. Of all deals sampled that had price increases, 56% of price increases occurred in the context of hostile deals and 44% related to friendly deals. Price increases are also clearly an important closing strategy in hostile takeovers – every hostile bid where the consideration was increased was eventually declared unconditional and all but one proceeded to compulsory acquisition.

Our full report will analyse the strategic considerations behind a bidder’s decision to increase bid price.

Timing & end game

Offer period

It won’t come as a great surprise to know that, in general, it takes longer to close a scheme of arrangement than a takeover. However, by the time you factor in the time to complete compulsory acquisition (which takes approximately 7 weeks assuming there are no objections to compulsory acquisition), takeovers are by no means the fastest way to get to 100%.

Over half (17 or 61%) of the total takeovers from our sample with known results at the date of the survey extended their offer periods. Of the takeovers that extended their offer periods, the average period of extension was approximately 32 days. 16 (or 94%) of the 17 takeovers with known results that extended their offer periods closed successfully.

Why transactions fail

It may sound trite, but if a major shareholder does not support a transaction, alarm bells should be going off. The most common contributing factor to the failure of transactions in our deal sample is lack of support from a major shareholder. This lack of support typically results in scheme or bid conditions not being met, for example not achieving a minimum acceptance or shareholder approval threshold.

Other reasons for failure include the emergence of a rival transaction andthe independent expert not concluding the transaction is fair and reasonable to shareholders.

 

NOTES:
[1]Our survey excluded mechanical conditions such as court approval andshareholder approval from the analysis of scheme conditions.
[2] 3 out of the announced 31 takeovers from the deal sample were ongoing at the time of the survey.
[3]Success is defined as a takeover bid becoming unconditional and closing or a scheme becoming effective.
[4]Of transactions with known results as at the time of the survey. 5 schemes and 3 takeovers from the deal sample were ongoing at the time of the survey.

 


 

For further information, please click here to contact a member of Corrs' M&A Practice Group.

© Corrs Chambers Westgarth, 2011
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