Big corporates are on the prowl

December 7, 2009, 9:13 am By James Ramsay jamesramsay

Rising M&A activity is another driver for equities in the medium term.

Big Corporate takeovers spiced up with M&A activity

With large corporate balance sheets largely repaired and cash piles building up, big corporates are now largely positioned to scoop up their weaker competitions.

With many smaller companies still suffering from stretched balance sheets and reduced margins now is the time for big corporates to take advantage of them.

This allows the big guys to increase market share, increase margins/profits and buy someone else's customers or products for less than what it cost to develop or acquire their own.

Some of what we have already seen is:

  • Google's purchase of AdMob
  • Kraft's bid for Cadbury
  • Comcast's bid to buy most of NBC Universal from GE
  • AMP's attempt to take over AXA.
  • Chinese companies have been on a shopping spree throughout Australia already spending billions.
  • Warren Buffett's Berkshire Hathaway $44bn purchase of American Rail Freight.
  • Woolworths taking over Danks Holdings.

Rising M&A activity is another driver for equities in the medium term.

Takeover targets have a few characteristics in common.

Company Size:

They are normally small to medium sized businesses. As companies grow in size it becomes increasingly more difficult to take them over. Look at BHP trying to takeover RIO. BHP had to get approval from most of the world before they could proceed.

Cash Reserves:

The bigger the better. More cash means the acquirer can use this to pay down debt or put it towards working capital.

Performance:

Unexpectedly the target normally has been through a stage of under performance. It is much easier to turn around a poorly run company and realise synergies between the two than take over a well-run company. An example of this is QBE trying to takeover IAG. IAG was going through a period of under performance and offered an opportune time to move.

Valuation:

The closer to book value or tangible assets the better. No acquirer wants to over pay for an acquisition and then become an underperformer.

Strategic location:

Mining companies often look for assets close by so they can leverage their existing infrastructure. This adds economies of scale to their current projects with minimal capital outlay. An example of this is BHP taking over UMC.

These takeovers are good for the market as they show companies are seeing growth in 3-5 years and don't want to miss out on low company valuations.

Now is the time for them to act and clearly they are.

How many potential takeovers are in your portfolio?

If you don't have any potential takeover targets in your portfolio then it's time you reassessed your portfolio before the deals are done.

James Ramsay is an advisor at Bell Potter Securities who works with you to build a portfolio using a range of investments that are suitable to you. You can contact him on 08 9326 7664 or jramsay@bellpotter.com.au.

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