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Every crash sinks some companies and provides once in a life time opportunities for others and this time around is no exception.  Companies with low debt and cash flow can buy up competitors while asset prices are lower, knowing it is a buyer’s market of distressed sellers and they have less competition for acquisitions.

The prospect of takeover activity throws up opportunities for investors but it also carries risks which can destroy value in either the buyer or target.  Mergers and acquisitions can take longer in a buyers’ market because there is less likely to be a bidding war and buyers can take their time to screw down the price.  There is also a risk of the deal falling over because it becomes too difficult, of the successful bidder finding they have bought a can of worms or that merging the asset drains management time and resources.

Equities analyst Julia Lee cautions investors that takeovers usually take months to unfold.

“You might be waiting six to nine months or a year for something that in fact is not going to happen.  I would assess the company on its own merits first and if it has potential to be taken over that is an added bonus.”

Although mergers and acquisitions appear to be increasing, data show that their numbers have slumped this year.  The Thomson Financial group, which tracks mergers and acquisitions worldwide, found deals in the Asia-Pacific region (excluding Japan) fell 43.7 per cent in value in the first quarter compared with the same period in 2008.  The Australian figure was boosted by Chinalco’s proposed takeover of Rio Tinto.

Julia Lee expects the resource sector to continue providing M&A action and says Santos is an obvious candidate given the removal of the 15 per cent ownership cap that protected the company from takeover.  She believes Oil Search is also a likely target but says the speculation is reflected in both companies’ share prices.  In the first quarter Oil Search rose 14 per cent and Santos 17 per cent while the oil price was up five per cent and Woodside Petroleum only managed a three per cent rise.

The jostling within the coal seam gas sector is also expected to continue as the potential for gas exports is re-rated and companies seek to buy into acreage.  Lee says that Arrow Energy remains cashed up after failing in its bid for Pure Energy and will be looking elsewhere for an acquisition.  Arrow recently bought coal seam gas acreage from Beach Petroleum, with Beach gaining cash and shares in Arrow, and Beach itself is considered a possible takeover target.

The energy industry exhibits some of the classic pointers for takeover activity:  there are companies with no debt and plenty of cash, the sector is hot and many analysts believe the potential is still undervalued.    Companies sitting on cash is another indicator which is why few will be surprised if BHP Billiton makes another takeover bid or buys assets from OZ Minerals or Rio Tinto that become available.

Investors can also track the ASX announcements for companies raising funds they don’t desperately need or chief executives saying they are looking for acquisitions.

A major shareholder which is under pressure can provide opportunities, with Network Ten reported to be on the block following reports that Canwest Global Communications is trying to sell its 57 per cent stake in Ten to repay debt.  Media is one of the first sectors to feel the effects of economic downturn, but also one of the earliest to see the revenues when business conditions improve.

“If you think this is the bottom of the cycle now would be a perfect time to be picking up media,” says Julia Lee.

The Canadian pensioners’ $2.50 a share bid for Macquarie Communications (trading at over $4 a year ago) immediately boosted the prices of other Macquarie satellites such as Macquarie Infrastructure Group and Macquarie Airports.   Intersuisse research manager Peter Russell expects Macquarie to be active as an arranger in more such deals as it spots opportunities.  

Among other infrastructure groups, he cites Asciano as a likely takeover candidate.  The rail and port operator is trying to sell assets to pay down debt.  He also expects more M&A activity in coal seam gas and with listed property trusts, nominating ING Industrial Fund as being vulnerable.  The Fund copped an ASX price query last month and said it was negotiating with its banking syndicate.  

Russell says the engineering sector could be rationalized and notes that Crane Group raised $40 million last month and said it wanted to be ready to capitalize on opportunities it expected to arise.  Toll Holdings is another potential acquirer, having made no secret of being cashed up and on the look-out for opportunities.

Russell says current asset prices might attract high net worth individuals or business owners who can spot value in sectors they follow.  If the 1987 crash is any guide, a number of listed companies will be privatized or swallowed by acquirers brave enough to defy the gloom and buy at bargain basement prices.


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