AFTER sharemarkets plummeted in 2008 and the world was on the precipice of a global economic disaster, US Federal Reserve governors used the word ''panic''.
Fast forward 18 months and the Australian corporate landscape has shifted with a rapidity that has surprised even the most seasoned market watchers.
This week the ASX 200 topped 5000 amid evidence Australia's mergers-and-acquisition market has reignited.
Macarthur Coal juggles three suitors. AXA is being stalked by two camps of would-be buyers. One of those buyers, AMP with $13.4 billion market capitalisation, is frequently named as being in the cross-hairs of a takeover itself.
Thomson Reuters data shows announced takeovers reached $US28.8 billion ($A30.8 billion) for the first quarter of 2010, pushing the year-to-date levels back towards boom-time peaks last experienced through 2007.
''I think it is more likely to be part of a longer wave,'' says David Cassidy, an equity strategist at broking firm UBS.
''Cyclical'' is how Cassidy describes a corporate world that moved from instances of insane levels of debt in 2006 and 2007 to very real questions about survival in 2008 and a slew of desperate capital raisings in 2009.
But a sharp recovery in Australia's economic fortunes has the sharemarket ticking higher. Earlier this month Cassidy lifted his forecast for the ASX 200 to 5550 by year-end.
And in lockstep with a resurgent sharemarket is the prospect of a return to heady levels of mergers-and-acquisitions.
UBS nominates sharemarket operator ASX, financial services business Suncorp Metway, Australian energy-and-power business AWE, Bank of Queensland, media buyer Mitchell Group, technology play Redflex and New Zealand casino Sky City as its top likely targets.
The wave of mergers-and-acquisitions shares common features with the pre-crisis boom (Cassidy singles out the absence of private equity as the most notable difference this time around).
First, many takeovers are now focused on a Chinese-led resources boom that is likely to bring high-level policy issues and low-level rabble rousing as China's interest in Australian assets continues.
''China is now Australia's largest trading partner. Just like the Japanese in the '80s, China is now looking to rapidly integrate vertically across the supply chain,'' says Tony O'Sullivan, an investment banker with boutique advisory firm O'Sullivan Partners.
Second, in common with the pre-crisis boom, retail shareholders will face the significant question - should I stay or should I go? - when they find themselves caught up in a bidding war.
Academic literature points to several indicators retail shareholders can look to as they decide whether the day their company announces its intention to buy another company is as good as it gets.
Third, the resurgence also has in common with the pre-crisis boom the often overlooked reality: it too will end.
First, how did we get back to investment bankers spruiking deals again?
Despite signs of health in the economy, it would be easy to see merger-and-acquisition activity as vultures picking over carcasses that barely survived the crisis.
In laying the foundations for the recovery, the recapitalisations throughout 2009 was a central plank, raising more than $US60 billion in equity to restore overstretched balance sheets across the Australian public market.
In Cassidy's view the recapitalisation was the building block that means merger and acquisition activity is more than a ''dead cat'' bounce.
Cassidy cites interest on loans faced by industrial companies of about 20 per cent of available cash before the capital raisings, falling to about 10 per cent of available cash after the capital raisings.
Just like a home loan, the more cash you have after you have met your interest bill, the more there is to spend.
''The cycle has swung back in the opposite direction very quickly,'' says Cassidy. ''Two things happened; they raised equity … and the second leg, that's the profits kicking up.''
The result is a lot of cash on the balance sheet available for - you guessed it - mergers and acquisitions.
The asperity with which investment bankers are ringing the bell for mergers and acquisitions, after taking at least $1 billion in fees from the wave or recapitalisations, has not gone unremarked. ''So in four financial years the (investment bank) advice has been 'maximise gearing', 'minimise gearing', and now 're-gear for M&A','' Charlie Aitken, an analyst with broker Southern Cross Equities, wrote in his April 7 newsletter.
''The only winner from that series of advice would be the investment banks themselves.''
But he adds: ''Trust me, the investment banks and their new M&A push will get an audience. Many Australian boards will sit around and say, 'Yes, the world is getting better and we have a good balance sheet, we need to do something'.''
O'Sullivan makes a similar point: ''M&A is incredibly sentiment driven. Every time a chairman and chief executive officer opens the paper and sees a bold move, it gives them the confidence and courage to think about their own business.''
O'Sullivan sees the return of the cycle in mergers and acquisitions being spurred by the demand for resources from the emerging middle classes in India and China.
And he predicts continuing demand for Australia's resources will raise profound policy considerations for Australia similar to the period in the 1980s when it was feared Japan would come to control significant assets within Australia.
He said that to date the Chinese had shown sophistication in avoiding Vegemite-style iconic assets, unlike the disproportionate Japanese interest in Gold Coast real estate.
''The fear, if people like Kevin Rudd have any fear at all, would be we wake up one day and a lot of our minerals have been hollowed out and so [affect] our wealth as a nation,'' he said.
And he said it could be a case for the federal government to rethink ownership structures for Australian resources, moving from a leasehold arrangement rather than outright ownership.
HOW investors should think about mergers and acquisitions has been informed by detailed academic research. US research has shown that acquirers, on average, tend to lose out in takeovers.
The most cited research on the negative experience in US takeovers, by Sara Moeller, Frederik Schlingemann and Rene Stulz, studied 12,000 takeovers of more than $US1 million between 1980 and 2001.
The research found, on average, acquiring firms lost $US25 million of value when a takeover was announced, with problems in acquisitions most pronounced in large company takeovers.
These losses on announcement of activity were long-lasting and were not reversed.
The research found large companies were more likely to offer larger premiums than small companies and also enter transactions where there were no synergy gains.
The research supported as the major reason for these failures the hubris, or overconfidence, among managers in large bidding companies.
Dr Ronan Powell, a senior lecturer in banking and finance with the University of New South Wales' Australian School of Business, said research had repeatedly shown the importance of the initial market reaction in assessing the likely success or failure of a takeover.
The US paper notes: ''The market seems fairly efficient in incorporating the information conveyed by acquisition announcements in the stock price.''
Powell says this ability of the market to judge a takeover accurately means a negative reaction for the acquirer should be a warning for both managers and the company's investors to think again.
And he says a management determined to conclude a negatively received deal indicated a willingness of management to act in its own interests, rather than those of shareholders.
''If it's negative [reaction to a takeover], as a manager you should be questioning this deal,'' he says. ''It's a good way to pick out the really entrenched managers, the ones who say they don't care what the market thinks.''
(As an example, investors need only think of the negative market reaction when Allco announced the purchase of Rubicon in October 2007. The acquisition heralded the end of Allco.)
Powell offers an additional checklist of takeover characteristics that lead to positive outcomes for acquirers, based on research.
- A strong rationale for the acquisition as a strategic necessity rather than overconfident empire-building.
- An acquirer using its shares as acquisition ''currency'' can signal that management believes its shares are overvalued. Think of AOL's takeover of Time Warner; AOL's shareholders would have been best off if they sold the moment the deal was announced.
- A takeover of a listed company rather than a private company is much more likely to result in the acquirer paying too much.
Powell and his student Mark Humphery issued an Australian Business School working paper in January that found the overall Australian takeover experience was significantly better than the US experience.
Their study of 1900 Australian acquisitions between 1993 and 2007 found a net gain to acquirers on takeover announcements of an average of $8 million. The Australian research also found, unsurprisingly, strong links between the company's previous operating performance and its operating performance after a takeover.
There was also a strong link showing the higher the premium paid, the better the operating performance after the takeover.
Of course, the maths are much simpler for investors in a target company considering a takeover offer.
''Obviously the general rule is, if I'm a retail investor … give me a control premium,'' Powell says.
Boutique investment advisory firm Greenhill Caliburn chairman Peter Hunt offers a note of caution on the overall return to economic good times, with recent history underlining how participants and investors should scrutinise potential downsides of any acquisition.
''We should have learnt there's a big risk this (crisis) will happen again because of the speed of the markets and the volatility of the markets and the tendency towards greed at the end of the cycle,'' he says.
''While the politicians and the regulators have talked about the need to stop it happening again, it's not clear to me yet that they will actually do anything meaningful to stop it happening again.''
Announced mergers and acquisitions
Year ending first quarter Value
2006 $95bn
2007 $221bn
2008 $179bn
2009 $113bn
2010 $144bn
2006 $95bn
2007 $221bn
2008 $179bn
2009 $113bn
2010 $144bn
ANNOUNCED DEALS, FIRST QUARTER 2010
SOURCE: THOMSON REUTERS
Target Acquirer Value
AXA Asia Pacific National Australia Bank $6.6bn
Macarthur Coal Peabody Energy $3.7bn
Arrow Energy Investor Group $3.1bn
AXA Asia Pacific (offshore) AXA SA $2bn
WesTrac Seven Network $1.8bn
AXA Asia Pacific National Australia Bank $6.6bn
Macarthur Coal Peabody Energy $3.7bn
Arrow Energy Investor Group $3.1bn
AXA Asia Pacific (offshore) AXA SA $2bn
WesTrac Seven Network $1.8bn
Source: The Age
