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Should you be looking at potential takeover targets?

Should you be looking at potential takeover targets?

After a subdued period following the GFC, merger and acquisition (M&A) activity appears to again be coming into fashion. According to Thomson Reuters, worldwide M&A was up 47 per cent in 2014, making it the strongest year for worldwide deal-making since 2007.

No doubt a large part of this surge is driven by the very low debt costs currently available around the world. Financial Sponsors (private equity) are among the greatest beneficiaries of low borrowing costs, and the Financial Sponsor share of worldwide M&A has certainly been increasing strongly in recent years.

Another factor will be increasing levels of confidence around boardrooms and investment committees. With equity markets generally rising at a healthy rate in recent years, many of the relevant decision makers will be feeling more positive about deploying capital for acquisitions.

It might serve their shareholders better if they were to go hunting in the dark times, when asset prices are low, but that doesn’t seem to be the way M&A works. It is a creature of the good times.

In Australia, we are seeing a broadly similar story, with domestic announced M&A increasing by 20 per cent in 2014 to US$119.8 billion. 2015 looks to be off to a solid start, with the Toll and iiNet deals taking advantage of favourable debt markets. The recent decline in the Australian dollar may further contribute to inbound M&A activity, as offshore buyers see improving value in Australian dollar denominated assets.

So, having regard to all of that, should you be thinking about where the next takeover premium may be found?

This is not really our style, and so for us the answer is probably “not really”. However, at the very least it may pay to factor takeover potential into the analysis of companies that already offer a solid mix of value and quality. iiNet is perhaps a case in point. Our investment analysis of iiNet noted that TPG was on the register, and would enjoy accretion and strategic benefits were it to acquire iiNet. This didn’t drive our decision making, but at the margin it added something to the investment case.

As we progress into 2015, we will continue to focus on our game, which is buying good companies trading at sensible prices. However, given the environment is becoming increasingly favourable to M&A, we will also be mindful of the broader questions of strategic value and corporate appeal.

Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To learn more about our funds please click here.

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Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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