Takeovers take the market stage
In my blog post last month, ‘Volatility is the window to opportunity’ I discussed how recent market volatility may represent an opportunity for investors to take advantage of investing in quality long-term assets and distressed assets at significant discounts. Interestingly, it did not take market participants too long to recognise these opportunities and to act on them.
March was certainly a volatile one for markets. We saw an early sell-off of assets as markets continued to digest the potential issues in global banking, which then rotated to optimism at the prospect of a peak in interest rates. Overall the month did end slightly in the red and the small ordinaries index was down 0.72% over the month.
Which brings me to what I believe was the most interesting development that occurred in markets over the month of March. If we look purely at small caps we saw five individual companies all come under bid for a takeover.
As these actions occurred, these stocks saw an appreciation in their share prices of between 15% to 90% in the month.
Collectively, we estimate that these corporate actions added approximately 150 basis points to the index’s performance for March.
The takeover volume spike
Corporate takeovers are generally not uncommon in stock markets, but what makes this unique is that we’ve had such a significant volume occur in one month and at a point in the cycle where at a macro level investors are cautious both on their allocation of capital and their outlook.
In our mind we asked the question ‘are we approaching an inflexion point in markets?’ We can see patient long-term capital investors are very comfortable in taking on cheap opportunities that they’re finding in a generally considered risk off environment.
If we consider some of the takeovers that have occurred and the bids that have been, there are some interesting observations.
Firstly, if we look at the takeovers of Healius Limited, United Malt Group, and also Liontown Resources Limited, we’re witnessing opportunistic competitors looking to take advantage of a potentially weaker competitor during a period of market and economic stress.
In the case of Liontown Resources, they are currently underbid from a U.S. corporate Albemarle – a U.S. listed company with a market cap of US$25 billion with strengths in bromine and lithium specialities. The long run development assets of Liontown would be of value to Albemarle. The recent volatility in the price of lithium saw some weakness in the Liontown share price which provided Albemarle with the opportunity they needed to strike a bid on Liontown.
Similarly, Healius and Malt Group have been bid on by competitors in their respective industries. The recent market weakness has allowed their bidders the opportunity to acquire a competitor with a view that in the long term they will strengthen their own positions. They are looking to increase their market share and penetration as well as extract synergies from their respective targets.
The final two targets for the month were Invocare Limited and Estia Health Limited. Both companies have come under bids from private equity organisations – TPG Global and Bain Capital respectively. Both businesses have suffered from various operational challenges over recent times, be it staffing, general cost increases or capital requirements, which again has led to weaker share price performance, opening a window of opportunity for their bidders. If we know nothing else about private equity firms, they live by the rule ‘you make your money when you buy’. They are also generally much longer-term investors than the average and will operate with a plan and patience.
In our mind this takeover activity outlined above poses an interesting question around where we are in the investment market cycle, as well as the opportunities current market valuations present investors. We are not experts in market timing, as a result we are not in the business of calling market tops or bottoms. However, we do listen to the market and are keen observers of market participant behaviours. We have seen some opportunistic moves taking place in the market, from some very sophisticated investors. Their timing may be a coincidence, or it may signal that these first movers are taking advantage of market opportunities.
You can read my first article about market volatility here:
Volatility is the window to opportunity