Chapter 6 of Gilbert + Tobin’s Takeovers + Schemes Review 2023 (below) explores success factors in public mergers and acquisitions in 2022.

Chapters:

• Key Highlights - An analysis of Australian public mergers & acquisitions in 2022
• Chapter 1 - Market activity: M&A activity stabilises in 2022 after all time high of 2021
• Chapter 2 - Sector analysis: exploring the sectors of interest in 2022
• Spotlight - technology public M+A
• Chapter 3 - Public M&A: schemes, takeovers and pre-bid stakes – trends in 2022
• Chapter 4 - Involvement of foreign bidders in public M&A in 2022 & FIRB considerations
• Chapter 5 - Public M&A: consideration types and sources of funding in 2022
• Spotlight - decarbonisation and M&A
• Chapter 6 - Success factors in public M&A in 2022
• Chapter 7 - Transaction timing in public M&A in 2022
• Chapter 8 - Implementation agreements and bid conditions in public M&A transactions in 2022
• Chapter 9 - Regulator influence, trends and developments in public M&A in 2022

Market stabilisation leads to 82% success rate, but high-value deals lower

82% of all public M&A transactions valued over $50 million were successful in 2022. This is identical to success rates in 2021, representing continued market stabilisation following the COVID-19 pandemic.

At the outset, it should be noted that our data is based on announced transactions that involve a takeover bid or, in the case of a scheme of arrangement, an agreed implementation deed. This may overstate the true success rate as many transactions fail at the non-binding offer stage and may not be announced, which means this is impossible to track. Nevertheless, the publicly announced data does give an accurate picture of the success of bidders’ converting a binding takeover bid or an agreed deal into a successful one.

High-value transactions (i.e. those valued above $500 million) had an 89% success rate in 2022, with only CapVest Partners’ bid for Virtus Health failing due to a superior offer from BGH Capital. Over the past five years, success rates in this category have fluctuated between a low of 67% in 2020, to a high of 95% in 2021, and have averaged 84% over the five year period. Consistent with 2021, transactions valued between $50 million to $500 million had less certainty of success, with 80% of these transactions being successful, which is in line with the five year average success rate of 79%.

It is interesting to analyse the circumstances in which transactions were not successful in 2022:

• Superior proposals: bids for Virtus Health by CapVest Partners and for Warrego Energy by Beach Energy were withdrawn following superior proposals from rival bidders.
• Breach of conditions: Keybridge Capital withdrew its bid for WAM Active after WAM Active breached two defeating conditions of the bid (namely, before tax net tangible assets declining by 8.7% and the declaration of a dividend during the offer period). This followed announcements from WAM Active advising shareholders to ignore the proposed bid on the basis that WAM Active did not consider the proposed bid to be genuine.
• Mutual termination: Zip and Sezzle mutually agreed to terminate the proposed acquisition of Sezzle by Zip “in light of current macroeconomic and market conditions”. As part of the mutual termination, Zip paid Sezzle a US$11 million break fee.
• Investor feedback: E&P Investments (as responsible entity of CD Private Equity Fund II) withdrew its proposal to merge with CD Private Equity Fund I, CD Private Equity Fund III and CD Private Equity Fund IV following strong investor feedback.

Success Rates

^{The success rates for 2022 described in this Chapter do not include seven transactions which were still current as at 28 February 2023. The success rates for 2018 to 2021 have been updated to reflect the ultimate outcome of all transactions which were analysed in those past Reviews.}

M&A structures see unexpected results: takeovers and schemes almost equal in 2022 success rates

Somewhat surprisingly, takeovers and schemes were almost equal in their success rates in 2022.

In 2020 and 2021, schemes of arrangement delivered materially better success rates compared to takeovers.

Interestingly, while schemes of arrangement remained the preferred structure for deals over $50 million in 2022 (68% of all transactions, down from 79% of transaction in 2021), takeovers were more popular in 2022 than in 2021, being used in 32% of transactions exceeding $50 million (up from 21% in 2021) (see our Public M&A: schemes, takeovers and pre-bid stakes – trends in 2022 chapter for further information).

Success rates for takeovers v schemes

Friendly transactions provided a more certain path to success

67% of hostile transactions were successful in 2022 (the highest success rate since 2019), most notably BGH Capital’s contested $711 million acquisition of Virtus Health.

86% of friendly transactions were successful, down from a peak of 91% in 2021 but trending in line with the past five year average (84%). This can be attributed to:

• the competitive bidding wars for Virtus Health and Warrego, where the initial friendly bids by CapVest and Beach Energy (respectively) were trumped by a superior, but initially hostile unrecommended, bid; 
• the mutual termination of the Sezzle / Zip transaction in light of market conditions; and
• the withdrawal of the CD Private Equity Fund deal due to investor feedback.

Success rates for friendly and hostile transactions

Above average premiums offered for M&A transactions

The average premium offered for all transactions over $50 million was 54%, which fell between the figures from previous years (37% in 2021 and 67% in 2020).

In calculating this average, we have excluded two proposed SPAC transactions (Security Matters and Carbon Revolution) with unusually high premiums which skewed the data, particularly for transactions under $500 million.  A SPAC is a special purpose acquisition company that does not have existing operations, but which is established specifically to raise capital through an initial public offering for the purpose of acquiring or merging with an established company. SPACs generally have two years to acquire an existing company or face liquidation.

In our view, SPAC transactions are not comparable to typical scrip M&A deals as they typically involve redemptions in the SPAC bidder and associated capital raisings. These matters all skew the data and so we have excluded the SPAC transactions from the premium calculation (on the basis that our methodology for valuing scrip transactions does not take into account these factors).

Average premium paid

The average premium for cash deals was 65%, whereas the average premium for scrip deals (excluding the two outlier SPAC transactions) was only 27%.

Consistent with 2021, the transactions that offered the top premiums in 2022 were all schemes of arrangement.

Top five premiums offered in 2022

Top 10 transactions by premium offered in the past five years

Both the Security Matters and Carbon Revolution transactions made the list of the top five premiums for 2022, and of the top 10 highest premiums offered over the past five years (ranked first and second, respectively). We have not included these SPAC transactions in these lists, however, for the reasons noted earlier. If we had used conventional measures to calculate these two premiums, they would have been 1139% and 483%, respectively.

Pre-bid stakes

The bidder had a pre-bid stake of some kind in 49% of all transactions in 2022, which was an increase on 2021 (39%) and broadly in line with 2020 and 2019 (48% and 46%, respectively).

Transactions featuring pre-bid stakes

Where a pre-bid stake was present, the type of pre-bid stake used was consistent with 2021. A pre-bid shareholding remained the most common form of pre-bid stake in 2022, being used in 65% of all transactions involving a pre-bid arrangement (slightly down from 71% in 2021). This was followed by pre-bid agreements with shareholders, which were used in 30% of all transactions involving a pre-bid arrangement (slightly down from 33% in 2021).

Equity derivatives were the least popular form of pre-bid stake in 2022, only featuring in two public M&A transactions which had a pre-bid stake, being:

• BGH Capital’s total return swap that represented a relevant interest of 10% in Virtus Health before its successful $711 million off-market takeover; and
• BHP’s cash settled equity swap that represented an economic interest of 4.5% in OZ Minerals,

collectively, representing 10% of the transactions that had a pre-bid stake (up from 4% in 2021).

Types of pre-bid arrangements (2021 & 2022)

While the use of swaps to build a pre-bid stake is still relatively uncommon for binding public M&A transactions, there were a number of potential transactions in 2022 involving the use of equity derivatives to build a pre-bid stake, including:

• IFM’s stake in Atlas Arteria that, initially, was a combined relevant and economic interest of 14.96%, of which only 1.2% was held by IFM in Atlas Arteria securities and the remainder was held pursuant to equity collar and swap arrangements. A significant percentage of the securities subject to the collar and swap did not appear to be hedged through holdings of Atlas Arteria securities; and
• Grok Ventures’ (controlled by Mike Cannon-Brookes) 11.28% interest in AGL, held entirely via a loan and equity collar transaction and a total return swap.

Strike Energy, while not successful in its pursuit of Warrego Energy, established a pre-bid stake via an unusual method. It entered into share purchase agreements with various Warrego Energy shareholders to increase its shareholding in Warrego Energy to approximately 19.9%. Under the share purchase agreements, the Warrego Energy shareholders swapped their Warrego Energy ordinary shares for ASX-listed Strike Energy ordinary shares on a 1:1 basis for the same value as offered under Strike’s takeover offer for Warrego.