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Neil Pathak speaks to Your Money about the future of M&A
Partner and Head of Mergers and Acquisitions (M&A) Neil Pathak speaks to Your Money about why M&A is thriving within the Australian context. Neil also discusses what market and economic conditions led to the large amount of activity in this area and the direction M&A is heading in the future.
Ticky Fullerton: Neil Pathak, welcome. Very interesting survey and takeover activity at a high.
Neil Pathak: Yes. Hi Ticky. Great to be here. Last year was the biggest year in about 10 years for takeover activity. There was over almost $50 billion worth of transactions involving 50 public companies. So it was a seven year high.
Ticky Fullerton: What drove this, do you think?
Neil Pathak: Look ultimately, we're living in good times. The economy's relatively stable. Market conditions are good. Finance is readily available, both debt and private equity. Australia is a relatively good, stable environment to invest in for foreign bidders. So all the elements are there.
Ticky Fullerton: It's interesting, because if you think about those sorts of things within this election campaign whether it be for small business or for the ordinary punter, you'd say the economy, access to credit, all that sort of stuff you'd think no, this is not the right story. But for big companies or companies looking to take over other companies, I guess you've got low interest rates and generally as you say a very good environment.
Neil Pathak: Yeah that's right Ticky. I mean I'm not here to talk about politics, but sometimes people get stuck on minor issues. But certainly in terms of global terms, markets and economic conditions have been very stable and as you said, interest rates are low which gives the opportunity to raise finance for acquisitions.
Ticky Fullerton: What about the role of regulators, Neil? Because well let's start at the top, with Kenneth Hayne and the Royal Commission, because that must have driven a huge number of divestitures.
Neil Pathak: Yeah, that's right, Ticky. I mean, it's interesting. While we've had such high M&A activity, regulators right across the board are getting more focused and taking a close look at business activity. When the Hayne Royal Commission, some people might say that was a long time coming, and indeed, partly before the Hayne Royal Commission some of the banks were looking at their portfolio of insurance companies and wealth management, but if we're going to have increased compliance costs, then banks and insurance companies are going to look more closely at divesting some of those assets.
Ticky Fullerton: Yeah, and I guess what drove the insurance as well, is now this issue of scale that's needed, and really can you be in the life insurance business? I guess that was a question that the AMP was asking itself, going forward, or do you really need to be an Allianz or some really big global player?
Neil Pathak: Yeah, that's right, Ticky. I mean, it's a decision that every company in that sector needs to face and AMP obviously thought they were better off selling that asset and they've obviously had some difficult times through the Royal Commission, so no doubt looking closely at their portfolio.
Ticky Fullerton: By the way, I mean we've got that AGM coming up next week, do you think the board was right not to run it by shareholders at a shareholder's meeting first, an asset sale like that?
Neil Pathak: Yeah, well they weren't legally required, Ticky, in that the wider AMP business had grown and there's many different businesses in that. So clearly they didn't need to go to shareholders, but there's always a decision whether what's the right thing, and no doubt they're getting some unsolicited feedback, and it'll be an interesting AGM, particularly given the last 12-18 months that they've been through.
Ticky Fullerton: What about regulatory intervention and FIRB and sovereign risk? Do companies worry about this?
Neil Pathak: Part of a worldwide trend, Foreign Investment Review Board, and indeed most countries throughout the world, including the US and China are looking a lot more closely at foreign investment. Certainly for us here in Australia, FIRB over the last two or three years has certainly looked a lot deeper at transactions. We're seeing bodies like the Australian Tax Office looking at transactions as part of the FIRB review, and also we've got the Critical Infrastructure Centre that's been developed to look at infrastructure transactions in the last two years.
Neil Pathak: Definitely having a closer look. That said, Australia's really relied on foreign investment for its growth, and our statistics show that last year, 60% of all public company deals were foreign deals and that's 90% by value as well. We need foreign investment-
Ticky Fullerton: And they're very-
Neil Pathak:... to grow. There's been very few knocked back.
Ticky Fullerton: Yeah, going to say, very few knocked back. Dulux being the latest one that's gone through.
Neil Pathak: That's right. So, that deal, I should say the one deal that was knocked back last year was the CKI bid for APA, but of course, CKI owned a number of gas assets already. But yeah, Dulux, that was a good deal for the company. It was signed up last week. It's still got to go through completion, and that will include FIRB and OIO review in New Zealand as well, as well as the shareholder approval.
Ticky Fullerton: I see, okay. It's still got to go. Now, some really interesting trends I think, one is the role of super, Industry Super in particular, and private equity coming together in a bid, unsuccessful as it turned out, for Healthscope, but that might still go private. Another one for Navitas, where it seems that it is being successful. Are we going to see more of this do you think?
Neil Pathak: Definitely, I think so, Ticky. I mean, there's two different thematics in there that are coming together. One is of course our great superannuation industry, where you've got all these superannuation funds getting larger and larger, and of course, looking for good spots to deploy their assets. Indeed, if they're invested in a company that they want more of, they are going to participate in public company transactions. In the examples you mentioned, you combine that with private equity which has quite a lot of firepower to spend, both domestic and international.
Neil Pathak: The other interesting thing when you put them together as well, it's pretty hard going being a public company at times these days. I mean, you've got corporate governance requirements, the scrutiny of investors every six months in Australia, shorter overseas.
Ticky Fullerton: So you can see quite a few companies coming off the board?
Neil Pathak: Well, I mean if you look at what's happened in the last two years, there's been fewer and fewer IPOs, and you've got private equity willing to spend money, and sometimes it's a lot easier for companies to prosecute their long term growth plans under private ownership than having to face up to public company shareholders every 6 or 12 months.
Ticky Fullerton: What happens, though, to the conflicts of interest there? Particularly with the super fund who might even find itself on the board, and their duty to their members. Equally they're on the board of the takeover target, and there might be an exclusive relationship with a private equity player, it creates all sorts of interesting situations, doesn't it, on the legal front?
Neil Pathak: Potentially, Ticky. I mean, I think some of those things have been a little bit overstated. Often the super fund, in fact most cases they're not actually on the board. They're free to act as a shareholder. Ultimately, their duties are to their members in their funds, and to grow the size of their funds, and if they see a company that's attractive and they would like to get more of those companies, well, the right thing for them to do is to invest further.
Ticky Fullerton: Even if it locks them into an exclusive arrangement with one player, and locks out another player coming in over the top?
Neil Pathak: I think that should be looked at in the context of parties that come together to do a consortium bid, they've got to decide are they together or are they not? I think it's pretty common in consortium bids for the parties to commit to each other exclusively for a period, and that's just an example of that, I think.
Ticky Fullerton: Okay. What sectors do you think are very hot this year at the moment?
Neil Pathak: Well, I think for Australia, healthcare. I mean, obviously we had Healthscope, Healius is subject to an approach, I think it's just also with our aging population. By the way, the aged care Royal Commission might also shake things up in that industry. I think healthcare and aged care. Infrastructure, again we've got that superannuation money looking for long, stable investments. And then you've got to look at our ultimately we're becoming a service economy, if not already there. Sectors like education and tourism are probably areas that are going to grow over time for Australia.
Ticky Fullerton: And our regulators like ASIC and APRA having to grow teeth, do you see the role of the ACCC, the competition and consumer regulator, becoming tougher at all, or do you think it's pretty well placed, pitched as it is now?
Neil Pathak: It's an interesting time to be a regulator. I think on one side, some of the regulators have been criticized themselves, for example, through the Royal Commission. They're certainly, the rhetoric is that they're getting stronger. ASIC saying, having a position that they need to ask themselves why they don't litigate.
Neil Pathak: ASIC is certainly getting stronger and tougher, as they should be, and APRA as well, through the Royal Commission has no doubt looked at itself and what it can do better. The ACCC, certainly with Rod Sims, they've always been a very strong regulator, and they'll continue to look at transactions as we go forward.
Ticky Fullerton: Yeah, a few honest players at the moment, I think. Neil Pathak, thank you so much. Very interesting review.
Neil Pathak: Thanks a lot, Ticky. Great to be here.