Mergers and Acquisitions in Australia

The Goal: Restructuring to Promote Growth and Financial Success

Australia is an advanced capitalist society and has a steady economy. Most Australian firms, regardless of their size, aim to grow in a market bound by competition and accelerated economic activity. Mergers and acquisitions (M&A) play a significant role in fostering a successful economy, and it is often executed to promote economies of scale and growth, amongst other business goals.

As of 2021, the Australian M&A market is characterised by amplification, with public company deals reaching AU$67.2 billion. Even after a global pandemic, Australian M&A confidence is at an all-time high. According to law firm Gilbert and Tobin, the current success in M&A transactions is attributed to low interest rates, an interest in taking advantage of technological opportunities, and targeting businesses that have been affected by the COVID-19 pandemic. The report also states that retail and consumer services is a popular sector for M&A transactions, totalling 60% of the total transaction value.

M&A is often used interchangeably to account for individual business goals and strategies, although the terms do have different theoretical meanings. To strive for a competitive place in the market, companies acquire high-value businesses that fit specific criteria and profiles. Successful M&A deals require meticulous planning, an experienced advisory team and extensive research on valuation methods.

While M&A is different in practice, and sometimes difficult to set apart, this guide will discuss both terms separately for a deeper understanding.

Defining Acquisitions

In simple terms, acquisitions are understood as transactions whereby a company takes over another and becomes the new owner. Depending on the purchaser’s objectives, they will absorb the target firm and take over its management structure, assets, and liabilities. Owners that are looking to sell their business can also be acquired by another company that has the resources to develop it further.

Hostile acquisitions happen when a target company’s board does not agree to the purchase, but the acquirer purchases significant stakes of the target company and gains control. However, ‘friendly’ acquisitions are more common, whereby shareholders of the target agree to the acquisition.

Different Ways to Carry Out Acquisitions:

Stock:

If an acquirer pursues a stock purchase, they will essentially purchase the entire company’s assets and liabilities. A stock acquisition is relatively simple, and it is easier to complete than an asset acquisition. All contracts, licenses and agreements will remain the same once the sale goes through.

However, because the purchaser will acquire the entire company, they will have to manage and deal with unwanted assets and liabilities.

Asset:

An asset acquisition involves the purchasers acquiring specific assets of a company, like equipment, trademarks, IP, or individual units of a company. Asset acquisitions are common because they have tax advantages, and a purchaser can decide which liabilities they assume.

However, asset acquisitions can be complicated, especially in the negotiation and due diligence phase. A purchaser will need to renegotiate assets like contracts and agreements, which can lead to multiple disruptions. For example, a customer who has a contract with the company may not feel comfortable with the acquisition and may refuse to sign a new contract.

It is important to note that in Australia, common means to obtain control of a public company include off-market takeovers and schemes of arrangements.

Motives for Acquisitions

A company that pursues acquisitions will have their own strategic objectives, but some of the common motives (ultimately the advantages) for them include:

• To achieve economies of scale
• To increase market share
• To acquire innovative research or unique technologies
• To achieve synergies
• Diversification through new geographical territories
• To integrate different supply chain units
• Tax benefits

The Disadvantages of Acquisitions

Of course, there will be risks when pursuing acquisitions. It is crucial to evaluate these, and find solutions to them:

• Administrative and divisional burdens
• Suppliers or vendors may become overwhelmed
• Risk of damaging your brand
• Issues with integrating new staff, board members and suppliers
• Unforeseen costs that your projections did not account for
• Unsuitable partner fit

Recent Acquisitions in Australia

Afterpay and Square

M&A deals in the financial technology sector provide promising terrain for success. This includes companies that allow consumers to manage and control their purchasing decisions, which are becoming increasingly popular as consumer demands accelerate. In 2021, Square, an American financial services company specializing in digital payments, acquired Afterpay, an Australian financial technology company. The total deal value is approximately AU$39 billion. The acquisition is expected to be paid in stock and will see both companies work together to deliver financial products and services to a bigger pool of international consumers.

Powernet Group and Paisley

As the world becomes increasingly digitized, cyber security is a growing concern for tech companies and consumers. Paisley is a Brisbane-based IT security provider that has experienced significant progress since its establishment in 1996. In a move to strengthen is security portfolio, Powernet Group acquired Paisley, and while the total deal value is not public knowledge, this acquisition highlights a strategic move by tech companies to meet the needs of security demands in both domestic and international markets.

How Are They Financed?

Acquiring a company is extremely costly, and it is not common for companies to have a significant amount of cash on hand. While larger companies can choose to take this route, small and middle-market firms often combine multiple financing methods. Some of these include:

• Bank funding
• Private equity investors
• Seller financing
• Debt financing (mezzanine debt, for example)
• Asset-based financing

Defining Mergers

A merger, in its simplest definition, is when two companies voluntarily fuse together to create a new entity. Usually, both firms that combine are equal in size and operational structure, and fuse together to increase market share, reduce costs and expand into new territories, product lines and customer base, amongst other strategic goals.

Mergers are often categorized differently, depending on what the two companies wish to achieve. Some categorizations include:

A horizontal merger:

When two companies who share similar product lines and markets merge.

A vertical merger:

Two promote vertical integration, a company and their supplier or vendor will merge to consolidate their position in the value chain.

A conglomeration:

To diversify into new, non-cyclical industries or geographic territories, companies that don’t have anything in common merge. This helps diversify cash flow and can anticipate losses in case one unit underperforms.

Pros and Cons of Mergers

The advantages and disadvantages of mergers are similar to acquisitions. Both transactions are usually carried out to achieve some form of strategic growth. If this strategy is successful, the advantages can be rewarding:

• Mergers can fill gaps in services, products, and client relationships
• It is a useful way to gain access to new talent, intellectual property, and research without having to invest a significant amount of capital
• Cost and revenue synergies can be achieved
• Adapting and restructuring business models

If the growth strategy is not planned properly, the risks can also be significant. Some of these include:

• Cultural disconnect
• Poor brand fit
• Once the merger is completed, there is a huge risk for distraction
• Brand strength can be damaged

Examples of a Merger in Australia

Vodafone Australia and TPG Telecom

Both telecommunication companies confirmed their merger to the Australian Securities Exchange. The new company will be called TPG Telecom Limited and will be valued at approximately AU$15 billion. Vodafone Australia shareholders will own 50.1% of the new company, while TPG will own 49.9%. This merger will see TPG Telecom become a rival competitor in the telecommunication sector.

The Documents You’ll Need in M&A Deals

First and foremost, there are regulatory frameworks in Australia that guide M&A transactions, so it would be wise to familiarize yourself with them.

For example, the Competition and Consumers Act prohibits mergers that would have a substantial effect on lessening competition in the market. Parties involved in a merger are also not legally required to notify the Australian Competition and Consumer Commission (ACCC). However, to avoid investigations from the ACCC, merging parties are encouraged to inform the commission.

Carrying out M&A deals should not be done alone, unless you are a business professional, accountant, lawyer, and banker all in one!

We recommend that you hire a strong, experienced advisory team that has intimate knowledge of all the financial, legal, and commercial contracts and agreements that pertain to M&A deals. Likewise, the documentation that you’ll need to consider will be different if you are on the buy or sell-side, so your advisors should also be experienced on your perspective.

Some standard documentation that will be required in the M&A transaction include:

Letter of Intent

This document will outline the commitment of business amongst both parties. It is preliminary, as it will provide insight into the broad framework of the transaction, detailing the terms of a potential deal.

Acquisition Agreement

This contract will vary depending on each merger or acquisition, and its purpose is to represent the terms of the deal. It will include a description of the deal, representations and warranties, conditions, covenants, and indemnification agreements.

Of course, there are far more documents and agreements you’ll need to assess, negotiate, and sign. Your advisory team should be familiar with these, and ensure that they are appropriately drafter and audited.

Final Thoughts

The Australian marketplace is currently experiencing a surge of confidence in M&A activity. While this is good news for those interesting in executing M&A, there are multiple financial and legal considerations. Australia has specific laws and regulations that govern the M&A process to preserve competitive market guidelines. While M&A is an effective strategy to maintain a place in the market and pursue growth, it is a complex procedure that requires industry knowledge and specialized support.

If you have further questions, feel free to contact our dedicated team.