Registered Members Login:
Forgotten Your Details? Click Here To Recover +
Welcome To The ShareCafe Community - Talk Shares And Take Stock With Smart Investors - New Here? Click To Register >

Reply to this topic

Takeovers, Discuss companies involved either rumoure or fact
post Posted: Oct 31 2018, 08:15 AM
  Quote Post

Posts: 9,994
Thanks: 2810

it's often said, with takeovers, the acquirer isn't the winner. Sadly, too true.

Take the money and run could be amended to "Take the money and avoid being run over"

"Always take the cash" - Kerry Packer

Roll up, roll up for the next blow-up
There's a joke among fund managers that the excuse they often hear from a CEO after he or she has blown a company up is "it was only the last acquisition that didn't work".

But the way of the 'roll-up', if you're a stock market cynic, is that companies that have built their strategies on acquiring other businesses are almost always compelled to do more deals.

And to feed the lust of the market for earnings growth that they have created, they'll eventually have to raise more capital and do a deal that they simply cannot stomach.

Almost every investment analyst has grappled with a 'roll-up',a creature that has the ability to both create, and destroy, enormous amounts of capital.

The roll-up debate is stirring up again after hedge fund VGI Partners launched an activist short campaign against Corporate Travel Management. Central to VGI's thesis is that Corporate Travel has delivered superior profits not so much through business and operational acumen but by serially acquiring other companies - 20 in total over the past decade, totalling $527 million. That, it says, has resulted in a 50 per cent increase in the share-count, and $400 million of goodwill accumulated on its balance sheet.

The last financial year, in which the company was acquisition free, was meant to herald the moment of truth. But VGI's findings suggest a sleight-of-hand accounting change may have allowed it to show more organic growth than it was generating in reality.

With Corporate Travel due to respond to the report on Wednesday, we may make get closer to the ultimate truth on this issue.

It's not the first time VGI has bet against a roll-up. It shorted the shares of Slater & Gordon, the first ever law firm in the world to list publicly. Slater & Gordon used its access to capital and its valuation to buy up a host of smaller law firms. Then it bought British professional services firm Quindell for $1.3 billion, raising $890 million of share capital and the difference in debt. The result was the most destructive deal in Australian corporate history.

The essence of a roll-up is what analysts often refer to as "multiple arbitrage" - where a company effectively uses its valuation to buy businesses on a lower valuation. When acquired profits are added to those of the acquirer, the result is a boost in the worth of the business. For instance, if a company with $1 million of earnings that the market values at $10 million (10 times earnings) buys a company with $500,000 of earnings for $2 million (4 times) the value of the acquirer should in theory go up by $5 million to $15 million (10 times the now $1.5 million of earnings).

A better lesson on "multiple arbitrage" was dished out by skincare company BWX's energetic (former) banker Miguel Fabregas of Waterloo Capital, who explained, as per a lawsuit, how he educated executives John Humble and Aaron Finlay on this "financial engineering technique". He "advised BWX to take its expensive share price trading at 20 x EBIDTA and buy private US companies priced for sale at 10x EBITDA", the complaint claimed.

"By purchasing these companies for sale at 10 x EBITDA with debt and subsequently cancelling the debt with shares of BWX stock issued at 20 x EBITDA, the shareholders of BWX would be rewarded with outsized value accretion."

This is an example of stockmarket magic, and it seems to work more often than it should.

In the long run, the value created should come down to how sustainable those earnings are, hence the obsession among investors in determining the extent to which earnings are growing "organically".

In essence, organic earnings should be maintained or growing if there is a sound operational rationale to the acquisition. If not, then in theory any acquisition of one company on a higher valuation than another should be rewarded by the market.

Quite often though, acquiring companies are focused simply on the multiple magic, which leads them to overpay for earnings that prove to be of a lower quality than the market initially assumed.

That then forces management to compensate by making bigger acquisitions. Eventually they come crashing down, but not before their stellar share price run has sucked in a host of investors that had believed the growth would continue.

The cynics also point out that highly acquisitive companies are egged on by bankers, brokers and analysts, as deal and capital-hungry businesses with soaring share prices are the ideal corporate customers.

One sector that has been a roll-up graveyard is professional services. Why is that so? Several years ago, a prominent hedge fund manager explained that highly skilled professionals such as doctors, lawyers and accountants individually possess both the skills and the clients, so the organisation brings little economic value.

Rolling up cottage professional services from law firms to advertising agencies to hairdressers is, and is likely to continue to be, a bad idea.

But in some cases roll-ups can work spectacularly well. In fact some of the greatest businesses in history are roll-ups - JPMorgan was a roll-up of banks while Warren Buffett's Berkshire Hathaway could also fit the definition of a roll-up.

Thanks to the strategy of 3G, a now-Berkshire partner, a Brazilian brewer called AmBev grew to become the largest brewer in the world through acquisitions.

Another lord of the roll-ups is the low-profile Canadian software tycoon Mark Leonard of Constellation Software, which has meticulously executed hundreds of small acquisitions, with limited need for new capital, creating incredible shareholder value in the process. Constellation's share price is a 40-bagger over ten years.

One fund manager cited Toll Holdings as an example of a roll-up that got it all right by consolidating the trucking industry to create bargaining power, before it lost its way and strayed into odd purchases like a Japanese footwear firm. Now Toll Holdings is the problem of Japan Post shareholders, who have been hit with a $4.9 billion write-down.

In Australia, however, roll-ups tend to work spectacularly and then unravel even more spectacularly. But they are such a feature of the market that analysts cannot ignore them.

In the context of Corporate Travel, one small-cap stock picker says travel, along with banking and telecommunications (iiNet gets a special mention as a roll-up success), is a sector where there is some "industrial logic" to a roll-up. This is because scale brings procurement benefits which either increase profits or can be used to grow market share at the same margin.

So how can investors spot a profit machine from a Ponzi? Often it's hard to until after the fact but experienced analysts are learning where to look.

In 2014, CLSA published a 10-point check-list for investors in roll-ups that focuses on the health of the strategy, the platform (i.e. governance and controls), the quality of management and whether leaders from the acquired businesses stick around after the deal.

"A central theme is that the better roll-ups focus on customers and have a primary objective of growing top-line revenue," CLSA said.

Another global manager said he had a four-point checklist when it came to mergers - distribution, scale, process and capital - but he said processes needed to be unique and could easily be replicated while capital is ubiquitous.

One tell-tale sign, although this far from a golden rule, is the extent to which shares are issued to finance incremental acquisitions. If an owner values their stock, they should be reluctant to issue it if it can be avoided.

The purist investors out there don't believe in the magic of "multiple arbitrage", though. They say it motivates publicly listed companies to do deals that privately owned companies would never pursue.

"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne
post Posted: Feb 20 2018, 03:00 PM
  Quote Post

Posts: 9,994
Thanks: 2810

Takeover targets emerge in a new hunting season for corporates

As we move into the second half of the interim profit-reporting season, it's not just investors studying the landscape; corporates too will be on the hunt for takeover targets.

Takeover activity among Australia's small caps is increasing.

Already this year we have had two standouts: one familiar to readers of this column will be the liver cancer treatment specialist Sirtex Medical. We also saw another offer for the gas exploration company AWE, which trumped a prior offer from Mineral Resources.

Here's a bit of history: since this column began more than six years ago, I have recommended more than 130 different companies, of which 21 have been taken over — a strike rate above 15 per cent.

Last year, this percentage was even higher. You just have to look at Australia's sluggish economic growth, and indeed the low growth around the globe, to see that mergers and acquisitions of small caps is not going to fade any time soon.

Think of the names that have been in the frame in the past few months alone:
• Superloop, an ASX-listed company, took over fellow junior telco BigAir;
• Billabong: private equity giant Oaktree Capital is taking over the troubled surf wear group;
• UGL and Seymour Whyte: two construction and mining services companies have been taken over by other industry players;
• Tox Free Solutions was taken over by waste-removal heavyweight Cleanaway;
• ASG, the IT services group was bought by Japan's Nomura Research Institute, which then took over another Under The Radar favourite SMS Technology; also in that sector, two companies that we have tipped — Macquarie Telecom has been trying to buy another Bulletproof, although we avoided Bulletproof at much higher levels;
● Programmed, the blue-collar workforce specialist, was snapped up by another Japanese company, Persol.

It never stops, and it never will. Here's why.

Taking over a company makes economic sense now more than ever. If you're a big company, you can borrow at 3 per cent or so — the earnings increase from a company you've bought ought to be a lot more than that. You get the double whammy, after all.On the one hand the acquirer gets the extra revenue growth; and then you get (in theory) extra earnings growth by cutting costs such as management, accounting and administration.

Even if a company is not ­attractive to the corporates, there is still plenty of cash in the private-equity sector, whose highly paid executives have nothing else to do but seek corporate transactions.

So what should you look for in a potential small cap takeover target?

People talk about economic ­cycles being important, and it's true poor conditions can drive companies to consider consolidations that would not have been achievable in good times. Ultimately, to be attractive a company should be strong enough to stand on its own but also offer attractions to a third party in terms of consolidating its market positioning. With the right target, it can generate a rise in market share and, as I explained, reduce unit costs.

Admittedly these qualities cover almost every company I like investing in. Remember, as investors we're looking for the same qualities as the corporate executives, which revolve around value.

Takeovers are most likely to happen in a fragmented market; and if you add into that to any industry in turmoil, you see that magic "C" word, "consolidation". This was what Oaktree Capital were looking for with Billabong and its US-based competitor Quiksilver, now known as Boardriders Inc.

We recommended Billabong last July and two months later it turned out the PE bean counters in Los Angeles saw the same thing we did: value in a company in distress and that industry consolidation is a reality in bricks-and-mortar retail, with heavy rental lease obligations. Of course, when I recommended Billabong, I didn't do so on the basis it would be taken over, because those leases are also a poison pill.

With retail facing many problems, we may see more action in this space, but when you are looking at mergers in retail you have to factor in that those huge lease liabilities remain.

With that caveat, there is a good chance we will see more deals in the sector soon. Just now the most obvious target is profit-warning-plagued Specialty Fashion, which owns Millers, Katies and Rivers. Though Speciality is associated with traditional shopping, the group has built an impressive online operation that may place it in a good position to withstand the Amazon invasion.

The company has effectively put itself up for sale in recent weeks, though any final outcome may depend on the ambitions of former chief executive Gary Perlstein, who has had a long association with the listed group.

Richard Hemming (r.hemming@ is an independent analyst who edits

"Every long-term security is nothing more than a claim on some expected future stream of cash that will be delivered into the hands of investors over time. For a given stream of expected future cash payments, the higher the price investors pay today for that stream of cash, the lower the long-term return they will achieve on their investment over time." - Dr John Hussman

"If I had even the slightest grasp upon my own faculties, I would not make essays, I would make decisions." ― Michel de Montaigne

Said 'Thanks' for this post: early birds  
post Posted: Apr 14 2005, 09:37 AM
  Quote Post

Posts: 44

In reply to: mailhep on Thursday 14/04/05 09:20am

There's speculation that RHC is going to takeover Affinity Health. Affinity is not listed on the ASX but it does have convertible notes issued (symbol AFYHA). We will soon know as RHC are in a trading halt atm pending an announcement.

post Posted: Apr 14 2005, 09:20 AM
  Quote Post

Posts: 144

Anyone got any new takeover plays running???

I'm working on CRG takeover theory.....

*Crane appears to have bottomed out to a level of support around $8.50 - down 20% plus from highs less than 6 months ago
* Crane is now trading on attractive PEs
* Crane has long been touted as an attractive target for Wesfarmers
* Wesfarmers are very cashed up and hold a stake in CRG under some dodgy name
* On January 19 NAB became a substantial shareholder (over 5%) paying up to $10.48 a share
* Micheal Chaney is new Chairman of NAB and outgoing CEO of Wesfarmers
* Schroders just entered the list paying around 30mil for a substantial holding paying around $9 or $10 a share

See headlines below for earlier speculation.....I reckon they'll want to strike before recent round of heavy cost cuts shows up in profits.....downside risk is of course an earnings downgrade given slowdown in building and increased raw materials cost....maybe worth a play in a tough market.

"New Crane Group managing director Greg Sedgwick has got the plumbing and metals group's share price moving in the right direction despite its profit woes, but that hasn't necessarily stopped speculation that rivals are looking to pounce on all or parts of the operation."
The Financial Review 11/08/2004

" Crane in line for break-up
The largest shareholder in the Crane Group believes the plumbing and metals company will be broken up in coming years."
The Financial Review 20/10/2004

"One way of spotting possible targets is to identify companies that have the capabilities and the most to gain from acquisitions. Three companies that are frequently mentioned are Wesfarmers (WES), GUD Holdings (GUD) and United Group (UGL). Each has two key characteristics: diversified interests and balance sheet strength - the former opening up a range of opportunities and the latter affording it the muscle to make an acquisition.

Wesfarmers would be more likely to consider larger companies, with Crane Group (CRG) a frontrunner."
By Trevor Hoey
Shares. First published 9/1/2003 BRW

"Yet Mr Williams said he was looking forward to Crane's new boss bringing about change, and added Crane was still "absolutely ripe for the picking" for a potential takeover from Wesfarmers, given its still attractive price-to-earnings (PE) ratio of around 12 times."
By Scott Rochfort
SMH October 21, 2003

post Posted: Jun 15 2004, 05:08 PM
  Quote Post

Posts: 261

PRY vs IPN..
My equation is
if PRY gets IPN for 0.5 or less= buy PRY for medium term gains
if PRY gets IPN >0.5= buy IPN for short term trade
haaa, come into my parlour said the spider to the fly.....
which way will it go?? devilsmiley.gif


Back To Top Of Page
Reply to this topic

You agree through the use of ShareCafe, that you understand and accept the TERMS OF USE.