In the wake of a significant market sell off following a stimulus induced boom there were plenty of company’s that saw the baby thrown out with the bath water.

Over the past year, TAMIM has identified significant opportunities within the merger and acquisition landscape. Takeovers have proven integral to our fund’s successful strategy, evidenced by recent transactions such as Task Group Holdings (ASX: TSK) receiving a bid at a 103% premium while Volpara Health Technologies (ASX: VHT) was also taken over by a bid from Lunit Inc.

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Will these updates have a material impact? Or is it all just hot air?

Significant changes are being proposed with particular emphasis on notification rules and creeping rules. These alterations mark a departure from the existing voluntary merger notification system, aligning Australia with global trends in regulatory oversight.

Under the proposed reforms, companies engaging in acquisitions above specified monetary and market share thresholds will be obligated to notify the Australian Competition and Consumer Commission (ACCC). The thresholds, likely determined by metrics such as turnover, profitability, or transaction value, will be subject to consultation before finalisation by the government. Once notified, companies must await ACCC approval before proceeding with the deal. Notably, the ACCC will possess the authority to nullify transactions conducted without proper notification or approval.

The notification process entails a rigorous review by the ACCC within a timeframe of either 15 or 30 days, followed by a potential additional 90-day period if concerns arise regarding competition reduction or market power entrenchment. Furthermore, the ACCC will extend its scrutiny to include all acquisitions made by the target or acquirer in the preceding three years, amplifying the scope of regulatory assessment. This expanded purview aims to prevent the gradual accumulation of market power through successive acquisitions below the mandatory notification thresholds.

The case of PETstock serves as a compelling example of the new creeping rules. PETstock, a pet food and services conglomerate formed through a series of smaller acquisitions, underscores the potential benefits of enhanced regulatory oversight in fostering competition. The ACCC, unaware of PETstock’s extensive market presence until Woolworths (ASX: WOW) sought partial acquisition.

Moreover, the reforms aim to address concerns surrounding tech giants’ acquisition strategies, as evidenced by Meta’s (NASDAQ: META) acquisition of Instagram and WhatsApp. While such acquisitions may not exhibit immediate competitive overlap, they can significantly bolster market power and data dominance. By adopting a holistic perspective on merger effects, the ACCC seeks to curb the potential for market concentration and reinforce competitive dynamics.

 

Our view is that these proposed changes won’t have a material impact on the smaller ASX market we tend to operate in. While it will be something to consider, we at TAMIM are not alarmed. We believe there are more significant factors that impact ASX takeover targets than regulatory updates.

Australian Dollar Weakness

The weakness in the Australian dollar creates attractive acquisition opportunities for foreign buyers, particularly those with stronger currencies like the US. A weaker dollar creates lower acquisition costs for those international entities looking to expand into the Asia-Pacific region or add a new segment to their business. The lower acquisition cost can improve returns on investment and be a viable option as opposed to organically growing in the area.

Interest Rate Stabilisation

A stable interest rate environment provides predictable borrowing capacity, allowing a company to plan its financing for potential acquisitions more effectively. This stability reduces uncertainty and minimises the risk of sudden increases in borrowing costs, making acquisitions more feasible and financially viable. Additionally, stable interest rates contribute to a stable economic environment overall, which can improve investor confidence and support healthy market conditions for acquisitions. Stable interest rates may signal a healthy economy, potentially attracting more potential acquirers and increasing competition for the target company, thereby potentially driving up its acquisition price.

Undemanding Valuations

Similarly to a weaker dollar, undemanding valuations offer the opportunity for acquiring companies to expand their market presence or diversify their portfolio at a lower cost. This can lead to strategic growth opportunities and enhanced competitiveness in the market. Additionally, undervalued acquisitions can create synergies and economies of scale, potentially boosting operational efficiency and profitability for the acquiring company. Furthermore, acquiring undervalued assets can result in immediate accretion to earnings and shareholder value, providing a favourable return on investment.

While regulatory changes are noteworthy, they are just one element in a broader set of factors affecting acquisitions and consolidations. Investors need to be aware of various elements that impact the market’s dynamics. Moreover, despite fluctuations in economic conditions and competition laws, the inherent nature of capitalism encourages companies to continuously look for opportunities to expand, merge, or be acquired.