KEY POINTS:
Takeover plays in New Zealand have provided better value for the acquiring companies than similar deals in other markets, a global report on takeovers and mergers activity between 1992 and 2006 shows.
The report by Boston Consulting Group found that, on average, overseas merger and acquisition deals created
value for shareholders in the target companies but not necessarily the acquiring companies.
But in New Zealand, value was generally created for shareholders in both the acquiring and target companies.
David Tapper, New Zealand partner and managing director for BCG, said that meant either that New Zealand shareholders tended to sell out more easily, or that the acquiring companies were buying smarter and picked companies that would create value for their shareholders.
The report found that private equity and industry consolidation are likely to continue to drive the merger and acquisition boom which has been underpinning the bullish markets in recent years, despite a short-term slowdown in deal-making due to the recent market turbulence.
Paul Newfield, a principal for BCG in New Zealand, conceded the recent global credit jitters would affect companies' ability to leverage deals.
He said the challenge now was for private equity firms to focus even more on generating operational improvements to increase value for their investments, as opposed to creating it through financial leverage.
"There are still lots of PE firms out there with [funds] they need to deploy and lots of companies sitting on excess cash. The outlook for M&A is strong but it will be at a reduced rate."
A lower New Zealand dollar meant local takeover targets could become more affordable to overseas buyers, Newfield said.
The report showed that, worldwide, private equity firms' share of the total value of deals jumped from 6 per cent in 1996 to 24 per cent last year. Meanwhile, the value of industry consolidation-based deals leaped from 49 per cent in 1999-2000 to 71 per cent last year.
The report, which surveyed 4000 deals between 1992 and 2006, said that industry consolidation and well-funded private equity firms were behind a wave of mergers and acquisition activity.
The leap was driven by globalisation of companies, a more liberal regulatory environment and private equity firms with ample funds.
The report found that deals over US$1 billion destroyed nearly twice as much value on a percentage basis as deals below that amount. Also, when companies bought targets which were more than twice their size, the value of the target tended to be destroyed. Companies were more successful when they bought a target that was less than 10 per cent of their size, which, Tapper said, showed that often more value was often created in smaller bolt-on deals.
Private equity companies also appeared to be winning by paying less than strategic buyers, the report said.
Newfield said private equities tended not to bid for targets in industries where there was strong consolidation because that was where synergies between companies already participating in that industry were very strong, he said, hence they'd chosen those targets. "That makes it more competitive because in some respects the PE firms come in a bit under the radar and head toward targets that aren't so heavily competed."
WORLDWIDE TREND
* Private equity groups accounted for just 6 per cent of mergers and acquisitions in 1992.
* In 2006 they accounted for 24 per cent.