Rudi’s View: M&A Targets – Who’s Next?

Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Feb 22 2023

In this week's Weekly Insights:

-M&A Targets - Who's Next?
-February: Brutal And Underwhelming, So Far
-Research To Download

By Rudi Filapek-Vandyck, Editor

M&A Targets - Who's Next?

One of the heaviest post-bubble punishments ever for small cap growth and technology stocks, rivalling the post-Nasdaq meltdown of 2000-2003, had already triggered takeover interest from mostly foreign suitors for ASX-listed companies including Elmo Software ((ELO)), Nearmap ((NEA)), Nitro Software ((NTO)), Proptech Group ((PTG)), Pushpay Holdings ((PPH)), ReadyTech Holdings ((RDY)) and Tyro Payments ((TYR)) - and that list is guaranteed to be incomplete.

Outside of technology, both energy retailers AGL Energy ((AGL)) and Origin Energy ((ORG)) have seen suitors emerging, but successfully completing deals has proven more problematic.

M&A potential didn't genuinely catch most investors' and institutional asset managers' attention until US-based gold producer Newmont announced it would like to re-join with its former Australian business unit, Newcrest Mining ((NCM)).

Not everybody is keen on dabbling into beaten-down, unprofitable, small-cap technology aspirants, but large cap resources, on the other hand...

With a market capitalisation of circa $21bn, Newcrest is the local heavyweight among ASX-listed gold miners with the likes of Northern Star ((NST)) on $13bn, Evolution Mining ((EVN)) on $5bn, and Perseus Mining ((PRU)) on $3bn far, far behind.

The revival in M&A appetite seems counterintuitive at face value, argue analysts at Morgan Stanley. The cost of debt is still rising, and likely to increase further, economic conditions look shaky at best (even if an economic recession can be avoided) and higher bond yields have de-rated market multiples for most sectors.

But this is the time when well-managed Quality companies can see opportunity, the analysts suggest, as those companies can exploit their relative valuation premium on top of conservatively managed balance sheet, supported by operational strength, a cost of funding advantage and easier access to capital.

In other words: it's on!

Looking at the market from a general top-down perspective, the spirit of the times is transitioning from capital preservation to capital allocation, explains Morgan Stanley. WiseTech Global's ((WTC)) acquisition of US-based Blume Global for US$414m, announced on Friday, would be yet more evidence backing up that statement.

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