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M&A activity is on the rise, but fundies aren’t easily swayed

By Rhea Nath
5 minute read

As companies seek to deploy built-up capital in the next 12 months, including towards inorganic growth, a Brisbane-based fund manager has explained why such allocations warrant a second look from investors.

A notable feature of the recently concluded reporting season was the amount of corporate and M&A activity recorded, with the trend expected to continue into 2024, according to Solaris Investment Management.

Speaking at a recent event in Sydney, analyst and portfolio manager Charles Story highlighted five bids on ASX 200 companies witnessed in recent months, including American aluminium producer Alcoa’s $3.3 billion bid for Alumina, and Japanese chipmaker Renesas Electronics’ acquisition of Altium for $9.1 billion. Moreover, Seven Group’s prospective takeover of Boral was also cited as a major move.

“We think that looking forward, that’s going to continue, and that’s due to a couple of reasons,” Story said.


“The first is, we all know what’s happened to the rate cycle and global GDP is slowing, so growth’s becoming harder to come by, so companies are chasing M&A. The other thing is, balance sheets at corporate Australia are in relatively good shape, so looking forward, we see this M&A activity will continue.”

However, investors need to ask questions regarding capital allocations, he said, noting that they should “check the rearview mirror”.

“We’ve got to properly critique and analyse that capital allocation and the reason why is, how companies are allocating capital is going to have a large effect on the future share price,” Story explained.

“[Capital allocation analysis] is often overlooked by the market but it is so crucial. When you hear a company engaging in M&A, everyone gets super excited – what are they buying? How much did they pay? They zero in on the asset; [but] we at Solaris take a step back and we go through our capital allocation framework.”

Among the most pertinent questions, he said, is the vendor’s identity and their motivation to sell.

“Are you buying from the government or from private equity? What is the motivation for the vendor selling?

“The other thing to think about is, how well capitalised are the assets? [A] number of times, we’ve seen private equity sell assets, either through IPOs on the Aussie market or through trade sales, and the assets have been undercapitalised,” he said.

Other considerations, according to Story, include the competitiveness of the bidding process; the state of a company’s balance sheet post the completion of a transaction; the rationale of the management team buying the asset; and the management team’s approach to synergies emerging from the inorganic growth.

Additionally, investors should take into account the company’s growth strategy, he said.

“How does a return on capital of entering into this transaction compare to, say, buying back shares or investing organically in your own business and what does the company engaging in this M&A strategy tell us about the organic growth in the business?” Story remarked.

“Is it a bit slower or worse than we thought, hence having to engage in large-scale risky M&A?”

In its preview of the Australian M&A Outlook 2024, consultancy firm PwC also indicated a growing appetite for acquisitions and deployment of capital even as corporates began the year on a cautious foot.

“After a period of slowdown in the second half of 2023, we’re seeing an uptick in M&A activity internationally, as well as early signs of an upswing in Australia. In 2024, we expect further capital recycling, public-to-private deals and foreign investment, as well as increased volume of private capital investment given the staggering levels of dry powder available,” it said.

“In fact, there’s potential for private capital to take a greater portion of the M&A pie in 2024.”

In its latest survey of Australia’s chief executives, almost two-thirds (59 per cent) said they are planning to execute a deal in the next three years, the firm observed.

Over a third (34 per cent) are planning to make three or more acquisitions in the next three years compared to 19 per cent of overseas CEOs.

PwC added: “Furthermore, we expect continued interest from foreign investors from nations such as the US, Japan, and South Korea. This is especially the case in mining and resources, as well as in technology and consumer goods.”