Record year for mergers and acquisitions

LAST year was a huge one for mergers and acquisitions (M&A) activity in Australia.

Takeover plays occurred in a number of high profile listed companies, such as Email, AAPT, and Colonial among others. And of course we had the Woodside/Shell deal being scuttled by the Treasurer.

There also appears to be a high success rate in the M&A market, with more than 70 per cent of the targets being taken over. Macquarie Equities figures for the 147 takeover offers over the past three years show that 80 per cent of them have been successful, with 12 per cent unsuccessful and 5 per cent still pending. The total value of the deals that were completed in 2000 was a record $55 billion. The average deal size has risen from $89 million three years ago to now be $135 million. Industry splits show some interesting variations (see table).

The benefit to shareholders of a takeover offer occurring is that, in the vast majority of cases, the announcement of a takeover tends to have a positive influence on the target firm’s share price.

Studies done in the past by Brown and Da Silva Rosa of 1528 target firms share price three months before an announcement and three months after the announcement found that the median abnormal return was 15.7 per cent, with the highest return being 25.5 per cent. Interestingly, their study also found that the share prices showed abnormal movement even when the takeovers were not successful. This was possibly explained by the speculation of a takeover causing a rise in the prices anyway.

The evidence around the M&A activities certainly suggests that shareholders can benefit from the activities that occur. The abnormal price rises deliver value to the shareholders. Obviously the bidding company also would be a valuable commodity, as it would be attempting a takeover to enhance its performance. So it would seem that a takeover could deliver value to both the shareholders of the bidding company and the target company.

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