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Nadeem
Veteran Investor
Joined: 11 Jul 2004
Posts: 639
Cash Points ££ 13955.74
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 Posted: Sun Jan 07, 2007 2:02 am Post subject: The year of the deal - Mergers & Acquisitions Boom time |
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2006 was clearly the year of the deal. The Australian mining sector alone saw A$145 billion in deals. According to Friday's Australian, investment banking firms did nearly 3,000 buyouts or mergers in 2006, with the top ten firms doing nearly $166 billion in deals.
So what's next? Has all the low-hanging fruit been picked? You'd think all the obvious deals have been done by now. With the cost of capital low, any under-valued firms with reliable cash flow have already been targeted. There are only so many firms where you can cut costs, find synergies, or operate more efficiently so that you generate a 15-20% return on your investment in a few years. Now that the big fish have been taken, it's time to look for littler fish.
It's a bit different in the mining industry, where the M&A activity is more typical of the resource cycle we know and love. Cashed-up big firms look to acquire smaller firms in order to ad to productive capacity and the resource base as underlying commodity prices rise.
There are two questions here. Are base metals and resources prices in for a rest? And how much more M&A activity will we see in the mining sector?
To answer the first question, base metals and resources may take a breather. But don't count on it being long. In the big, big, big picture, Chinese, Asian, and even eventually Latin American and African demand are behind the resource boom. After all, we're talking about a revolution in the living standards of three to four billion people. That's a long-term trend with plenty of legs.
In the short term, companies like Zinifex (ASX: ZFX) and Oxiana (ASX: OXR) may find themselves the target of foreign and domestic overtures. There will be other targets. But even with money flowing so freely, doing proper diligence and careful valuation will be more important. Mining is notorious for unpredictable cash-flows, price volatility in the underlying commodity, and heavy fixed capital costs. Those are not the attributes private equity firms typically look for, which is why most mining M&A activity will take place within the industry, by people who know what they're doing rather than plundering pirates.
That doesn't mean you won't see the private equity boom tail off. But it will probably head in a different direction. Somewhere north of here in Melbourne, like Asia.
In last Friday's New York Times, Timothy Dattles of Texas Pacific Group (involved in the Qantas deal) says, “Asia clearly offers long-term potential as a private equity market.” It will be interesting to see if the money-shufflers can do anything but gamble on Asian enterprises. But give the man credit, he talks a good game about Asia's economic future. Dattles says:
“The great enterprises of the next 100 years are being built today in some of these markets, like China and India. And there is a role for global players in private equity, who bring in the management expertise, the experience in international markets, to partner some of these companies and help them create value and realize their potential.”
Full article http://www.marketoracle.co.uk/Article203.html |
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