May 30, 2013 – RSM Bird Cameron, one of the largest mid-tier accounting firms in Australia, has announced the results of its 2013 Control Premium Study. The study reveals that there is a clear correlation between the offer price in merger and acquisition (M&A) transactions and the 52-week share price high of the target company.
RSM Bird Cameron’s Control Premium Study analyses the implied control premiums observed in successful takeovers and schemes of arrangement. The control premium is the amount a buyer is willing to pay over the current market price of a publicly traded company.
Glyn Yates, director, RSM Bird Cameron, said, “It is not surprising that the study found a clear correlation between the offer price in M&A transactions and the prior 52-week share price high of the target company. The 52-week high could be perceived to provide both a familiar and recent benchmark of value to acquirers and acquirees.
“When considering change of control transactions, the control premium is a fundamental component of value. Ignoring this price component can significantly understate a company’s market value, especially in the current volatile economic environment. Directors and valuers should consider this issue carefully when analysing and assessing transactions.”
The Control Premium study analysed successful takeover offers and schemes of arrangement completed between 1 July 2005 and 30 June 2012 for companies listed on the Australian Securities Exchange (ASX).
RSM Bird Cameron calculated the implied control premium as (offer price – share price)/share price, based on the closing share price of the target company at 20, 5 and 2 days before the announcement of the offer. The analysis primarily focuses on 20 day pre-bid premiums, which are less likely to be influenced by bid speculation.
The results indicate that attributes such as industry sector and size affect or influence the observed control premium.
“Interestingly, the analysis shows that existing knowledge of a target can lead acquirers to pay significantly higher premiums than otherwise observed. This could be the result of a lower perceived business risk in the transaction,” Glyn said.
“It will be interesting to see how control premiums move in 2013 and beyond. This includes whether control premiums will keep falling as the Australian and global economies continue to recover from the impact of the global financial crisis like in FY2011 and FY2012.”
2010 study vs 2013 study
* The average implied control premium at 20 days pre-bid for the Australian market lies at 35.3 per cent (based on transactions completed in the period FY2006 – FY2012). This is 4.6 per cent higher than the average control premium observed in the 2010 study (based on analysis of transactions completed in the five years ended in FY2010).
* The median control premium offered at 20 days pre-bid in Australian transactions increased to 29 per cent in the 2013 study compared to 23.3 per cent in the 2010 study.
* The average annual implied control premium fell to 40.1 per cent in FY11 and 39.5 per cent in FY12 from a high of 45.9 per cent in FY2010.
* Observed premiums continue to fall in the days immediately pre-bid, which is consistent with the 2010 study. This suggests information leakage and/or bid speculation in the market.
* The industry sector appears to affect the control premium required to complete a successful transaction. Sectors traditionally priced and valued on a cash flow basis such as metals and mining, biotechnology and energy have considerably higher premiums than those where price is generally based on assets such as real estate and financial institutions.
* There has been a significant fall in the average control premium in the metals and mining sector to 40.8 per cent in FY2011and 22.4 per cent in FY2012 from a high of 48.5 per cent in FY2010.
* The average control premium for scrip deals has increased by 5.3 per cent to 29.9 per cent. This may be due to the popularity of scrip in small transactions and volatile industries such as mining and exploration.
2013 study – new findings
“We widened the study’s scope this year. This provided further insight into factors influencing the control premiums we observed in successful transactions. RSM Bird Cameron believes size matters, as does the target’s 52-week high,” Glyn Yates said.
There seems to be a strong negative correlation between market capitalisation and the level of control premium paid. The study shows that the control premium declines as target market capitalisation increases. It is also is appreciably higher in transactions involving targets with a market capitalisation of less than $50 million.
There is a clear correlation between the offer price and the 52-week high of the target’s share price prior to the announcement of an offer.
About RSM Bird Cameron
RSM Bird Cameron is the largest mid-tier accounting firm in Australia with national ownership and profit sharing and offers a full range of specialist advisory services, including business consulting and advisory, assurance and advisory, taxation consulting, corporate consulting and turnaround and insolvency. RSM Bird Cameron is a core member firm of RSM International, the seventh largest network of independent accounting and consulting firms in the world.