What would have happened to St George Bank had Westpac (ASX:WBC) not acquired it right before the pointy end of the GFC? How would Rinker have fared had Cemex (BMV:CEMEX) not taken it over, months before one of the largest building downturns in US history? Had SABMiller (LSE:SAB) not acquired Fosters, would it have been able to address declining mainstream beer sales as consumer tastes shift to craft and premium beer?
These are just a handful of high profile Australian takeovers that were timely for shareholders. But presumably these large targets would have survived and still be reasonably profitable today.
But what about smaller companies who had a rapid, detrimental change in fortunes? Such businesses lack scale or a well-known brand to defend against any headwinds. The three Australian companies below were former market darlings whose prospects took a very sudden turn for the worse. They’re three of the more fortuitous shareholder get-out-of-jail-free cards that we can remember.
BigAir
Like many junior telcos circa 2009, BigAir (ASX:BGL) carved out a very profitable niche. It became a market leader in what is known as fixed wireless. This is a bit like wi-fi in your home but on a much grander scale. It is used to fill coverage holes in rural areas and to provide wi-fi services in shopping centres and university campuses. BigAir offered this as a wholesale service for telco retailers.
Fixed wireless was a very profitable and popular product until two things happened.
Firstly, the telco industry underwent a wave of consolidation. iiNet made numerous acquisitions before being taken over by TPG (ASX:TPM) in 2015. M2 also made a number of acquisitions before being taken over by Vocus (ASX:VOC) in 2016, who themselves had just taken over Amcom.
BigAir had around 30 to 40 customers seven years ago, all falling over themselves to purchase BigAir’s fixed wireless service. But today, BigAir has a handful of powerful customers who have far more bargaining power and demand better terms.
Secondly, the NBN was built in areas where BigAir operated, using the same fixed wireless technology. Suddenly, fixed wireless became a commodity that any telco could purchase from NBN Co.
BigAir attempted to mitigate the decline of fixed wireless by moving into the highly crowded managed services space. This was looming as a very tough slog.
Superloop‘s (ASX:SLC) bid last week at a 34% premium couldn’t have come at a much better time.
Wotif.com
When Wotif listed in 2006 it soon became a market darling. And why not. It was part of the quartet of online stocks (along with Seek, REA and Carsales) that was a must own for any growth manager. This highly profitable company benefited from the fast growing online accommodation market, which was rapidly gaining share from travel agents. It appeared to be a recession proof business. Not even the GFC could stop it as it doubled its profit between 2007 and 2010.
Wotif originated as a ‘clearing house’ for excess hotel inventory. Want a last minute accommodation deal? Check out Wotif. But management wanted to grow earnings faster. How to do this? Extend the booking window. At first by a few weeks. Then by a few months.
It seemed to work. A slight profit dip in 2011 was followed by a record year in 2012. But this strategy moved Wotif away from its sweet spot as a destination for last minute bargains. It was now a mainstream booking website.
Then a funny thing happened. Two global behemoths, Expedia (NASDAQ:EXPE) and Priceline (NASDAQ:PCLN) (under its booking.com website) started operating in Australia. They were also mainstream online booking portals for accommodation. And they were 20 times the size of Wotif, with massive marketing budgets, global brands and deep existing connections to hotel operators. Their ads appeared on TV, on the back of buses and pretty much everywhere.
Wotif’s market share started to reverse. Its profit fell 25% in two years. To stem the bleeding, it announced a multi-pronged strategy to expand into Asian markets, holiday packages and corporate travel. But it required a large IT upgrade to do this and had minimal success without it.
Faced with years of market share erosion, Expedia’s takeover bid in 2014 couldn’t have come at a better time.
Magna Pacific
What new technology giveth, newer technology taketh away. This sums up the story of DVD distributor, Magna Pacific. In the video entertainment space, the video cassette had the 80s and 90s all to itself. Video on demand (VOD) owns the current era. The DVD had a much narrower window at the start of the 21st century.
But what a window it was. As movie buffs rushed to build their DVD libraries, Magna was a major beneficiary. After three consecutive years of losses in the late 1990s, the company enjoyed rapid growth, peaking at a $9.3 million profit in 2005.
But once consumers had established their DVD libraries, the growth dried up. Around the same time, VOD emerged, with Foxtel launching its digital service in 2004, followed by Quickflix in 2005 and Apple TV in 2007.
Preparing for the future that never was, Magna built a new $14 million 6,000 square metre office and distribution facility in 2006. Its $11-million-dollar cash balance in 2005 turned into a $14 million net debt position by 2007.
The company was acquired by ASX-listed Destra Corporation in 2007. Magna shareholders who took the all-cash option (versus the cash and scrip alternative) were counting their lucky stars. Following 13 acquisitions in three years, Destra was placed in administration in 2008, after recording a $79 million loss.
But wait, there’s more
These are just a few that come easily to mind. There are many more.
Have you been a shareholder of a target that received a fortuitous or timely bid? Aside from the three examples above, the analysts at Forager believe honourable mentions should go to S8, Dexion and Oakton. Which takeovers do you think should be added to the above list?
I think Daniel it’s easy to view and draw conclusions in retrospect, but worth keeping in mind perhaps that good companies often try to have a number of options and fall back positions. So, as correct as your examples may be, there is a certain logical fallacy, to draw definite conclusions that the takeovers ‘saved the bacon’ of the shareholders.
Who knows what other options may have arisen or resulted had they not gone ahead.
One way to correct the ‘error’ (if you could call it that) would be to examine mergers and takeovers which significantly disadvantaged the shareholders. I think you would have whole quiver full before you could blink too many times, and I think the lessons from that would be more helpful in terms of future investment decisions.
Great thought exercise Daniel. Too often investors view a takeover bid as a final vindication of their investment decision-making, when in reality a takeover bid is simply another person’s opinion of value at a point in time.
Macarthur Coal, Patrick Corporation, Austereo Group and Tandou are all shoo-ins for any shareholder escape shortlist, whilst I think that Gerard Lighting and Novion Property are two takeovers that will probably be viewed as great escapes at some point in the not too distant future once we get our long overdue housing crash.
FAI. Before your time perhaps?
These businesses saw their positions eroded and lost market confidence in their ability to grow and enjoy future product/service tail-winds (“too hungry to eat”). Their residual value as components in other larger pictures was fortuitous, for sure.
AOL/Time Warner. A gift for AOL shareholders.
Agree wholeheartedly on WTF. Still perplexed why Expedia bothered.
Also, Industrea’s purchase by GE when Industrea’s peers had all fallen materially before the transaction closed.
And possibly making history now internationally – Tesla’s proposed acquisition of SolarCity, although it’s worth a wager that may not go through.
After reading the article Darlings and Deadbeats in the AFR today about the diammetrically opposed views of fund mgrs about companies, it made me wonder whether a more forward looking approach to your question might be appropriate.
So, for example, I wonder whether a company like Flight Centre is a prime candidate for some major future change because my own experience over the last 12 months would indicate it’s a dying model (as one of the analysts mooted also). Two trips to Nth America – one with Flight Centre (because of time pressures left it to them), and the other organised myself online. The former was messy and expensive, the latter easy and relatively cheap.
A Buffett ‘Haynes in reverse’ insight perhaps?
I was a FLT bear for many many years, citing the same trite reasons as yours. I was bearish enough on its long term prospects that I made a conscious decision not to buy when it fell to the $4ish mark during the GFC.
However I now think that I was partly wrong. I underestimated the adaptability of this business, and I also underestimated the extent of its value-add to customers. I think that somehow or another, Flight Centre will still be making plenty of money decades from now, whether that money is made the same way as it is currently being made is another question.
Yes, I have tended the same way as you SG, and readily acknowledge the reality has not matched the forecast but I think the ‘value-add’ is the critical aspect to FLT’s business model which I think is being sorely challenged nowadays.
What was a critical feature just 5 years ago is now being eroded by the ease of booking flights, accommodation and travel insurance etc online.
But Graeme Turner is clearly a sharp CEO so it will be interesting to see what changes occur in the future, though I don’t share your confidence in a time frame of ‘decades from now’.
One of my best investments ever was Federation Centres aka Vicinity Centres during the GFC. I think they were lucky not to have the banks pull the pin, and also saved by the CEO they parachuted in to salvage and turn it around. I guess RHG would also fall in that bucket. And I guess when Packer sold whatever it was to Alan Bond and then bought it back a few years later for a fraction. (“You only get one Alan Bond in your life !” )
I have forgotten the details, but remember the quote !
My great escape was GIO when it was purchased by AMP. The “expert” report valued GIO about 20 cents per share higher that AMP’s offer. I took the cash, as I figured don’t bother chasing the extra 5% or 20 cents per share. Lucky I did for when AMP finally mopped up the recalcitrant shareholders, it was for just over half their original offer. And AMP? Well, it’s been a pretty poor investment over the long term.