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.
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.
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.
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?
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.