Backing M&A targets ‘more luck than genius’

Investors should be wary of backing companies based on their potential merger and acquisition (M&A) activity and should focus on company fundamentals.

There had been a flurry of M&A activity recently as companies sought to put money to work after building up excesses during the COVID-19 period.

Speaking to Money Management, Dion Hershan, head of Australian equities at Yarra Capital Management, said predicting potential M&A targets was “more luck than genius”.

He said it would be better to buy businesses based on their company fundamentals rather than speculation of a potential merger or acquisition as some of the market noise was opportunistic.

“It’s tempting to speculate and invest on who might be next, but that’s likely more luck than genius,” he said.

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“I wouldn’t expect there to necessarily be a flood in the number of deals that get done. It is incumbent on boards to be judicious in assessing value, a lot of these bids are opportunistic and targeting COVID-impacted businesses.

“Investors are wise to buy businesses on fundamentals; it’s always dangerous to assume there’s a party in the wings to buyout a weak business at a large premium.”

He said there were other options available to companies aside from M&A although the recent lockdowns would likely force companies to be more conservative with cash. While the economy had tended to snap back from previous lockdowns, it would still mean a negative gross domestic product figure in the third quarter of 2021.

“We are interested in companies that reinvest extra cash for growth. [Software company] PEXA remains a standout in that regard.

“It’s important to keep in mind that nothing about 2020/21 should be extrapolated into FY22/23 as some companies have over-earned through this period.”