ASX busy for takeover activity but new listings pipeline is dismal

The ASX is running red hot for takeover activity, but the pipeline of new floats has been dismal.

Of the 18 new listings so far this year, 12 are now under their IPO price. Picture NCA Newswire/ Gaye Gerard

Rejecting a takeover bid is a risky thing to do. But this week’s rejection by lithium explorer Azure Minerals of a $900m bid from New York-listed SQM tells us two things: The first is that the lithium sector really is a red-hot long term resource play; the second is that the takeover scene is red hot, too.

It’s the buoyancy in the takeover scene that is surprising, but something the board of Azure would know very well. Just now the markets are wide open for takeover activity and if SQM does not ultimately come to the table there are plenty of rivals roaming the world looking for targets.

At face value it may look like the ASX is having a relatively conventional year with a 4 per cent return to date. But behind that number the truth is this is a most unusual market where takeovers are flying and new floats are dying.

For investors, the reality is that in general you make money out of takeover bids and invariably you lose money on Initial Public Offerings (IPOs).

Takeover activity may not always be what you want as an investor – many local investors were furious at the removal of Sydney Airport from the boards and believed the premium paid by super funds did not fully compensate for the loss of a unique sharemarket asset.

But the upside of course is that any investor should get an instant boost of around 30 per cent to the value of their shares if their stock is acquired by another company.

Azure’s decision to spurn the SQM takeover has already received a vote of confidence. The Azure Minerals share price actually lifted after the rejection- by around 2 per cent. Azure is up 700 per cent in the last six months.

In contrast, the roll call of ASX companies that have succumbed to takeover attempts of late is less than inspiring.

We have had the Blackmores vitamins group best known for board infighting before it fell to Japan’s Kirin drinks group, and the endless troubles of the fruit grower Costa Group which are now solved through it being purchased by private equity operator Paine Schwartz.

Similarly, the Estia aged care group is removed from a deeply troubled locally listed aged care sector by a bid from private equity group Bain. Private equity is also behind the takeover of Origin Energy and InvoCare.

The $29bn takeover of Newcrest by Newmont at least garnered a string of improved bids and the company is being picked up by a predator in the same game.

Either way, in all of these situations, investors will either get more cash than they might have reasonably expected or scrip (shares) in a company that has been going better than the one acquired.

In contrast, the miserable trickle of new floats this year has managed little other than to lose money for most investors who took the bait.

Here’s the numbers. Of the 18 new listings so far this year, 12 are now under their IPO price. In other words for every three times you take the trouble of enrolling in an ASX-based IPO you will lose money on two of them. Why would you bother?

Meanwhile, the takeover scene is in rude health. In this atmosphere takeovers will be rejected more often. When the takeovers complete successfully – whatever else happens, investors who held the stock make money.

In contrast the IPO scene is hopeless, the general quality of what is coming through the system is letting investors down. No wonder it is virtually dormant.

Originally published as ASX busy for takeover activity but new listings pipeline is dismal