Sundance Resources and Hanlong Mining On Friday July 15, Hanlong Mining Investment Pty Limited approached Sundance Resources Limited (ASX:SDL) with a conditional cash offer for 100 per cent of the company at 50 cents per share.
As the major shareholder in Sundance, Hanlong has a stake of 18.6 per cent.
On the Monday morning, July 18, Sundance's board told shareholder to take no action, and said the terms of Hanlong's offer didn't provide adequate or certainty to Sundance shareholders. Chairman George Jones said: "the company has the vision, passion and technical expertise to develop the Mbalam Project, which will produce 35 million tonnes per annum of high-grade hematite."
In response, Hanlong told the Australian Securities Exchange that it did note talks between Sundance and the governments of countries it mines in were still progressing.
On the day, the company's managing director, Dr .Xiao Hui, said he looked forward to discussing the proposal with Sundance.
On Friday, one week after the initial offer, Sundance told the ASX there had been no material developments regarding the takeover offer, despite a spike in the company's shares.
The value of mergers and acquisitions Arthur Alexander, the lead consultant at boutique consultancy ITAS, is well versed in mergers and acquisitions, having worked with some of Australia's largest mining companies in strategy development.
He said studies have shown that half, and sometimes more than half, of mergers fail to deliver returns.
"Only 36 per cent of target acquisitions maintain their revenue growth after a merger is announced," he said.
Research by McKinsey indicates that by the third quarter, post acquisition on 11 per cent of target acquisition maintain their revenue growth.
"Often the loss of revenue momentum is due to a focus on cost synergies," Mr Alexander said.
"Quite often when you hear CEOs talk they talk about intrinsic values, which really is very difficult to measure, and when you ask them, 'what does that mean?', they can't tell you. "Quite often in the acquisition they look for cost benefit rather than revenue benefit, and they lose a lot of revenue benefit, and the research shows that during the acquisition process and for some time after, the companies lose their momentum."
As far as Mr Alexander is concerned, this is a sign that a company has set the wrong goals. "What are the stated values that the company thinks it's going to get out of the M&A - is it to boost revenue or is it cost saving? If the talk is only on cost synergies, I would be very wary because in my opinion, I think the revenue synergies are far more important," he said.
What it means for investors Mr Alexander said that investors need to look deeply at the companies in question if they want to determine how merger and acquisition activity will impact their earnings.
He worked with one large company who merged with a smaller miner. He said a difference in pay between managers was even a significant factor in how the merger was carried out.
"As an investor culture is also one of the hardest things to understand. Junior miners are very sparse in terms of the capability they have to do anything. They might have great reserve, but they've got five or six people sitting in the office. So if it's a junior miner, are they doing it in their own? Are they getting outside help? During the integration phase they have to integrate systems, cultures, processes - a whole stack of stuff. So how does it all work?"
The impact of the deal also depends on the position of the company in question. Mr Alexander said when assessing the acquirer, investors should study its experience in such activities, annual reports, and the status of its strategy.
"Is it the best strategic option for the company? In many cases it is if they want to grow fairly rapidly. From an investor viewpoint, you need to see whether this acquisition will give them economic profit."
SDL Price at posting:
52.0¢ Sentiment: Buy Disclosure: Held
