Is merger and acquisition activity heating up?

A change of government and a refreshed offer for The Trust Company suggest it could be.

Graincorp (ASX: GNC) shares were flat on Monday morning after the Abbott-led coalition declared election victory at the weekend. The grain marketer the logistics company has been working its way through an off-market takeover bid by Canadian firm Archer-Daniels-Midlands (ADM) ever since an initial approach by the company in October 2012, which led to a conditional agreement in April this year.

ADM and Graincorp have now cleared most regulatory hurdles however approval from the Foreign Investment Review Board is still required. While Mr Abbott declared Australia “once more open for business” it’s still a tough call whether a Coalition government will be more or less amenable to the passing of potentially strategic agricultural assets to a foreign company given the National Party’s rural supported base.

Meanwhile, after last week reporting here on diversified wealth manager IOOF’s (ASX: IFL) entry into the race to acquire The Trust Company (ASX: TRU), leading contender Perpetual (ASX: PPT) has returned this week with a revised proposal which guarantees a minimum cash offer plus dividends of $6.68 per share to Trust shareholders.

This revised offer is above the $6.42 guaranteed minimum cash consideration offered by IOOF. Perpetual is also offering a script alternative which it states values the offer at $7.18 per share. Trust’s shares jumped around 5.5% by midday in response to Perpetual’s revised offer to be trading in line with the script based offer price.

While investors should always heed Aristotle’s wise words that “one swallows does not a summer make” it is also important to be aware of the leverage firms such as Macquarie Group (ASX: MQG) have to an uptick in merger and acquisition (M&A) activity. The current lacklustre M&A environment is unlikely to last forever and there could be significant upside to come.

Foolish takeaway

Many companies have significantly strengthened their balance sheets compared with a few years ago. Given the low revenue growth environment faced by many industries, growth by acquisition is likely to be viewed as an attractive option, particularly where synergies can be attained too. Provided management is careful that any acquisition actually creates value, shareholders could be well served by a pick-up in M&A activity.

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Motley Fool contributor Tim McArthur owns shares in Perpetual and Macquarie Group.

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