In the December edition of the Gresham Group 150, which ranks the top 150 Australian Securities Exchange-listed resources companies by market capitalisation, Gresham investigated whether M&A activity was value creative in the resources sector.

The measure of value creation was assessed by the change in market capitalisation of the predator and the target over the periods of one week before, one week after and three months after the announcement of the transaction.

Taking into account other factors, Gresham highlighted the market cap of the target firm increased as the market evaluates and understands the transaction and the risk of whether the deal will eventuate diminishes.

Over the period one week before and one week after the announcement, Gresham calculated market cap on average gained 29% for the takeover target over the period. This compared to a 32% jump in the target’s value over the period from one week before and three months after the announcement.

Iron ore play Ferraus fared well in its takeover by Atlas Iron with its market cap jumping 97% over the period from one week before and three months after the announcement.

Meanwhile, Sphere Minerals recorded 113% spike in its market cap over the same period after Swiss giant Xstrata slapped its offer on the table.

However, the same value creation could not be said for the takeover predators with market caps on average falling by 2% over the period one week prior and one week after the announcement. This compared to a 6% gain over the period one week before and three months after the announcement.

“The review of the predators suggests that the market, especially in scrip offers initially sells the stock down as shareholders switch to the target,” Gresham said.

“In certain circumstances, both the target and the predator increase in value, hence meeting the objective of creating shareholder value in the mining industry.”

This could be said for Focus Minerals’ takeover of Crescent Gold with Crescent’s market cap gaining 37% over the three month period while Focus gained 29% over the same period.

However, the same could not be said for the friendly merger of GGG Resources and Auzex Resources with Auzex value dropping 8% over the three month period versus a 31% fall in value for GGG.