Rising M&A Activity: How Adaptability and Technology Are Driving Australia & NZ Deals Forward

The insights from these seasoned dealmakers underscore the importance of adaptability, innovation, and thorough preparation in navigating the complexities of dealmaking in Australia & New Zealand. By leveraging creative deal structures, conducting rigorous due diligence, understanding macroeconomic and regulatory dynamics, and focusing on resilient sectors, dealmakers can successfully navigate challenges and seize opportunities in this dynamic market.

M&A activity looks to have lifted slightly in the last year. Do you expect to see this momentum continue?
Yes, certainly we’re seeing a pick-up in activity. There’s a lack of patience that’s starting to bubble up – people are realising they can’t sit on their hands for too much longer.
There’s going to be a lot of pent-up demand coming through in activity, probably in the back end of this year or early next calendar year. That’s a pretty general trend.
Personally, we do a lot of work in the technology sector, which took a bit of a hit when valuations came down after the 2021 peaks, and it’s taken a bit of time for those valuations, the bid-ask spread between buyers and sellers, to start matching up.
We’re getting there on those, but given technology advances so quickly, and people want to put their foot on assets they think they can leverage strategically, there’s no time better than now for that sector.

Interest rates are proving stickier than expected, and dealmakers are also contending with heightened geopolitical risks. How is this affecting dealmaking?
Where interest rates are going to land continues to be a key question in everybody’s heads. The geopolitical side of things remains uncertain on several counts, and we’ve had the backdrop of the two main stages of war being played out in Ukraine and the Middle East.
Added to that, you have all the elections that are occurring. You’ve got the US, the UK, Taiwan has recently had their change in leadership, and you can see the way that China is posturing in its response to that election outcome.
I don’t think that’s necessarily going to affect the market on a deal-by-deal basis. Instead, boards and management teams need to maintain conviction that now is the right time to execute against this macro landscape.
What we’ve also found, particularly in the last 18 months, is that corporate acquirers have been very focused on their strategic imperatives – they want acquisitions that fit their core corporate strategy on a much more targeted basis than in the past.
Where they might previously have said, ‘it’s close enough, let’s have a go here’, now it really has to be a bullseye strategic fit.

Close to half the global population is expected to vote in the 2024 calendar year, with climate change likely to be a major battleground between politicians. How will these elections and broader ESG considerations factor into M&A?
Every party tries to establish its own nuanced position when it comes to the ESG environment and their policies but I don’t think there’s going to be any fundamental shifts following changes in governments.
People accept the fact ESG is here and they need to be more thoughtful on all of the aspects of it.
When you break it down, a lot of the factors have been around for a long time already. It’s just that now the E is going to be more on the radar of boards and the regulatory and risk environment has heightened.
Cyber risk has crept up significantly and the requirements coming in as part of Scope 1, 2 and 3 emissions reporting will also need to be considered by boards.
Everyone’s approach to due diligence is just more cautionary and expanded now because of the backdrop of all of these ESG factors.

The ACCC has proposed several changes to its regulatory approach. What impact might this have on the M&A market?
The ACCC changes are still to be fully ironed out, especially for the $30 to $200 million enterprise value mid-market segment.
But it’s certainly going to affect the mid-market because there are often a lot of bolt-on acquisitions that come from that cohort of companies.
There’s also been more focus on the roll-up strategies from serial acquirers, particularly conducted by private equity firms.
So, it’s coming, but I think there needs to be careful thought about how these changes affect all M&A market segments. Whether it be the big end-of-town, small startups, tech companies or the midmarket, these all need to be fully considered before they formalise the reforms.

Which regions do you expect to benefit most from cross-border M&A flow?
From a geographical perspective, I think Australia’s going to continue to do very well. We’ve always seen a strong appetite from US buyers and I don’t think that’s going to stop.
The strong US dollar will also continue to drive Australia’s M&A activity.
The technology companies we’re establishing domestically are some really great scale-up businesses and they are going to continue getting strong levels of interest from international buyers and investors.
There’s also quite a lot of interest in India – that’s going to be a big area of focus for corporates. The tailwinds and market size potential for that economy are such that people want to get in at the ground floor, and I think given the closing off of China, this is the next large economy that investors and corporates will want to explore.
The other factor to bear in mind is US tariffs on China – India is going to be an ally to the US from a supply perspective, and is probably going to do well as an alternative to China.

Given where the market is at right now, are you expecting to see a shift in monetary policy and IPOs in the next 12 months?
Everybody’s on a knife edge, and if monetary policy goes either way, the markets will react. We need to have a sustained period of knowing which way it’s going to go before we see a positive impact on M&A activity over and above just people wanting to get deals done.
But people are talking about rate rises now rather than falls. You’ll also notice in the headlines that the IPO market is opening up a little bit.
There’s been a hiatus of IPOs over the last few years, but you can see a trickling of them coming back on stream now.
Where there’s alternative options for liquidity events, that’s giving people a bit more confidence to transact. It may not be where they end up transacting – it might be a dual-track process that eventuates in a trade sale – it might be a trade sale or dual-track process – but at least that optionality is coming back.

What trends are you seeing in the private equity market?
Private equity is increasingly looking at portfolio exits – they’re wanting – or needing – to close off some of their funds.
So, we’ll see continued exits across the private equity portfolios. That may be running auction processes or it might be secondaries of various forms including seeing some of the larger global private equity firms come in to take good performing assets off the mid-market private equity firms.
It’ll also be interesting to see how AI and its adoption continues to plays out, and how quickly private equity firms can use it to attack their portfolio company cost bases. If you think about software development costs in tech and how AI efficiencies can be run through that cost line, there’s immediate benefits to the bottom line and PE returns.