Navigating the Resilient M&A Landscape in Australia & New Zealand: Trends, Opportunities, and Challenges Amid Macroeconomic Shifts

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.

The M&A market has faced several macroeconomic and geopolitical challenges since 2020, but we’ve seen an uptick in activity of late. How will this trend evolve in the coming year?
Something dealmakers should try to observe is the link between geopolitical events what’s happening in the macroeconomy. What’s quite interesting is the markets have been extremely resilient in the last few years.
If you look at the Middle East and what’s happening in Ukraine and then look at markets, they haven’t been particularly affected.
Investor activity is so much more driven by what’s happening in the global economy – the story in the last two years is has been all about inflation and interest rates.
Investors – by which I mean public markets, pension funds and private equity – are more focused on that than the geopolitical issues. The vast bulk of those investors believe inflation has peaked and interest rates will decline – though by how much is still up for debate.
That’s what’s underpinning confidence in the market, and that’s why we’re seeing a nascent pick-up in M&A activity.
Private equity firms have also been less active in making new investments than they’re comfortable with – many of them have closed-end funds with limited lives and there’s only so long they can go without new deal activity.
Until a few months ago, those firms were very focused on ensuring the performance of their portfolio companies, but with interest rates plateauing many of these firms will go out looking for new investments.

Inflation is easing but remains high – how do you expect monetary policy to react?
The problem facing monetary policy is that governments and central banks are moving in opposite directions. We’re still seeing a lot of spending at both the federal and state level in Australia. That’s probably why inflation’s declining slower than it otherwise might. Central banks are also concerned about the current level of wage increases which risk prolonging higher levels of inflation.
So, it’s really hard to say when this might change. The last thing central banks want to do is start cutting rates and then realise inflation’s gone back up as a result. If I was to bet, I’d say we’ll probably have to wait until 2025 before interest rates start to fall in Australia.
In the US market in early 2024 there were forecasts for as many as six or seven cuts but the Fed has prove more cautious.
In Europe, we may see more activity. The European economies are significantly weaker than the US in terms of the growth outlook at the moment, and with interest rates being higher over there consumers and companies are under a lot of stress.
The European Central Bank has started cutting rates and the Bank of England and the Fed will likely not be far behind.

Where do you see the cross-border M&A flow going over the next 12 months – which regions will be the beneficiaries and which may lag behind?
In terms of M&A inbound to Australia, traditionally the flow has been greatest from the US, followed by Europe and then Asia.
If we look at GDP growth forecasts for these regions and the outlook for interest rate declines – both of which should be leading indicators of forthcoming M&A activity – the US would appear very well-placed to lead the recovery.
Although more subdued economically, Europe also has many world-leading companies that are often attracted to Australia given the resilience of its economy and long-term growth and we will continue to see large-cap transactions from Europe.
Looking to Asia, Japan has replaced China as one of the most active Asian source of inbound deals. Expect energy transition to continue to drive activity, followed by tech, media and telecoms. Consumer is likely to remain subdued.
In terms of outbound M&A, we would expect the US and Europe to be the top target destinations for Australian capital and for infrastructure to be a key sector of interest. Our super funds will likely continue to drive outbound activity as more and more of them beef up their operations overseas in the search for new investment opportunities.
In terms of domestic activity, we do expect to see an increase in activity from private equity funds, both buying and selling assets, with business services likely the most active sector.

What are some other trends dealmakers should be watching for?
The aftermath of Covid is still affecting company performance. Look at the healthcare sector performance, for instance – we still see difficulty in hiring and staff turnover.
In other industries, we’re still seeing wage increases and higher costs and both are affecting businesses, affecting company results. For buyers, this can make it difficult to value a business.
What will be really helpful for dealmakers is for these impacts to work their way out of company earnings throughout the course of this year.
With inflation subsiding, and companies able to secure price increases to recover the inflation costs that they’ve been incurring, the quality of earnings should start to improve. We should then start to see the valuation expectation gap between buyers and sellers close a little, and that will mean more transactions.