Strategic Moves in a Dynamic Market: M&A Insights and Expectations for 2024

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.

Despite ongoing macroeconomic and eopolitical challenges, M&A activity is on the rise. Do you expect to see that trend continue in the next year?
We’ve seen a steady incline as 2023 was not a strong year for M&A and because there is available capital and a desire for growth. Equity capital markets have been pretty docile as well, particularly IPOs.
That has tended to result in more strategic M&A. Corporates are looking to either diversify or enhance their capabilities – particularly through new tech – or they’re trying to simplify their structure to emphasise their core business.
We’re seeing a lot of opportunistic divestments where a corporate has more than one business line and there are different valuation multiples which apply to each. Many are deciding it’s a good time to split them to get the right value for each.
There are some challenges that may affect this trajectory in 2024. It’s a record year for global elections with roughly 50 countries – more than 2 billion voters – going to the polls, heightened rates, and market volatility.
Medium-sized deals are easier to see through with conviction and have a higher probability. Larger deals have had a softer start. In a number of deals the premium in bid-ask spread has been lower and, as issues arise, it’s usually required sellers to walk away from the deal or accept a material price reduction.
Against that backdrop some sectors still look strong – mining, deep technology, and some healthcare sectors – particularly where businesses are seen as ‘core plus’ infrastructure opportunities. But to answer the question in a nutshell, there’s been a lot of dry powder in the market for a while, and a lot of heads of M&A feeling pressure to transact this year, so M&A activity should continue to rise.

Why are we seeing this difficulty at the larger end of the market?
At the top end of the market it can be difficult to get financing at the right price or quantum which makes it difficult to bid at a price within seller expectations as compared to the past few years. Regulatory approvals are proving to be more difficult and complex and there’s a little more market and regulatory uncertainty towards the back end of the year and the risk-reward trade off is a bit heightened.
In the middle market, deals are more likely to be for strategic reasons where a buyer can absorb a higher price, or a buyer might be able to use balance sheet funding and push the deal through because it makes strategic sense to do it.
Some of the more strategic players are achieving the equivalent of larger deals by consolidating multiple medium-sized deals into a single holding company, integrating those businesses, rather than pursuing one large deal at a higher price with greater uncertainty.

How might the wave of elections we’re seeing across the globe this year affect deal activity?
It’s had a significant effect on dealmaking generally, especially on cross-border transactions.
We’ve seen a moderation of activity from certain countries, and strategic alliances between nations are becoming more pronounced and defined.
There’s a new level of scrutiny applied to these deals as people determine what they should do.
With that said, we’re reaching a point where people don’t want to wait out the period of risk, and they’re increasing their tolerance for international and geopolitical uncertainty. They’re willing to do it. As much as the current geopolitical climate is a deterrent for doing deals, it’s also attractive for the right deals. Where dealmakers can find commercial alignment with a strategic ally, we see meaningful opportunities.

Going to that idea of those strategic alliances, from an Australian perspective, where are we going to see the best opportunities for cross-border M&A?
The US has traditionally been the top counterpart for us, in both volumes and value. With a strong US dollar at the moment, there’s huge opportunity there.
They’ll continue to be number one for several reasons. One, they historically have been Two, they’re a strategic ally. Three, Australian businesses in several sectors generally now prefer to expand to the US before Europe, where they historically have gone looking for growth.
And four, the US likes Australia – particularly in the tech sector. They see us as good bang for their buck in terms of cost of human capital. You can invest in Australian tech and get high quality developers and innovators with less turnover, and the landscape is good for founders.
We’re also seeing China taking more interest and being more active, especially in sectors such as renewables. More generally, AsiaPacific is increasing in activity as well for us. Meanwhile, we’re seeing strategics in other jurisdictions take an interest in our defence and critical minerals sectors.
The unfortunate events involving global conflicts are also seeing more cash flow and transaction activity in the defence sector right now.

Will we see greater scrutiny on ESG credentials in the year ahead?
We already are – it’s becoming an area of increased focus globally. There’s greater regulation, particularly on the environmental side but obviously also on the social aspect as well.
Looking at governance, it’s an overarching theme that governance has always had increased scrutiny and focus year-on-year.
Australia’s also looking at what others are doing globally and ensuring we’re on the right pathway, as a jurisdiction, in comparison – whether that means pushing harder or being more balanced. But the current Australian government has made it clear that further ESG regulation and enforcement is a priority area for it, including through the impending mandatory climate disclosure regime.
So what is happening globally? We’ve got more legislation coming out in numerous jurisdictions including the EU. This isn’t just a regulatory issue, we’re seeing more activism as well.
We are seeing claims for indirect liability for financial institutions including French NGOs’ suing a commercial bank in a world-first climate lawsuit, and law suits against fossil fuel entities and financiers in the US for contributing to heat waves.
Several banks now have significant ESG targets for their lending, they want to hit a certain percentage of ESG linked loans in the next 5, 10, or 15 years.
That’s driving this focus from a financing perspective, too.

What other trends are you seeing?
Private equity firms are being impacted by high interest rates and pivoting towards strategic portfolio management consolidation. They’ve got substantial dry powder reserves and are poised for resurgence and more deal activity once interest rates stabilise.
That could lead to competitive advantages, as they target under undervalued asset for future growth.
Then you’ve got corporate acquirers who are less dependent on debt financing looking to exploit reduced valuations and expand strategically – many of whom are focusing on digital innovation to remain competitive.
We’re also seeing deals where people aren’t necessarily acquiring whole businesses’ they’re just buying enough of a stake to have a line of sight into the technology – they’re looking for first rights, licensing, capability, of the tech without having to write big cheques.