Rising Opportunities in M&A: Insights on Market Activity and Cross-Border Flows: M&A Insights for Australia & New Zealand

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.

After a disappointing 2023, it looks as though M&A activity is picking back up, albeit slowly. What do you see happening in the next 12 months?
After a cautious start to 2023, activity definitely picked up in the second half and looked pretty strong into 2024 as interest rates appeared to stabilise. Over the last couple of months we’ve seen a little bit more uncertainty creep into the economy.
For example, earlier this year there was an expectation that we’d see rate cuts in the second half – that timeframe now looks to have been pushed out and we’ve even seen the possibility of a rate rise amid ongoing cost of living and consumer sentiment issues.
Uncertainty’s returning to the broader economy and that’s never good for M&A.
So, we’re still seeing good levels of activity but those challenges are filtering through into a little buyer caution in transactions.
The theme we’ve seen over the last 18 months is longer transaction timeframes – with prolonged due diligence periods – and deal structures that offer more protection, including increased use of earnouts.
We’re still seeing a broad range of buyers who are very interested and motivated to do transactions, including international acquirers, private equity funds who’ve raised a lot of capital over the last couple of years, and corporates looking for growth.

With ongoing conflicts in Europe and the Middle East, we seem to be in a period of heightened macroeconomic and geopolitical risk. How is this affecting M&A?
As I said before, uncertainty is never a positive thing in M&A. If there are flowon disruptions to economic sentiment, then yes, that will have an impact.
What we’ve seen is that over the recent years, if we have an Australian business that has key suppliers or customers in a jurisdiction enduring heightened political tensions, that will affect buyer interest in a business.
We haven’t seen a huge general impact of the Middle East tensions, on broader M&A activity in the mid-market – it’s been more specific to individual businesses.

How do you expect to see the regulatory environment evolve in the next year and what will that mean for dealmaking?
In Australia, we’re seeing a level of regulatory uncertainty creep into the M&A sector, and there are a few examples of that. The first is the ACCC’s proposed changes to the merger laws in Australia, including mandatory notification requirements and potentially a prohibition of certain merger transactions happening without prior approval.
They’re still just proposals, but if what’s proposed does eventuate it may introduce uncertainty, particularly for private equity firms who often have ‘buy and build’ strategies where they’ll acquire a platform and then consolidate a particular sector.
There are also some proposed reforms to the FIRB framework – those may be positive in some regards, but also may include greater restrictions in particular sectors.
And then there are ESG regulations, including mandatory climate change reporting coming to the Australian market in next year.
We expect a broad range of businesses to be impacted. Whilst these reporting requirements are initially focused on very large companies, they will go down their supply chain and smaller companies will get caught up in that process as well.
Labour and industrial relations regulations are also causing a few challenges in sectors with a heavy focus on people.
There are a few M&A-specific and a few general regulatory changes which will have some bearing on M&A activity over the next year or so.

Who do you expect will be the greatest beneficiary of cross-border M&A flows?
Over recent years we have seen US and European buyers account for the majority (around 80%) of Australian M&A transactions with an overseas buyer and Asian buyers represent around 15% of deal flow.
One key driver for this interest from overseas buyers is the opportunity to acquire technology and IP that can be leveraged in much bigger markets overseas. Australia is also seen as a safe and resilient economy and an ideal launching point into Asia.
Private equity firms globally have raised significant capital in recent years and we are seeing many US and European corporates who have secured private equity investment with a strategy of growth by acquisition, turning to the Australian market for additional geographic expansion.
This trend is expected to continue over the coming 12 months, with interest in a broad range of sectors including software, financial services, consulting, health care and advanced manufacturing.

When do you think we might start seeing a shift in monetary policy?
At the beginning of this year, there was optimism that there would be a cut to interest rates in the second half of 2024, but the timeframe has crept out.
In terms of actual monetary policy, I’ll leave that up to the RBA – but in terms of the impact inflation and the uncertainty around interest rates has on M&A, we’re seeing caution amongst buyers.
Given the current inflation environment and high cost of living, certain sectors such as retail and consumer services are especially vulnerable to this.
We’re also seeing many private equity firms focused more on B2B businesses, particularly business critical technologies and services, ie businesses that have less exposure to consumers and cost of living.
One of the effects of low economic growth is that corporates focus on M&A because it’s more difficult to achieve organic growth in the market at the rates their shareholders expect, particularly for listed companies.
On the flip side of that, we’re also seeing a few listed corporates that are normally very acquisitive pulling back because their shareholders aren’t so keen about them raising more debt in a higher interest rate environment.

What are the other major trends you’re observing in the market?
In recent years, vendors are increasingly interested in preparing their businesses for sale. They’re seeing M&A activity happen, they have an objective to do a transaction in the future, but they’re keen to engage actively with advisors to prepare their business ahead of time.
It could be six months or it could be several years of planned preparation, in order to maximise the business’s value and attractiveness to potential acquirers.
A lot of vendors have been talking about exiting for a while, but there’s definitely a wave of succession issues now with owners getting to the point of retirement and needing to lock in a plan.
Separately, younger business owners, want to start that process – for example, if think they’ve got the business as far as they would like to take it, and now they want to transact and then go and do something else.
There’s a growing awareness of the benefits of early preparation in terms of building value.