Mastering Deal Dynamics: Adaptability and Innovation in the Australian Market

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.

There seems to have been quite an incline in M&A activity over the last few years. Do you think that this will continue into 2025?
It depends on the segment of the market that you’re looking at. At the top end, the large deals over $200 million dollars have been very soft, because they need more funding. If you’re looking at a $200 million deal, you’re probably going to seek equity funding of around 50%, leaving about $100 million in debt financing. That money’s not as readily available as it was two or more years ago when money was cheap and interest rates were virtually zero. The risk-appetites of the banks and investors have evolved, with both requiring significantly higher risk-adjusted rates of return, given the healthy 4-5% p.a. returns they can access in the bond markets.
However, smaller transactions make up the bulk of the market – about 80% of transactions in Australia are smaller transactions under $100m. In this space, it’s much easier to do the due diligence, to get the funding and to transition to business.
We deal in the SME market – a diverse mix of owner operators, entrepreneurs and unlisted companies, with varying needs and levels of sophistication. The SME sector is very active because it covers many companies, most wanting to grow their businesses and many thinking about succession and exit planning. The SME market provides a good hunting ground for larger companies as well as private equity.
Succession planning is particularly important for this segment of the market, you’ve got a whole bunch of entrepreneurs saying, “What do I do with my business? I’ve made enough money, I’ve got the holiday house, I’ve got the kids’ houses paid off. My business is doing quite well. I’m 60 or thereabouts. Do I keep going or do I pass this over to someone else?”
This dynamic doesn’t really apply to the larger, more sophisticated listed companies, where the owners are not the shareholders. Most of the Australian market, when compared to global markets, is a middle market, and there are relatively few billion dollar transactions – on average 5% of the total number of transactions in Australia over the last 10 years had a value of more than $500m – so there will always be a solid bunch of smaller transactions here.

What do you see happening in the next 12 months and what are the implications for dealmakers?
Over the last 1–2 years, some sectors have done poorly, such as retail and consumer products – and the valuations of technology companies has come down to more realistic levels. So a lot of buyers will see this as a good opportunity to purchase a business at a better price that gives them a benefit like growing their top line, improving their sales, or giving them new products or new technology.
It’s also becoming more important to get access to experienced workers. I’m seeing businesses say “We want to buy people and expertise, because we haven’t got enough experienced people like toolmakers, or specialised technicians, or sheet metal workers to be able to continue with our business.” Our unemployment is low, you can get a job more easily, and people’s salaries are pretty good generally. So its hard to find and retain good people.

How are geopolitical issues affecting the M&A landscape?
The whole geopolitical situation is very sensitive at the moment. Australia trades a lot with China especially iron ore and other resources, such as rare earths.
I think what’s happening generally is that post-Covid, owners are trying to de-risk their businesses. They don’t want all their eggs in one basket – they want some level of independence. That doesn’t mean to say that trade with China will stop, but people don’t want to be overly dependent on one country.
So if things get more sensitive geopolitically, countries want to be more independent about what they can produce – whether it’s microchips, rare earths, or other resources. I think the US particularly wants to de-risk itself from China.
Businesses and governments want to get hold of raw materials and products without heavily relying on one country. This is also a driver of M&A activity globally in different markets.
Advances in technology, such as robotics, as well as their lower cost, has enabled smaller manufacturing businesses to be more competitive and cost effective with offshore competitors. That’s because our biggest problem in Australia has been the cost of labour.

Where do you see the best potential for cross-border M&A in the next 12 months?
Australia has a lot going for it right now, particularly in the technology sector. We’ve been a really good hunting ground for players in the US and Europe who’ve bought or partnered with Australian companies.
A weaker Australian dollar has made it a lot cheaper for investors in those regions to pick up technology we’ve developed and tested and then blend it into their market or their product offering rather than spending years developing it themselves. It’s a better proposition.
In a similar vein, healthcare and particularly med-tech will see that cross-border M&A growth. If you look at demographics, across the world you’ve got an ageing population and you’ve got new technologies.
I foresee there will be more growth and activity in the biotech and med-tech spaces because Australia has been investing in these areas for a number of years. Organisations such as CSIRO and universities have also become more aware of how to commercialise their developed technology.
I also see more activity in the advanced manufacturing sector as technology becomes cheaper. Local manufacturing can provide quicker turnaround than offshore suppliers, particularly with the increasing delays with freight and logistics due to geopolitical issues.
Its going to be interesting to watch the healthcare sector particularly because there’s only so much organic growth you will have in this space. We are seeing the next phase of growth in this area- this is scale – the roll up of both specialist and general healthcare services such as dental, general practice, allied health etc to get the benefits of fixed costs and tackle the issues such as data protection, privacy and governance, which you can do better with scale. But that’s just bringing them together and making them bigger so you can get those benefits of scale – but what’s the next phase?
Growth in healthcare will also be pushed by new technologies (such as AI) including new drugs and better data – this will have the biggest impacts to M&A over the next 10 years.
The next thing is going to be the technology side. New drugs, new technologies in different areas – that’s an area that over the next 10 or 20 years will grow considerably.
The last beneficiary is certainly going to be resources. In terms of the geopolitical environment, resources is a sector where businesses and government will want to ensure their independence and security.

What other trends have you seen in the market?
Covid had a knock-on effect on transportation costs. Freight costs went through the roof – a product coming from China cost about 15 times more to bring it here, and took about three months longer to arrive.
It’s introduced more of an uncertainty factor, which means clients have had to be much more flexible – they have to have alternatives just in case something happens, which isn’t always possible. For a lot of business owners, it’s got too complicated, so they’ve decided to bow out. The other trend I’m noticing is ESG and sustainability. A lot of private equity businesses have strong expectations about the ESG piece. And many sellers realise that if they get their ESG credentials right, they’ll get a better dollar outcome for their businesses.