Mastering the Complexities of M&A in Australia & New Zealand: Insights, Challenges, and Opportunities in a Dynamic Market

Tim Miles - Miles Advisory Partners | 2024/2025 ANZ M&A Outlook

By ansaradaMon Jul 29 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.

There seems to have been a bit of an incline in M&A activity over the last few years. Do you think that will continue into 2025?
I don’t think it’s true to say there’s been an incline – there’s been peaks and troughs. Transaction volumes will always decline when there’s a macro event like the GFC or the pandemic. However, deal volume increases again after these types of events. Which is partly due to the catch-up effect.
Current deal volume is not at the levels of ’21 and 22 or the peak we say in 09 and 10. It feels to me more like a steady, systemic increase in activity.
A key driver to this is that we are now starting to understand post pandemic business performance. Which makes it easier for sellers and buyers to properly understand value.
Now we have two years’ worth of post pandemic financial performance we can clearly identify ‘the new normal’, which makes it easier for bidders to asses opportunities.

Which countries do you anticipate will benefit the most from cross-border M&A flows over the next 12 months?
Ignoring the changes to FIRB and the ACCC for now, I don’t think much will change with cross-border activity.
Inbound from China has slowed down significantly compared to the 2010-2020 period. The US and Europe will remain very active, and Japan will be very selectively active. So I don’t see much changing.
What we are seeing is some of the more global PE firms migrating from region specific funds – such as an Asia fund, an American fund, and a European fund – to having a more open fund and being able to deploy their money anywhere.
That will be interesting from Australia’s perspective. One of the challenges for this region is that, if a fund that was previously only investing in Australia, or the broader APAC region, and it can now put its money into other regions, like Europe, where the multiples are lower and the addressable market larger, then that fund is likely to invest in the most attractive market.
I’m not sure whether that will have an impact immediately, but certainly some of the more global funds are talking about no longer ring-fencing their funds to particular geographies, and there could be a knockon impact.

What’s driving M&A activity right now?
A great deal of the M&A volume involves private equity, whether that’s private equity firms exiting their investment portfolio or private equity firms investing in new businesses.
And, as a business, private equity firms are employed to put other people’s money to work and to realise the money they’ve put to work. They can’t sit on their hands forever.
When these activity troughs happen, you tend to come out the other side and find private equity. If they haven’t done anything for 12 to 18 months, they tend to get quite busy finding deals to do.
Australia has lasted for roughly 30 years without a recession, and we’ve had very strong and consistent business performance over that period.
When something like the pandemic happens, businesses get disrupted. Whether that’s actually driving peaks or troughs in the business performance depends on the sector and the business. Off the back of the pandemic, we found you had to spend a lot of time, effort, and energy to understand the underlying performance. And by and large, businesses continued to perform strongly in this part of the world and this makes them attractive for M&A activity.
In the private market sector, there’s a tendency for M&A activity to be led by founder sentiment. After many years running a business, founders can mgt tiered and this can motivate them to look for a path to either de-risk or to exit.

Geopolitical tensions are running high in the wake of conflict in Europe and the Middle East. What are the implications for M&A activity?
These geopolitical tensions are undoubtedly having an effect, but not anywhere near what you would expect.
The impact is more a consequence of the economic flow from those events – you could argue they’ve caused price inflation, which is impacting margins and in turn driving an increase in interest rates.
Those factors – the margin compression, the interest rate increases – that’s impacting deal flow. I don’t think the market is waiting to see outcome of these events.
People are seem to be getting on with the business of buying and selling businesses. But, to the extent, those events have had an impact on business performance, they have had an impact on values.

How has this affected due diligence?
Due diligence processes have gotten significantly longer and more intense. But again, I don’t think that’s solely due to the geopolitical environment. I think it’s much more the consequences of the geopolitical environment the domestic landscape and the carry over from the pandemic.
Bidders need to be comfortable that, trading has returned to normal, and is not suffering from a flow-on impact from the pandemic?
There are numerous examples of where the impact during the pandemic has been the reverse post.
With the AMA placement about to happen, I can use smash repair as an example. During the pandemic, there were far fewer cars on the road and, therefore, fewer accidents (so revenue is down). Then, post pandemic, accidents increased again, but there is sever supply constraints meaning cars were off the road for longer, and repairs took longer.
So if you’re looking at a business in smash repair now, you’d be asking if the market has returned to normal? And, if it hasn’t, how is that impacting the financial performance of the business?
That applies across almost all industries, and due diligence processes are looking to understand those potential impacts.
So, significantly more scrutiny is happening.

How might the regulatory environment affect due diligence and dealmaking?
I’m very concerned by the current government’s attitude towards increasing regulation on transactions. If what we read in the papers comes to fruition, they’ll be applying the ACCC lens at a far more granular level than in the past. This will make it harder to give certainty in a process and harder to keep processes confidential.
These are two very important criteria for founder-led businesses.
During Covid, the Government also increased the number of transactions that had to go through FIRB, compared to pre-Covid. It then wound that back – but, I understand that they’re considering tightening this again. If they do this, it will slow transactions massively. FIRB timelines went from 45 days to four or five months at the peak of the pandemic.
If those sorts of timelines returned, it would be catastrophic for dealmaking because, in the mid-market, just over 40% of transactions are happening cross-border.
If Australia suddenly becomes a harder place to do business, those international bidders will go and do business elsewhere.

 

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